How Telltales Told You Not to Own Wal-Mart, and Continue To Do So

How Telltales Told You Not to Own Wal-Mart, and Continue To Do So

Wal-Mart market value took a huge drop on Wednesday.  In fact, the worst valuation decline in its history.  That decline continued on Thursday.  Since the beginning of 2015 Wal-Mart has lost 1/3 of its value.  That is an enormous ouch.

WMT stockBut, if you were surprised, you should not have been.  The telltale signs that this was going to happen have been there for years.  Like most stock market moves, this one just happened really fast.  The “herd behavior” of investors means that most people don’t move until some event happens, and then everyone moves at once carrying out the implications of a sea change in thinking about a company’s future.

All the way back in October, 2010 I wrote about “The Wal-Mart Disease.”  This is the disease of constantly focusing on improving your “core” business, while market shifts around you increasingly make that “core” less relevant, and less valuable.  In the case of Wal-Mart I pointed out that an absolute maniacal focus on retail stores and low-cost operations, in an effort to be the low price retailer, was being made obsolete by on-line retailers who had costs that are a fraction of Wal-Mart’s expensive real estate and armies of employees.

At that time WMT was about $54/share.  I recommended nobody own the stock.

In May, 2011 I reiterated this problem at Wal-Mart in a column that paralleled the retailer with software giant Microsoft, and pointed out that because of financial machinations not all earnings are equal.  I continued to say that this disease would cripple Wal-Mart.  Six months had passed, and the stock was about $55.

By February, 2012 I pointed out that the big reorganization at Wal-Mart was akin to re-arranging deck chairs on a sinking ship and said nobody should own the stock.  It was up, however, trading at $61.

At the end of April, 2012 the Wal-Mart Mexican bribery scandal made the press, and I warned investors that this was a telltale sign of a company scrambling to make its numbers – and pushing the ethical (if not legal) envelope in trying to defend and extend its worn out success formula.  The stock was $59.

Then in July, 2014 a lawsuit was filed after an overworked Wal-Mart truck driver ran into a car killing James McNair and seriously injuring comedian Tracy Morgan.  Again, I pointed out that this was a telltale sign of an organization stretching to try and make money out of a business model that was losing its ability to sustain profits.  Market shifts were making it ever harder to keep up with emerging on-line competitors, and accidents like this were visible cracks in the business model.  But the stock was now $77. Most investors focused on short-term numbers rather than the telltale signs of distress.

In January, 2015 I pointed out that retail sales were actually down 1% for December, 2014.  But Amazon.com had grown considerably.  The telltale indication of a rotting traditional retail brick-and-mortar approach was showing itself clearly.  Wal-Mart was hitting all time highs of around $87, but I reiterated my recommendation that investors escape the stock.

By July, 2015 we learned that the market cap of Amazon now exceeded that of Wal-Mart.  Traditional retail struggles were apparent on several fronts, while on-line growth remained strong.  Bigger was not better in the case of Wal-Mart vs. Amazon, because bigger blinded Wal-Mart to the absolute necessity for changing its business model.  The stock had fallen back to $72.

Now Wal-Mart is back to $60/share.  Where it was in January, 2012 and only 10% higher than when I first said to avoid the stock in 2010.  Five years up, then down the roller coaster.

From October of 2010 through January, 2015 I looked dead wrong on Wal-Mart.  And the folks who commented on my columns here at this journal and on my web site, or emailed me, were profuse in pointing out that my warnings seemed misguided.  Wal-Mart was huge, it was strong and it would dominate was the feedback.

But I kept reiterating the point that long-term investors must look beyond short-term reported sales and earnings.  Those numbers are subject to considerable manipulation by management. Further, short-term operating actions, like shorter hours, lower pay, reduced benefits, layoffs and gouging suppliers can all prop up short-term financials at the expense of recognizing the devaluation of the company’s long-term strategy.

Investors buy and hold.  They hold until they see telltale signs of a company not adjusting to market shifts.  Short-term traders will say you could have bought in 2010, or 2012, and held into 2014, and then jumped out and made a profit.  But, who really can do that with forethought?  Market timing is a fools game.  The herd will always stay too long, then run out too late.  Timers get trampled in the stampede more often than book gains.

In this week’s announcement Wal-Mart executives provided more telltale signs of their problems, and the fact that they don’t know how to fix them, and therefore won’t.

  • Wal-Mart is going to spend $20B to buy back stock in order to prop up the price.  This is the most obvious sign of a company that doesn’t know how to keep up its valuation by growing profits.
  • Wal-Mart will spend $11B on sprucing up and opening stores.  Really.  The demand for retail space has been declining at 4-6%/year for a decade, and retail business growth is all on-line, yet Wal-Mart is still massively investing in its old “core” business.
  • Wal-Mart will spend $1.1B on e-commerce.  That is the proverbial “drop in the competitors bucket.” Amazon.com alone spent $8.9B in 2014 growing its on-line business.
  • Wal-Mart admits profits will decline in the next year.  It is planning for a growth stall.  Yet, we know that statistically only 7% of companies that have a growth stall ever go on to maintain a consistent growth rate of a mere 2%.  In other words, Wal-Mart is projecting the classic “hockey stick” forecast.  And investors are to believe it?

The telltale signs of an obsolete business model have been present at Wal-Mart for years, and continue.

In 2003 Sears Holdings was  $25/share.  In 2004 Sears bought K-Mart, and the stock was $40. I said don’t go near it, as all the signs were bad and the merger was ill-conceived.  Despite revenue declines, consistent losses, a revolving door at the executive offices and no sign of any plan to transform the battered, outdated retail giant against growing on-line competition investors believed in CEO Ed Lampert and bid the stock up to $77 in early 2011. (I consistently pointed out the telltale signs of trouble and recommended selling the stock.)

By the end of 2012 it was clear Sears was irrelevant to holiday shoppers, and the stock was trading again at $40.  Now, SHLD is $25 – where it was 12 years ago when Mr. Lampert started his machinations.  Again, only a market timer could have made money in this company.  For long-term investors, the signs were all there that this was not a place to put your money if you want to have capital growth for retirement.

There will be plenty who will call Wal-Mart a “value” stock and recommend investors “buy on weakness.”  But Wal-Mart is no value.  It is becoming obsolete, irrelevant – increasingly looking like Sears.  The likelihood of Wal-Mart falling to $20 (where it was at the beginning of 1998 before it made an 18 month run to $50 more than doubling its value) is far higher than ever trading anywhere near its 2015 highs.

Smisek’s United Ouster – Were You Really Surprised?

Smisek’s United Ouster – Were You Really Surprised?

Jeff Smisek, CEO of United Continental Holdings, was fired this week. It appears he was making deals with public officials (specifically the Chairman of the Port Authority of New York and New Jersey) to keep personally favored flights of politicians in the air, even when unprofitable, in a quid-pro-quo exchange for government subsidies to move a taxiway and better airport transit.

Wow, horse-trading of the kind that put the governor of Illinois in the penitentiary.

United-Jeff-Smisek-FiredBut you have to ask yourself, couldn’t you see it coming?  Or are we just so used to lousy leadership that we think there’s no end to it?

United has been beset with a number of problems.  Since Mr. Smisek organized the merger of Continental (his former employer) with United, creating the world’s largest airline at the time, things have not gone well.  Since announcing the merger in 2010, more has gone wrong than right at United:

The merged airline didn’t start in a great position.  It was in 2009 that a budding musician watched United baggage handlers destroy his guitar, leading to a series of videos on bad customer service that took to the top of YouTube and iTunes and his book on the culture of customer abuse at United underscored a major PR nightmare.

How could things seem to constantly become worse?  It was clear that at the top, United’s leadership cared only about cost control (ironically code named Project Quality.) Operational efficiency was seen as the only strategy, and it did not matter how much this strategy disaffected employees, suppliers or customers.  In 2013 United ranked dead last in the quality ranking of all airlines by Wichita State University, and the airline replied by saying it really didn’t care.

The power of thinking that if you focus on pennies and nickels the quarters and dollars will take care of themselves is strong.  It encourages you be very focused on details, even myopic, and operate your business very narrowly.  And it can set you up to make really dumb mistakes, like possibly trading airline flights for construction subsidies.

Focus, focus, focus often leads to being blind, blind, blind to the world around you.

There were ample signs of all the things going wrong at United, and the need for a change. The open question is why it took a criminal investigation into bribing government officials for the airline’s Board to fire the CEO?  Bad performance apparently didn’t matter?  Do you have to be an accused lawbreaker to be shown the door?

The story broke in February, so the Board has had a few months to find a replacement CEO.  Mr. Oscar Munoz will now take the reigns.  But one has to wonder if he is up for the challenges.  As a former railroad President, his world of relationships was much smaller than the millions of customers and 84,000 employees at United.

United’s top brass has a serious need “to get over itself.”  United’s internal focus, driven by costs, has disenfranchised its brand embassadors, its customer base, and many industry analysts.

United needs to become a lot clearer about what customers really need and want. Years of overly simplistic “all customers care about is price” has commoditized United’s approach to air travel.  Customers have been smart enough to see through lower seat prices, only to be stuck with seat assignment and baggage fees raising total trip cost.  And charging for everything on the plane, including cheesy TV shows, has customers wondering just how far from Spirit Airlines’ approach United would drift before someone reminded leadership what their customers want and why they used to choose United.

Unfortunately, it is a bit unsettling that CEO Munoz said his first action will be to take 90 days “traveling the system and listening and talking to our people and working with our management team.”  Sounds like a lot more internal focus.  Spending more time talking to customers at United’s hubs, and seeing how they are treated from check-in to baggage, might do him a lot more good.

United became big via acquisition.  That is much different than building an airline, like say Southwest did.  Growth via purchase is not the same as growth via loyal customers and an attractive brand proposition.  United has clearly lost its way.  It has a lot of problems to solve, but first among them should be understanding what customers want.  Then designing the model to profitably deliver it.

A $7.6B Write-off Plus Layoffs Is Never a Good Sign Microsoft

Microsoft announced today it was going to shut down the Nokia phone unit, take a $7.6B write-off (more than the $7.2B they paid for it,) and lay off another 7,800 employees.  That makes the layoffs since CEO Nadella took the reigns almost 26,000.  Finding any good news in this announcement is a very difficult task.

MSFT_logo_rgb_C-Gray_DUnfortunately, since taking over as Microsoft’s #1 leader, Mr. Nadella has been remarkably predictable.  Like his peer CEOs who take on the new role, he has slashed and burned employment, shut down at least one big business, taken massive write-offs, and undertaken at least one wildly overpriced acquisition (Minecraft) that is supposed to be a game changer for the company.  He apparently picked up the “Turnaround CEO Playbook” after receiving the job and set out on the big tasks!

Yet he still has not put forward a strategy that should encourage investors, employees, customers or suppliers that the company will remain relevant long-term. Amidst all these big tactical actions, it is completely unclear what the strategy is to remain a viable company as customers move, quickly and in droves, to mobile devices using competitive products.

I predicted here in this blog the week Steve Ballmer announced the acquisition of Nokia in September, 2013 that it was “a $7.2B mistake.”  I was off, because in addition to all the losses and restructuring costs Microsoft endured the last 7 quarters, the write off is $7.6B.  Oops.

Why was I so sure it would be a mistake?  Because between 2011 and 2013 Nokia had already lost half its market share.  CEO Elop, who was previously a Microsoft senior executive, had committed Nokia completely to Windows phones, and the results were already catastrophic.  Changing ownership was not going to change the trajectory of Nokia sales.

Microsoft had failed to build any sort of developer community for Windows 8 mobile.  Developers need people holding devices to buy their software.  Nokia had less than 5% share.  Why would any developer build an app for a Windows phone, when almost the entire market was iOS or Android?  In fact, it was clear that developing rev 2, 3, and 4 of an app for the major platforms was far more valuable than even bothering to port an app into Windows 8.

Nokia and Windows 8 had the worst kind of tortuous whirlpool – no users, so no developers, and without new (and actually unique) software there was nothing to attract new users.  Microsoft mobile simply wasn’t even in the game – and had no hope of winning.  It was already clear in June, 2012 that the new Windows tablet – Surface – was being launched with a distinct lack of apps to challenge incumbents Apple and Samsung.

By January, 2013 it was also clear that Microsoft was in a huge amount of trouble.  Where just a few years before there were 50 Microsoft-based machines sold for every competitive machine, by 2013 that had shifted to 2 for 1.  People were not buying new PCs, but they were buying mobile devices by the shipload – literally.  And there was no doubt that Windows 8 had missed the mobile market.  Trying too hard to be the old Windows while trying to be something new made the product something few wanted – and certainly not a game changer.

A year ago I wrote that Microsoft has to win the war for developers, or nothing else matters.  When everyone used a PC it seemed that all developers were writing applications for PCs.  But the world shifted.  PC developers still existed, but they were not able to grow sales.  The developers making all the money were the ones writing for iOS and Android.  The growth was all in mobile, and Microsoft had nothing in the game.  Meanwhile, Apple and IBM were joining forces to further displace laptops with iPads in commercial/enterprise uses.

Then we heard Windows 10 would change all of that.  And flocks of people wrote me that a hybrid machine, both PC and tablet, was the tool everyone wanted.  Only we continue to see that the market is wildly indifferent to Windows 10 and hybrids.

Imagine you write with a fountain pen – as most people did 70 years ago.  Then one day you are given a ball point pen.  This is far easier to use, and accomplishes most of what you want.  No, it won’t make the florid lines and majestic sweeps of a fountain pen, but wow it is a whole lot easier and a darn site cheaper.  So you keep the fountain pen for some uses, but mostly start using the ball point pen.

Then the fountain pen manufacturer says “hey, I have a contraption that is a ball point pen, sort of, and a fountain pen, sort of, combined.  It’s the best of all worlds.”  You would likely look at it, but say “why would I want that.  I have a fountain pen for when I need it.  And for 90% of the stuff I write the ball point pen is great.”

That’s the problem with hybrids of anything – and the hybrid tablet is  no different.  The entrenched sellers of old technology always think a hybrid is a good idea.  But once customers try the new thing, all they want are advancements to the new thing. (Just look at the interest in Tesla cars compared to the stagnant sales of hybrid autos.)

And we’re up to Surface 3 now. When I pointed out in January, 2013 that the markets were rapidly moving away from Microsoft I predicted Surface and Surface Pro would never be important products.  Reader outcry at that time from Microsoft devotees was so great that Forbes editors called me on the carpet and told me I lacked the data to make such a bold prediction.  But I stuck by my guns, we changed some language so it was less blunt, and the article ran.

Two and a half years later and we’re up to rev number Surface 3.  And still, almost nobody is using the product.  Less than 5% market share.  Right again.  It wasn’t a technology prediction, it was a market prediction.  Lacking app developers, and a unique use,  the competition was, and remains, simply too far out front.

Windows 10 is, unfortunately, a very expensive launch.  And to get people to use it Microsoft is giving it away for free.  The hope is then users will hook onto the cloud-based Office 365 and Microsoft’s Azure cloud services.  But this is still trying to milk the same old cow.  This approach relies on people being completely unwilling to give up using Windows and/or Office.  And we see every day that millions of people are finding alternatives they like just fine, thank you very much.

Gamers hated me when I recommended Microsoft should give (for free) xBox to Nintendo.  Unfortunately, I learned few gamers know much about P&Ls.  They all assumed Microsoft made a fortune in gaming.  But anyone who’s ever looked at Microsoft’s financial filings knows that the Entertainment Division, including xBox, has been a giant money-sucking hole.  If they gave it away it would save money, and possibly help leadership figure out a strategy for profitable growth.

Unfortunately, Microsoft bought Minecraft, in effect “doubling down” on the bet.  But regardless of how well anyone likes the products, Microsoft is not making money.  Gaming is a bloody war where Sony and Microsoft keep battling, and keep losing billions of dollars. The odds of ever earning back the $2.5B spent on Minecraft is remote.

The greater likelihood is that as write offs continue to eat away at profits, and as markets continue evolving toward mobile products offered by competitors hurting “core” Microsoft sales, CEO Nadella will eventually have to give up on gaming and undertake another Nokia-like event.

All investors risk looking at current events to drive decision-making.  When Ballmer was sacked and Nadella given the CEO job the stock jumped on euphoria.  But the last 18 months have shown just how bad things are for Microsoft.  It is a near monopolist in a market that is shrinking.  And so far Mr. Nadella has failed to define a strategy that will make Microsoft into a company that does more than try to milk its heritage.

I said the giant retailer Sears Holdings would be a big loser the day Ed Lampert took control of the company.  But hope sprung eternal, and investors jumped on the Sears bandwagon, believing a new CEO would magically improve a worn out, locked-in company.  The stock went up for over 2 years.  But, eventually, it became clear that Sears is irrelevant and the share price increase was unjustified.  And the stock tanked.

Microsoft looks much the same.  The actions we see are attempts to defend & extend a gloried history.  But they don’t add up to a strategy to compete for the future.  HoloLens will not be a product capable of replacing Windows plus Office revenues.  If developers are attracted to it enough to start writing apps.  Cortana is cool, but it is not first.  And competitive products have so much greater usage that developer learning curve gains are wildly faster.  These products are not game changers.  They don’t solve large, unmet needs.

And employees see this.  As I wrote in my last column, it is valuable to listen to employees.  As the bloom fell off the rose, and Nadella started laying people off while freezing pay, employee support of him declined dramatically.  And employee faith in leadership is far lower than at competitors Apple and Google.

As long as Microsoft keeps playing catch up, we should expect more layoffs, cost cutting and asset sales.  And attempts at more “hail Mary” acquisitions intended to change the company.  All of which will do nothing to grow customers, provide better jobs for employees, create value for investors or greater revenue opportunities for suppliers.

 

Why CEOs Make So Much Money

Why CEOs Make So Much Money

The Economic Policy Institute issued its most recent report on CEO pay yesterday, and the title makes the point clearly “Top CEOs Make 300 Times More than Typical Workers.”  CEOs of the 350 largest US public companies now average $16,300,000 in compensation, while typical workers average about $53,000.

Actually, it is kind of remarkable that this stat keeps grabbing attention.  The 300 multiple has been around since 1998.  The gap actually peaked in 2000 at almost 376.  There has been whipsawing, but it has averaged right around 300 for 15 years.

The big change happened in the 1990s.  In 1965 the multiple was 20, and by 1978 it had risen only to 30.  The next decade, going into 1990 saw the multiple rise to 60.  But then from 1990 to 2000 it jumped from 60 to well over 300 – where it has averaged since.  So it was long ago that large company CEO pay made its huge gains, and it such compensation has now become the norm.

But this does rile some folks.  After all, when a hired CEO makes more in a single workday (based on 5 day week) than the worker does in an entire year, justification does become a bit difficult.  And when we recognize that this has happened in just one generation it is a sea change.

CEO-Pay-HumongousIf average workers are angry, and some investors are angry, and politicians are increasingly speaking negatively about the topic why does CEO pay remain so high?

Reason 1 – Because they can

CEOs are like kings.  They aren’t elected to their position, they are appointed.  Usually after several years of grueling internecine political warfare, back-stabbing colleagues and gerrymandering the organization.  Once in the position, they pretty much get to set their own pay.

Who can change the pay?  Ostensibly the Board of Directors.  But who makes up most Boards?  CEOs (and former CEOs).  It doesn’t do any Board member’s reputation any good with his peers to try and cut CEO pay.  You certainly don’t want your objection to “Joe’s” pay coming up when its time to set your pay.

Honestly, if you could set your own pay what would it be?  I reckon most folks would take as much as they could get.

Reason 2 – the Lake Wobegon effect

NPR (National Public Radio) broadcasts a show about a fictional, rural Minnesota town called Lake Wobegon where “the women are strong, the men are good-looking, and all of the children are above average.”

Nice joke, until you apply it to CEOs.  The top 350 CEOs are accomplished individuals.  Which 175 are above average, and which 175 are below average?  Honestly, how does a Board judge?  Who has the ability to determine if a specific CEO is above average, or below average?

So when the “average” CEO pay is announced, any CEO would be expected to go to the Board, tell them the published average and ask “well, don’t you think I’ve done a great job?  Don’t you think I’m above average?  If so, then shouldn’t I be compensated at some percentage greater than average?”

Repeat this process 350 times, every year, and you can see how large company CEO pay keeps going up.  And data in the EPI report supports this.  Those who have the greatest pay increase are the 20% who are paid the lowest.  The group with the second greatest pay increase are the 20% in the next to lowest paid quintile. These lower paid CEOs say “shouldn’t I be paid at least average – if not more?”

The Board agrees to this logic, since they think the CEO is doing a good job (otherwise they would fire him.)  So they step up his, or her, pay.  This then pushes up the average.  And every year this process is repeated, pushing pay higher and higher and higher.

Oh, and if you replace a CEO then the new person certainly is not going to take the job for below-average compensation.  They are expected to do great things, so they must be brought in with compensation that is up toward the top.  The recruiters will assure the Board that finding the right CEO is challenging, and they must “pay up” to obtain the “right talent.” Again, driving up the average.

Reason 3 – It’s a “King’s Court”

Today’s large corporations hire consultants to evaluate CEO performance, and design “pay for performance” compensation packages.  These are then reviewed by external lawyers for their legality.  And by investment bankers for their acceptability to investors.  These outside parties render opinions as to the CEO’s performance, and pay package, and overall pay given.

Unfortunately, these folks are hired by the CEO and his Board to render these opinions.  Meaning, the person they judge is the one who pays them.  Not the employees, not a company union, not an investor group and not government regulators.  They are hired and paid by the people they are judging.

Thus, this becomes something akin to an old fashioned King’s Court.  Who is in the Boardroom that gains if they object to the CEO pay package?  If the CEO selects the Board (and they do, because investors, employees and regulators certainly don’t) and then they collectively hire an outside expert, does anyone in the room want that expert to say the CEO is overpaid?

If they say the CEO is overpaid, how do they benefit? Can you think of even one way?  However, if they do take this action – say out of conscious, morality, historical comparisons or just obstreperousness – they risk being asked to not do future evaluations.  And, even worse, such an opinion by these experts places their clients (the CEO and Board) at risk of shareholder lawsuits for not fulfilling their fiduciary responsibility.  That’s what one would call a “lose/lose.”

And, let’s not forget, that even if you think a CEO is overpaid by $10million or $20million, it is still a rounding error in the profitability of these 350 large companies.  Financially, to the future of the organization, it really does not matter.  Of all the issues a Board discusses, this one is the least important to earnings per share.  When the Board is considering the risks that could keep them up at night (cybersecurity, technology failure, patent infringement, compliance failure, etc.) overpaying the CEO is not “up the list.”

The famed newsman Robert Krulwich identified executive compensation as an issue in the 1980s.  He pointed out that there were no “brakes” on executive compensation.  There is no outside body that could actually influence CEO pay.  He predicted that it would rise dramatically.  He was right.

The only apparent brake would be government regulation.  But that is a tough sell.  Do Americans want Congress, or government bureaucrats, determining compensation for anyone?  Americans can’t even hardly agree on a whether there should be a minimum wage at all, much less where it should be set.  Rancor against executive compensation may be high, but it is a firecracker compared to the atomic bomb that would be detonated should the government involve itself in setting executive pay.

Not to mention that since the Supreme Court ruling in the case of Citizens United made it possible for companies to invest heavily in elections, it would be hard to imagine how much company money large company CEOs would spend on lobbying to make sure no such regulation was ever passed.

How far can CEO pay rise?  We recently learned that Jamie Dimon, CEO of JPMorganChase, has amassed a net worth of $1.1B.  It increasingly looks like there may not be a limit.

How HR “best practices” Kill Innovation

How HR “best practices” Kill Innovation

Did you ever notice that Human Resource (HR) practices are designed to lock-in the past rather than grow?  A quick tour of what HR does and you quickly see they like to lock-in processes and procedures, insuring consistency but offering no hope of doing something new.  And when it comes to hiring, HR is all about finding people that are like existing employees – same school, same degrees, same industry, same background.  And HR tries its very hardest to insure conformity amongst employees to historical standard – especially regarding culture.

Several years ago I was leading an innovation workshop for leaders in a company that made nail guns, screw guns, nails and screws.  Once a market leader, sales were struggling and profits were nearly nonexistent due to the emergence of competitors from Asia.  Some of their biggest distributors were threatening to drop this company’s line altogether unless there were more concessions – which would insure losses.

They liked to call themselves a “fastener company,” which has long been the trend with companies that like to make it sound as if they do more than they actually do.

I asked the simple question “where is the growth in fasteners?”  The leaders jumped right in with sales numbers on all their major lines.  They were sure that growth was in auto-loading screwguns, and they were hard at work extending this product line.  To a person, these folks were sure they new where growth existed.

But I had prepared prior to the meeting.  There actually was much higher growth in adhesives.  Chemical attachment was more than twice the growth rate of anything in the old nail and screw business.  Even loop-and-hook fasteners [popularly referred to by the tradename Velcro(c)] was seeing much greater growth than the old-line mechanical products.

They looked at me blank-faced.  “What does that have to do with us?” the head of sales finally asked.  The CEO and everyone else nodded in agreement.

I pointed out to them they said they were in the fastener business.  Not the nail and screw business.  The nail and screw business had become a bloody fight, and it was not going to get any better.  Why not move into faster growing, less competitive products?

Competitors were making lots of battery powered and air powered tools beyond nail guns and screw guns, and their much deeper product lines gave them much higher favorability with retail merchandisers and professional tool distributors.  Plus, competitor R&D into batteries was already showing they could produce more powerful and longer-lasting tools than my client.  In a few major retailers competitors already had earned the position of “category leader” recommending the shelf space and layout for ALL competitors, giving them a distinct advantage.

This company had become myopic, and did not even realize it.  The people were so much alike that they could finish each others sentences.  They liked working together, and had built a tightly knit culture.  The HR head was very proud of his ability to keep the company so harmonious.

Only, it was about to go bankrupt.  Lacking diversity in background, they were unable to see beyond their locked-in business model.  And there sure wasn’t anyone who would “rock the boat” by admitting competitors were outflanking them, or bringing up “wild ideas”  for new markets or products.

According to the New York Times 80% of hiring is done based on “cultural fit.”  Which means we hire people we want to hang out with. Which almost always means people that are a lot like ourselves.  Regardless of what we really need in our company.  Thus companies end up looking, thinking and acting very homogenously.

It is common amongst management authors and keynote speakers to talk about creating “high-performance teams.” The vaunted Jim Collins in “Good to Great” uses the metaphor of a company as a bus.  Every company should have a “core” and every employee should be single-mindedly driving that “core.” He says that it is the role of good leaders to get everyone on the bus to “core.”  Anyone who isn’t 100% aligned – well, throw them off the bus (literally, fire them.)

We see this phenomenon in nepotism.  Where a founder, CEO or Chairperson who succeeds uses their leadership position to promote relatives into high positions.

Wal-Mart’s Board of Directors, for example, recently elected the former Chairman’s son-in-law to the position of Chairman.  He appears accomplished, but today Wal-Mart’s problem is Amazon and other on-line retail. Wal-Mart desperately needs outside thinking so it can move beyond its traditional brick-and-mortar business model, not someone who’s indoctrinated in the past.

The Reputation Institute just completed its survey of the most reputable retailers in the USA.  Top of the list was Amazon, for the third straight year.  Wal-Mart wasn’t even in the top 10, despite being the largest U.S. retailer by a considerable margin.  Wal-Mart needs someone at the top much more like Jeff Bezos than someone who comes from the family.

malcolm-forbes-publisher-diversity-the-art-of-thinking-independentlyDespite what HR often says, it is incredibly important to have high levels of diversity.  It’s the only way to avoid becoming myopic, and finding yourself with “best practices” that don’t matter as competitors overwhelm your market.

Ever wonder why so many CEOs turn to layoffs when competitors cause sales and/or profits to stall?  They are trying to preserve the business model, and everyone reporting to them is doing the same thing.  Instead of looking for creative ways to grow the business – often requiring a very different business model – everyone is stuck in roles, processes and culture tied to the old model.  As everyone talks to each other there is no “outsider” able to point out obvious problems and the need for change.

In 2011, while he was still CEO, I wrote a column titled “Why Steve Jobs Couldn’t Find a Job Today.” The premise was pretty simple. Steve Jobs was not obsessed with “cultural fit,” nor was he a person who shied away from conflict.  He obsessed about results.  But no HR person would consider a young Steve Jobs as a manager in their company.  He would be considered too much trouble.

Yet, Steve Jobs was able to take a nearly dead Macintosh company and turn it into a leader in mobile products.  Clearly, a person very talented in market sensing and identifying new solutions that fit trends.  And a person willing to move toward the trend, rather than obsess about defending and extending the past.

Quotation-W-Somerset-Maugham-trouble-men-charm-ideas-Meetville-Quotes-97641Does your organization’s HR insure you would seek out, recruit and hire Steve Jobs, or Jeff Bezos?  Or are you looking for good “cultural fit” and someone who knows “how to operate within that role.”  Do you look for those who spot and respond to trends, or those with a history related to how your industry or business has always operated?  Do you seek people who ask uncomfortable questions, and propose uncomfortable solutions – or seek people who won’t make waves?

Too many organizations suffer failure simply because they lack diversity.  They lack diversity in geographic sales, markets, products and services – and when competition shifts sales stall and they fall into a slow death spiral.

And this all starts with insufficient diversity amongst the people.  Too much “cultural fit” and not enough focus on what’s really needed to keep the organization aligned with customers in a fast-changing world. If you don’t have the right people around you, in the discussion, then you’re highly unlikely to develop the right solution for any problem.  In fact, you’re highly unlikely to even ask the right question.

CSC – When All Else Fails, Split!

CSC – When All Else Fails, Split!

Information technology (IT) services company Computer Sciences Corporation (CSC) recently announced it is splitting into two separate companies.  One will “focus” on commercial markets, the other will “focus” on government contracts.  Ostensibly, as we’ve heard before, leadership would like investors, employees and customers to believe this is the answer for a company that has incurred a number of high profile failed contracts, a turnover in leadership, vast losses and declining revenue.

Oh boy.

After years of poor performance, and an investigation by the UK parliament into a failed contract for the National Health Services, in 2012 CSC brought in a new CEO.  Like most new CEOs, his first action was to announce a massive cost-cutting program.  That primarily meant vast layoffs.  So out the door went thousands of people in order to hopefully improve the P&L.

Only a services company doesn’t have any hard assets.  The CSC business requires convincing companies, or government agencies, to let them take over their data centers, or PC deployment, or help desk, or IT development, or application implementation – in other words to outsource some part (or all) of the IT work that could be done internally.  Winning this work has been an effort to demonstrate you can hire better people, that are more productive, at lower cost than the potential client.

So when CSC undertook a massive layoff, service levels declined.  It was unavoidable.  Where before CSC had 10 people doing something (or 1,000) now they have 7 (or 700).  It’s not hard to imagine what happens next.  Morale declines as layoffs ensue, and the overworked remaining employees feel (and perhaps really are) overworked.  People leave for better jobs with higher pay and less stress.  Yet, the contract requirements remain, so clients often start complaining about performance, leading to more pressure on the remaining employees.  A vicious whirlpool of destruction starts, as things just keep getting worse.

Immediately after taking the CEO job in 2012 Mike Lawrie declared a massive $4.3B loss.  This allowed him to “bring forward” anticipated costs of the anticipated layoffs, cancelled contracts, etc.  Most importantly, it allowed him to “cost shift” future costs into his first year in the job – the year in which he would not be fired, regardless how much he wrote off.  This is a classic financial machination applied by “turnaround CEOs” in order to blame the last guy for not being truthful about how badly things were, while guaranteeing the end of the new guy’s first year would show a profit due to the huge cost shift.

True to expectations, after one year with Lawrie as CEO, CSC declared a $1B profit for fyscal 2013 (about 20% of the previous write-off.)  But then fyscal 2014 returned to the previous norm, as profits shrunk to just $674M on about $12B revenues (~5% net margin.) For 4th quarter of fyscal 2015 revenues dropped another 12.6% – not hard to imagine given the layoffs and ensuing customer dissatisfaction.  Most troubling, the commercial part of CSC, which represents 75% of revenue, saw all parts of the business decline between 15-20%, while the federal contracting (much harder to cancel) remained flat.  This is not the trajectory of a turnaround.

CEO Lawrie blames the deteriorating performance on execution missteps.  And he has promised to keep his eyes carefully on the numbers.  Although he has admitted that he doesn’t really know when, or if, CSC will return to any sort of growth.

No wonder that for more than a year prior to this split CSC was unable to sell itself.  Despite a lot of hard effort, no banker was able to put together a deal for CSC to be purchased by a competitor or a private banking (hedge fund) operation.

If none of the professionals in making splits and turnarounds were willing to take on this deal, why should individual investors?  In this case, watching people walk away should be a clear indicator of how bad things are, and how clueless leadership is regarding a fix for the problems.

The real problem at CSC isn’t “execution.”  The real problem is that the market has shifted substantially.  For decades CSC’s outsourcing business was the norm.  But today companies don’t need a lot of what CSC outsources.  They are closing down those costly operations and replacing them with cloud services, cloud application development and implementation, mobile deployments and significant big data analytics.  Or looking for new services to solve problems like cybersecurity threats. CSC quite simply hasn’t done anything in those markets, and it is far, far behind.  It is a big dinosaur rapidly being overtaken by competitors moving more quickly to new solutions.

One of CSC’s biggest competitors is IBM, which itself has had a series of woes.  However, IBM has very publicly set up a partnership with Apple and is moving rapidly to develop industry-specific software as a service (SaaS) offerings that are mobile and operate in the cloud.  These targeted enterprise solutions in health care, finance and other industries are designed to make the services offered by CSC obsolete.

Although it may have had a huge client base of 1,000 customers.  And CSC brags that 175 of the Fortune 500 buy some services from it, exactly what does CSC bring to the table to keep these customers?  Years of cost cutting means the company has not invested in the kinds of solutions being offered by IBM and competitors such as Accenture, HP and Dell domestically – and WiPro, TCS (Tata Consulting Services,) Infosys and Cognizant offshore.  Not to mention dozens of up-and-coming small competiters who are right on the market for targeted solutions with the latest technology such as 6D Gobal Technologies.  CSC is still stuck in its 1980s consulting model, and skill set, in a world that is vastly different today.

csc_crime_against_humanityCSC has no idea how to “focus” on clients.  That would mean investing in modern solutions to rapidly changing client needs.  CSC failed to do that 15 years ago when most outsourcing involved heavy use of offshore resources.  And CSC has never caught up.  Leadership overly relied on selling old services, and discounting.  It’s model caused it to underbid projects, until the UK government almost shut the company down for its inability to deliver, and constantly hiding actual results.

Now CSC lacks any of the capabilities, people or skills to offer clients what they want. Its diffuse customer base is more a liability than a benefit, because these customers are “end of life” for the services CSC offers.  Years of declining revenues demonstrate that as value declines, contracts are either allowed to go to very cheap offshore providers, lapse completely or cancelled early in order to shift client resources to more important projects where CSC cannot compete.

This split is just an admission that leadership has no idea what to do next. Customers are leaving, and revenues are declining.  Margins, at 5%, are terrible and there is no money to invest in anything new.  Some of the world’s best investors have looked at CSC deeply and chosen to walk away.  For employees and individual investors it is time to admit that CSC has a limited future, and it is time to find far greener pastures.

 

Why McDonald’s Can’t Save Itself – They Myth of Core

Why McDonald’s Can’t Save Itself – They Myth of Core

McDonald’s just had another lousy quarter.  All segments saw declining traffic, revenues fell 11%.  Profits were off 33%.  Pretty well expected, given its established growth stall.

A new CEO is in place, and he announced is turnaround plan to fix what ails the burger giant.  Unfortunately, his plan has been panned by just about everyone. Unfortunately, its a “me too” plan that we’ve seen far too often – and know doesn’t work:

  1. Reorganize to cut costs.  By reshuffling the line-up, and throwing out a bunch of bodies management formerly said were essential, but now don’t care about, they hope to save $300M/year (out of a $4.5B annual budget.)
  2. Sell off 3,500 stores McDonald’s owns and operate (about 10% of the total.)  This will further help cut costs as the operating budgets shift to franchisees, and McDonald’s book unit sales creating short-term, one-time revenues into 2018.
  3. Keep mucking around with the menu.  Cut some items, add some items, try a bunch of different stuff.  Hope they find something that sells better.
  4. Try some service ideas in which nobody really shows any faith, like adding delivery and/or 24 hour breakfast in some markets and some stores.

McDonalds burger and friesNeedless to say, none of this sounds like it will do much to address quarter after quarter of sales (and profit) declines in an enormously large company.  We know people are still eating in restaurants, because competitors like 5 Guys, Meatheads, Burger King and Shake Shack are doing really, really well.  But they are winning primarily because McDonald’s is losing.  Even though CEO Easterbrook said “our business model is enduring,” there is ample reason to think McDonald’s slide will continue.

Possibly a slide into oblivion.  Think it can’t happen?  Then what happened to Howard Johnson’s?  Bob’s Big Boy? Woolworth’s?  Montgomery Wards? Size, and history, are absolutely no guarantee of a company remaining viable.

In fact, the odds are wildly against McDonald’s this time.  Because this isn’t their first growth stall.  And the way they saved the company last time was a “fire sale” of very valuable growth assets to raise cash that was all spent to spiffy up the company for one last hurrah – which is now over.  And there isn’t really anything left for McDonald’s to build upon.

Go back to 2000 and McDonald’s had a lot of options.  They bought Chipotle’s Mexican Grill in 1998, Donato’s Pizza in 1999 and Boston Market in 2000.  These were all growing franchises.  Growing a LOT faster, and more profitably, than McDonald’s stores.  They were on modern trends for what people wanted to eat, and how they wanted to be served.  These new concepts offered McDonald’s fantastic growth vehicles for all that cash the burger chain was throwing off, even as its outdated yellow stores full of playgrounds with seats bolted to the floors and products for 99cents were becoming increasingly not only outdated but irrelevant.

But in a change of leadership McDonald’s decided to sell off all these concepts.  Donato’s in 2003, Chipotle went public in 2006 and Boston Market was sold to a private equity firm in 2007.  All of that money was used to fund investments in McDonald’s store upgrades, additional supply chain restructuring and advertising. The “strategy” at that time was to return to “strategic focus.”  Something that lots of analysts, investors and old-line franchisees love.

But look what McDonald’s leaders gave up via this decision to re-focus.  McDonald’s received $1.5B for Chipotle.  Today Chipotle is worth $20B and is one of the most exciting fast food chains in the marketplace (based on store growth, revenue growth and profitability – as well as customer satisfaction scores.)  The value of all of the growth gains that occurred in these 3 chains has gone to other people.  Not the investors, employees, suppliers or franchisees of McDonald’s.

We have to recognize that in the mid-2000s McDonald’s had the option of doing 180degrees opposite what it did.  It could have put its resources into the newer, more exciting concepts and continued to fidget with McDonald’s to defend and extend its life even as trends went the other direction.  This would have allowed investors to reap the gains of new store growth, and McDonald’s franchisees would have had the option to slowly convert McDonald’s stores into Donato’s, Chipotle’s or Boston Market.  Employees would have been able to work on growing the new brands, creating more revenue, more jobs, more promotions and higher pay.  And suppliers would have been able to continue growing their McDonald’s corporate business via new chains.  Customers would have the benefit of both McDonald’s and a well run transition to new concepts in their markets.  This would have been a win/win/win/win/win solution for everyone.

But it was the lure of “focus” and “core” markets that led McDonald’s leadership to make what will likely be seen historically as the decision which sent it on the track of self-destruction.  When leaders focus on their core markets, and pull out all the stops to try defending and extending a business in a growth stall, they take their eyes off market trends.  Rather than accepting what people want, and changing in all ways to meet customer needs, leaders keep fiddling with this and that, and hoping that cost cutting and a raft of operational activities will save the business as they keep focusing ever more intently on that old core business.  But, problems keep mounting because customers, quite simply, are going elsewhere.  To competitors who are implementing on trends.

The current CEO likes to describe himself as an “internal activist” who will challenge the status quo.  But he then proves this is untrue when he describes the future of McDonald’s as a “modern, progressive burger company.”  Sorry dude, that ship sailed years ago when competitors built the market for higher-end burgers, served fast in trendier locations.  Just like McDonald’s 5-years too late effort to catch Starbucks with McCafe which was too little and poorly done – you can’t catch those better quality burger guys now.  They are well on their way, and you’re still in port asking for directions.

McDonald’s is big, but when a big ship starts taking on water it’s no less likely to sink than a small ship (i.e. Titanic.)  And when a big ship is badly steered by its captain it flounders, and sinks (i.e. Costa Concordia.)  Those who would like to think that McDonald’s size is a benefit should recognize that it is this very size which now keeps McDonald’s from doing anything effective to really change the company.  Its efforts (detailed above) are hemmed in by all those stores, franchisees, commitment to old processes, ingrained products hard to change due to installed equipment base, and billions spent on brand advertising that has remained a constant even as McDonald’s lost relevancy. It is now sooooooooo hard to make even small changes that the idea of doing more radical things that analysts are requesting simply becomes impossible for existing management.

And these leaders, frankly, aren’t even going to try.  They are deeply wedded, committed, to trying to succeed by making McDonald’s more McDonald’s.  They are of the company and its history.  Not the CEO, or anyone on his team, reached their position by introducing a revolutionary new product, much less a new concept – or for that matter anything new.  They are people who “execute” and work to slowly improve what already exists. That’s why they are giving even more decision-making control to franchisees via selling company stores in order to raise cash and cut costs – rather than using those stores to introduce radical change.

These are not “outside thinkers” that will consider the kinds of radical changes Louis V. Gerstner, a total outsider, implemented at IBM – changing the company from a failing mainframe supplier into an IT services and software company.  Yet that is the only thing that will turn around McDonald’s.  The Board blew it once before when it sold Chipotle, et.al. and put in place a core-focused CEO.  Now McDonald’s has fewer resources, a lot fewer options, and the gap between what it offers and what the marketplace wants is a lot larger.

Why You Want to Own Facebook Rather Than Google

Why You Want to Own Facebook Rather Than Google

Last week saw another slew of quarterly earnings releases.  For long term investors, who hold stocks for years rather than months, these provide the opportunity to look at trends, then compare and contrast companies to determine what should be in their portfolio.  It is worthwhile to compare the trends supporting the valuations of market leaders Google and Facebook.

Facebook v GoogleGoogle once again reported higher sales and profits.  And that is a good thing. But, once again, the price of Google’s primary product declined. Revenues increased because volume gains exceeded the price decline, which indicates that the market for internet ads keeps growing. But this makes 15 straight quarters of price declines for Google.  Due to this long series of small declines, the average price of Google’s ads (cost per click) has declined 70%* since Q3 2011!

While this is a miraculous example of what economists call demand elasticity, one has to wonder how long growth will continue to outpace price degradation.  At some point the marginal growth in demand may not equal the marginal decline in pricing. Should that happen, revenues will start going down rather than up.

Part of what drives this price/growth effect has been the creation of programmatic ad buying, which allows Google to place more ads in more specific locations for advertisers via such automated products as AdMob, AdExchange and DoubleClick Bid Manager.  But such computerized ad buying relies on ever more content going onto the web, as well as ever more consumption by internet users.

Further, Google’s revenues are almost entirely search-based advertising, and Google dominates this category.  But this is largely a PC-related sale.  Today 67.5% of Google ad revenue is from PC searches, while only 32.5% is from mobile searches.  Due to this revenue skew, and the fact that people do more mobile interaction via apps, messaging apps and social media than browser, search ad growth has fallen considerably.  What was a 24% year over year growth rate in Q1 2012 has dropped to more like 15% for the last 8 quarters.

So while the market today is growing, and Google is making more money, it is possible to see that the growth is slowing.  And Google’s efforts to create mobile ad sales outside of search has largely failed, as witnessed by the  recent death of Google+ as competition for Twitter or Facebook. It is the market shift, to mobile, which creates the greatest threat to Google’s ability to grow; certainly at historical rates.

Simultaneously, Facebook’s announcements showed just how strongly it is continuing to dominate both social media and mobile, and thus generate higher revenues and profits with outstanding growth.  The #1 site for social media and messenger apps is Facebook, by quite a large margin.  But, Facebook’s 2014 acquisition of What’sApp is now #2.  WhatsApp has doubled its monthly active users (MAUs) just since the acquisition, and now reaches 800million. Growth is clearly accelerating, as this is from a standing start in 2011.

Facebook Messenger at #3, just behind WhatsApp.  And #5 is Instagram, another Facebook acquisition.  Altogether 4 of the top 5 sites, and the ones with greatest growth on mobile, are Facebook.  And they total over 3billion MAUs, growing at over 300million new MAUs/month.  Thus Facebook has already emerged as the dominant force, with the most users, in the fast-growing, accelerating, mobile and app sectors.  (Just as Google did in internet search a decade ago, beating out companies like Yahoo, Ask Jeeves, etc.)

Google is moving rapidly to monetize this user base.  From nothing in early 2012, Facebook’s mobile revenue is now $2.5B/quarter and represents 67% of global revenue (the inverse of Google’s revenues.)  Further, Facebook is now taking its own programmatic ad buying tool, Atlas, to advertisers in direct competition with Google.  Only Atlas places ads on both social media and internet browser pages – a one-two marketing punch Google has not yet cracked.

Google’s $17.3B Q1 2015 revenue is 30 times the revenue of Facebook.  There is no doubt Google is growing, and generating enormous profits.  But, for long-term investors, growth is slowing and there is reason to be concerned about the long term growth prospects of Google as the market shifts toward more social and more mobile.  Google has failed to build any substantial revenues outside of search, and has had some notable failures recently outside its core markets (Google + and Google Glass.)  Just how long Google will continue growing, and just how fast the market will shift is unclear.  Technology markets have shown the ability to shift a lot faster than many people expected, leaving some painful losers in their wake (Dell, HP, Sun Microsystems, Yahoo, etc.)

Meanwhile, Facebook is squarely positioned as the leader, without much competition, in the next wave of market growth.  Facebook is monetizing all things social and mobile at a rapid clip, and wisely using acquisitions to increase its strength.  As these markets continue on their well established trends it is hard to be anything other than significantly optimistic for Facebook long-term.

* 1x .93 x .88 x .84 x .85 x .94 x .96 x .94 x .93 x .89 x .91 x .94 x .98 x .97 x .95 x .93 = .295

 

Innovating to Solve Tanqueray’s Growth Quandary

Innovating to Solve Tanqueray’s Growth Quandary

If you don’t drink gin you may not know the brand Tanqueray, a product owned by Diageo. But Tanqueray has been around for almost 190 years, going back to the days when London Dry Gin was first created. Today Tanqueray is one of the most dominant gin brands in the world, and the leading brand in the USA.

Tanqueray London Dry GinBut gin is not a growth category. And Tanqueray, despite its great product heritage and strong brand position, has almost no growth prospects.

Any product that doesn’t grow sales cannot generate profits to spend on brand maintenance. Firstly, if due to nothing more than inflation, costs always go up over time. It takes rising sales to offset higher costs.  Additionally, small competitors can niche the market with new products, cutting into leader sales. And competitors will undercut the leader’s price to steal volume/share in a stagnant market, causing margin erosion.

Category growth stalls are usually linked to substitute products stealing share in a larger definition of the marketplace. For example sales of laptop/desktop PCs stalled because people are now substituting tablets and smartphones. The personal technology market is growing, but it is in the newer product category stealing sales from the older product category.

This is true for gin sales, because older drinkers – who dominate today’s gin market – are drinking less spirits, and literally dying from old age. In the overall spirits market, younger liquor drinkers have preferred vodkas and flavored vodkas which are “smoother,” sweeter, and perceived as “lighter.”

Smirnoff Vodka Group

So, what is a brand manager to do? Simply let trends obsolete their product line? Milk their category and give up money for investing somewhere else?

That may sound fine at a corporate level, where category portfolios can be managed by corporate vice presidents. But if you’re a brand manager and you want to become a future V.P., managing declining product sales will not get you into that promotion. And defending market share with price cuts, rebates and deals will cut into margin, ruin the brand position and likely kill your marketing career.

Keith Scott is the Senior Brand Manager for Tanqueray, and his team has chosen to regain product growth by using sustaining innovations in a smart way to attract new customers into the gin category. They are looking beyond the currently dwindling historical customer base of London Dry Gin drinkers, and working to attract new customers which will generate category growth and incremental Tanqueray sales.  He’s looking to build the brand, and the category, rather than get into a price war.

Building on demographic trends, Tanqueray’s brand management is targeting spirit drinkers from 28-38. Three new Tanqueray brand extensions are being positioned for greatest appeal to increasingly adult tastes, while offering sophistication and linkage to one of the longest and strongest spirits brands.

Tanqueray Rangpur#1 – Tanqueray Rangpur is a highly citrus-flavored gin taking a direct assault on flavored vodkas. Although still very much a gin, with its specific herb-based taste, Rangpur adds a hefty, and uniquely flavored, dose of lime. This makes for a fast, easy to prepare gin and tonic or lime-based gimlet – 2 classic cocktails that have their roots in England but have been popular in the US since before prohibition. And, in defense of the brand, Rangpur is priced about 10-20% higher than London Dry.

Tanqueray Malacca#2 – Tanqueray Old Tom and Tanqueray Milacca appeal to the demographic that loves specialty, crafted products. The “craft” product movement has grown dramatically, and nowhere more powerfully than amongst 28-42 year old beer drinkers. Old Tom and Milacca leverage this trend.  Both are “retro” products, harkening to gins over 100 years ago. They are made in small batches and have limited availability. They are targeted at the consumer that wants something new, unique, unusual and yet tied to old world notions of hand-made production and high quality. These craft products are priced 25-35% higher than traditional London Dry.Tanqueray Old Tom

#3 – Tanqueray No. 10 is a “super-premium” product pointed at the customer who wants to project maximum sophistication and wealth. No 10 uses a special manufacturing process creating a uniquely smooth and slightly citrus flavor. But this process loses 40% of the product to “tailings” compared to the industry standard 10% loss. No. 10 is the high-end defense of the Tanqueray brand (a “top shelf” product as its known in the industry) priced 75-90% higher than London Dry.

Tanqueray no 10

No. 10 is being promoted with “invitation only” events being held in major U.S. cities such as New York, Chicago and Atlanta. No. 10 “trunk events” bring in some of the hottest, newest designers to showcase the latest in apparel trends, accompanied by hot, new musical talent. No. 10 is associated with the sophistication of super-premium brands – individualized and rare products – in a members-only environment. Targeted at the primary demographic of 28-38, No. 10 events are designed to lure these consumers to this product they otherwise might overlook .

Rather than addressing their gin category growth stall with price cuts and other sales incentives, which would lead to brand erosion, price erosion, and margin erosion, the Tanqueray brand team is leveraging trends to bring new consumers to their category and generate profitable growth.  These innovative brand extensions actually build brand value while leveraging identifiable market trends.  Notice that all these sustaining innovations are actually priced higher than the highest volume London Dry core product, thus augmenting price – and hopefully margin.

Too often leaders see their market stagnate and use that as an excuse lower expectations and accept sales decline. They don’t look beyond their core market for new customers and sources of growth. They react to competition with the blunt axe of pricing actions, seeking to maintain volume as margins erode and competition intensifies. This accelerates product genericization, and kills brand value.

The Tanqueray brand team demonstrates how critical sustaining innovation can be for maintaining growth at all levels of an organization. Even the level of a single product or brand.  They are using sustaining innovations to lure in new customers and grow the brand umbrella, while growing the category and achieving desired price realization.  This is a lesson many brands, and companies, should emulate.

GE’s Complete Leadership Failure

General Electric’s Chairman and CEO Jeffrey Immelt announced last week that his next big step as leader will be to sell off the company’s real estate assets and the balance of its financial services business.  This is a massive $300B asset sale.  It follows the very large spin-off of GE’s retail banking unit as Synchrony Financial in 2014, and the sale of NBC/Universal in 2013.  When it comes to shrinking a company, few CEOs have ever been as successful as Mr. Immelt!

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The money is not going into developing any new markets or new products.  It is not being used to finance growth of GE at all.  Rather, Mr. Immelt will immediately begin a massive $50B stock buyback program in order to prop up the stock price for investors.

Immelt GE WayWhen Mr. Immelt took the job of CEO GE sold for about $40/share.  Last week it was trading for about $25/share.  A decline of 37.5%.  During that same time period the Dow Jones Industrial Average, of which GE is the oldest component, rose from 9,600 to 17,900.  An increase of 86.5%.  This has been a very, very long period of quite unsatisfactory performance for Mr. Immelt.

Prior to Mr. Immelt GE was headed by Jack Welch.  During his tenure at the top of GE the company created more wealth for its investors than any company ever in the recorded history of U.S. publicly traded companies.  GE’s value increased 40-fold (4000%) from 1981 to 2001. He expanded GE into new businesses, often far removed from its industrial manufacturing roots, as market shifts created new opportunities for growing revenues and profits.  From what was mostly a diversified manufacturing company Mr. Welch lead GE into real estate as those assets increased in value, then media as advertising revenues skyrocketed and finally financial services as deregulation opened the market for the greatest returns in banking history.

Jack Welch was the Steve Jobs of his era.  Because he had the foresight to push GE into new markets, create new products and grow the company.  Growth that was so substantial it kept GE constantly in the news, and investors thrilled.

But Mr. Immelt – not so much.  During his tenure GE has not developed any new markets.  He has not led the company into any growth areas.  As the world of portable technology has exploded, making a fortune for Apple and Google investors, GE missed the entire movement into the Internet of Things.  Rather than develop new products building on new technologies in wifi, portability, mobility and social Mr. Immelt’s GE sold the appliance division to Electrolux and spent the $3.3B on stock buybacks.

Mr. Immelt’s tenure has been lacked by a complete lack of vision. Rather than looking ahead and preparing for market shifts, Immelt’s GE has reacted to market changes – usually for the poorer.  Unprepared for things going off-kilter in financial services, the company was rocked by the financial meltdown and was only saved by an infusion from Berkshire Hathaway.  Now it is exiting the business which generates nearly half its profits, claiming it doesn’t want to deal with regulations, rather than figuring out how to make it a more successful enterprise.  After accumulating massive real estate holdings, instead of selling them at the peak in the mid-2000s it is now exiting as fast as possible in a recovering economy – to let the fund managers capture gains from improving real estate.

GE is now repatriating some $36B in foreign profits, on which it will pay $6B in taxes.  Investors should realize this is happening at the strongest value of the dollar since Mr. Immelt took office.  If GE needed these funds, which have been in offshore currencies such as the Euro, it could have repatriated them anytime in the last 3 years and those funds would have been $50B instead of $36B!  To say the timing of this transaction could not have been poorer ….

The only thing into which Mr. Immelt has invested has been GE stock.  And even that has been a lousy spend, as the price has gone down rather than up!   Smart investors have realized that there is no growth in Immelt’s GE, and they have dumped the stock faster than he could buy it.  Mr. Immelt’s Harvard MBA gave him insight to financial engineering, but unfortunately not how to lead and grow a major corporation.  After 15 years Immelt will leave GE a much smaller, and as he said in the press release, “simpler” business.  Apparently it was too big and complicated for him to run.

In the GE statement Mr. Immelt states “This is a major step in our strategy to focus GE around its competitive advantage.”  Sorry Mr. Immelt, but that is not a strategy.  Identifying growing markets and technologies to create strong, high profit positions with long-term returns is a strategy.  Using vague MBA-esque language to hide what is an obvious effort at salvaging a collapsing stock price for another 2 years has nothing to do with strategy.  It is a financial tactic.

The Immelt era is the story of a GE which has reacted to events, rather than lead them.  Where Steve Jobs took a broken, floundering company and used vision to guide it to great wealth, and Jack Welch used vision to build one of the world’s most resilient and strong corporations, Jeffrey Immelt and his team were overtaken by events at almost every turn.  CEO Immelt took what was perhaps the leading corporation of the last century and will leave it in dire shape, lacking a plan for re-establishing its once great heritage.  It is a story of utterly failed leadership.

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