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.
But 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.”
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.
#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.
#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.
#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.
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.
It is that time of year when many of us celebrate with an alcoholic beverage. But increasingly in America, that beverage is not beer. Since 2008, American beer sales have fallen about 4%.
But that decline has not been equally applied to all brands. The biggest, old line brands have suffered terribly. Nearly gone are old brands like Milwaukee’s Best, which were best known for being low priced – and certainly not focused on taste. But the most hurt, based on volume declines, have been what were once the largest brands; Budweiser, Miller Lite and Miller High Life. These have lost more than a quarter of their volume, losing a whopping 13million barrels/year of demand. These 3 brand declines account for 6% reduction in the entire beer market.
The popular myth is that this has been due to the rise of craft beers. And there is no doubt, craft beer sales have done well. Sales are up 80%. Many articles (including the WSJ)tout the growth of craft beers, which are ostensibly more tasty and appealing, as being the reason old-line brands have declined. It is an easy explanation to accept, and has largely gone unchallenged. Even the brewer of Budweiser, Annheuser-Busch InBev, has reacted to this argument by taking the incredible action of dropping clydesdale horses from their ads after 81 years – in an effort to woo craft beer drinkers, which are thought to be younger and less sentimental about large horses.
This all makes sense. Too bad it’s the wrong conclusion – and the wrong actions being taken.
Realize that craft beer sales are up from a small base, and today ALL craft beer sales still account for only 7.6% of the market. In fact, ALL craft beers combined sell only the same volume as the now smaller Budweiser. The problem with Budweiser sales – and sales of other big name brand beers – is a change in demographics.
Drinkers of Budweiser and Lite are simply older. These brands rose to tremendous dominance in the 1970s. Many of those who loved this brand are simply older – or dead. Where a hard working fellow in his 30s or 40s might enjoy a six pack after work, today that Boomer (if still alive) is somewhere between late 50s and 70s. Now, a single beer, or maybe two, will suffice thank you very much. And, equally challenging for sales, today’s Boomer is more often drinking a hard liquor cocktail, and a glass of wine with dinner. Beer drinking has its place, but less often and in lower quantities.
Meanwhile, Hispanics are a growing demographic. Hispanics are the largest non-white population in America, at 54million, and represent over 17% of all Americans. With a growth rate of 2.1%, Hispanics are also one of the fastest growing demographic segments – and increasingly important given their already large size. Hispanics are truly becoming a powerful buying group in American economics.
So, just as decline in Boomer population and consumption has hurt the once great beer brands, we can look at the growth in Hispanic demographics and see a link to sales of growing brands. Two significant (non-craft volume) beer brands that more than doubled sales since 2008 are Modelo Especial and Dos Equis. In fact, these were the 2 fastest growing brands in America, even though the first does no English language advertising at all, and the latter only lightly funds advertising with an iconic multi-year campaign. Together their sales total almost 5.4M barrels – which makes these 2 brands equal to 1/3 the ENTIRE craft beer marketplace. And growing 33% faster!
Chasing the myth of craft sales is doing nothing for InBev and MillerCoors as they try to defend and extend outdated brands. On the other hand, Heineken controls Dos Equis, and Constellation Brands controls Modello Especial. These two companies are squarely aligned with demographic trends, and well positioned for growth.
So, be careful the next time you hear some simple explanation for why a product or service is declining. The answer might sound appealing, but have little economic basis. Instead, it is much smarter to look at big trends and you’ll likely see why in the same market one product is growing, while another is declining. Trends – such as demographics – often explain a lot about what is happening, and lead you to invest much smarter.
I’m a “Boomer,” and my generation could have been called the Coke generation. Our parents started every day with a cup of coffee, and they drank either coffee or water during the day. Most meals were accompanied by either water, or iced tea.
But our generation loved Coca-Cola. Most of our parents limited our consumption, much to our frustration. Some parents practically refused to let the stuff in the house. In progressive homes as children we were usually only allowed one, or at most two, bottles per day. We chafed at the controls, and when we left home we started drinking the sweet cola as often as we could.
It didn’t take long before we supplanted our parent’s morning coffee with a bottle of Coke (or Diet Coke in more modern times.) We seemingly could not get enough of the product, as bottle size soared from 8 ounces to 12 to 16 and then quarts and eventually 2 liters! Portion control was out the window as we created demand that seemed limitless.
Meanwhile, Americans exported our #1 drink around the world. From 1970 onward Coke was THE iconic American brand. We saw ads of people drinking Coke in every imaginable country. International growth seemed boundless as people from China to India started consuming the irresistible brown beverage.
My how things change. Last week Coke announced third quarter earnings, and they were down 14%. The CEO admitted he was struggling to find growth for the company as soda sales were flat. U.S. sales of carbonated beverages have been declining for a decade, and Coke has not developed a successful new product line – or market – to replace those declines.
Coke is a victim of changing customer preferences. Once a company that helped define those preferences, and built the #1 brand globally, Coke’s leadership shifted from understanding customers and trends in order to build on those trends towards defending & extending sales of its historical product. Instead of innovating, leadership relied on promotion and tactics which had helped the brand grow 30 years ago. They kept to their old success formula as trends shifted the market into new directions.
Coke began losing its relevancy. Trends moved in a new direction. Healthfulness led customers to decide they wanted a less calorie rich, nutritionally starved drink. And concerns grew over “artificial” products, such as sweeteners, leading customers away from even low calorie “diet” colas.
Meanwhile, younger generations started turning to their own new brands. And not just drinks. Instead of holding a Coke, increasingly they hold an iPhone. Where once it was hip to hang out at the Coke machine, or the fountain stand, now people would rather hang out at a Starbucks or Peet’s Coffee. Where once Coke was identified and matched the aspirations of the fast growing Boomer class, now it is replaced with a Prada handbag or other accessory from an LVMH branded luxury product.
Where once holding a Coke was a sign of being part of all that was good, now the product is largely passe. Trends have moved, and Coke didn’t. Coke leadership relied too much on its past, and failed to recognize that market shifts could affect even the #1 global brand. Coke leaders thought they would be forever relevant, just do more of what worked before. But they were wrong.
Unfortunately, CEO Muhtar Kent announced a series of changes that will most likely further hurt the Coca-Cola company rather than help it.
First, and foremost, like almost all CEOs facing an earnings problem the company will cut $3B in costs. The most short-term of short-term actions, which will do nothing to help the company find its way back toward being a prominent brand-leading icon. Cost cuts only further create a “hunker-down” mindset which causes managers to reduce risk, rather than look for breakthrough products and markets which could help the company regain lost ground. Cost cutting will only further cause remaining management to focus on defending the past business rather than finding a new future.
Second, Coca-Cola will sell off its bottlers. Interestingly, in the 1980s CEO Roberto Goizueta famously bought up the distributorships, and made a fortune for the company doing so. By the year 2000 he was honored, along with Jack Welch of GE, as being one of the top 2 CEOs of the century for his ability to create shareholder value. But now the current CEO is selling the bottling operations – in order to raise cash. Once again, when leadership can’t run a business that makes money they often sell off assets to generate cash and make the company smaller – none of which benefits shareholders.
Third, fire the Chief Marketing Officer. Of course, somebody has to be blamed! The guy who has done the most to bring Coca-Cola’s brand out of traditional advertising and promote it in an integrated manner across all media, including managing successful programs for the Olympics and World Cup, has to be held accountable. What’s missing in this action is that the big problem is leadership’s fixation with defending its Coke brand, rather than finding new growth businesses as the market moves away from carbonated soft drinks. And that is a problem that requires the CEO and his entire management team to step up their strategy efforts, not just fire the leader who has been updating the branding mechanisms.
Coca-Cola needs a significant strategy shift. Leadership focused too long on its aging brands, without putting enough energy into identifying trends and figuring out how to remain relevant. Now, people care a lot less about Coke than they did. They care more about other brands, like Apple. Globally. Unless there is a major shift in Coke’s strategy the company will continue to weaken along with its primary brand. That market shift has already happened, and it won’t stop.
For Coke to regain growth it needs a far different future which aligns with trends that now matter more to consumers. The company must bring forward products which excite people ,and with which they identify. And Coke’s leaders must move much harder into understanding shifts in media consumption so they can make their new brands as visible to newer generations as TV made Coke visible to Boomers.
Coke is far from a failed company, but after a decade of sales declines in its “core” business it is time leadership realizes takes this earnings announcement as a key indicator of the need to change. And not just simple things like costs. It must fundamentally change its strategy and markets or in another decade things will look far worse than today.
Crumbs Bake Shop – a small chain of cupcake shops, almost totally unknown outside of New York City and Washington, DC – announced it was going out of business today. Normally, this would not be newsworthy. Even though NASDAQ traded, Crumbs small revenues, losses and rapidly shrinking equity made it economically meaningless. But, it is receiving a lot of attention because this minor event signals to many people the end of the “cupcake trend” which apparently was started by cable TV show “Sex and the City.”
However, there are actually 2 very important lessons all of us can learn from the rise, and fall, of Crumbs Bake Shop:
1 – Don’t believe in the myth of passion when it comes to business
Many management gurus, and entrepreneurs, will tell you to go into business following something about which you are passionate. The theory goes that if you have passion you will be very committed to success, and you will find your way to success with diligence, perseverance, hard work and insight driven by your passion. Passion will lead to excellence, which will lead to success.
And this is hogwash.
Customers don’t care about your passion. Customers care about their needs. Rather than being a benefit, passion is a negative because it will cause you to over-invest in your passion. You will “never say die” as you keep trying to make success out of an idea that has no chance. Rather than investing your resources into something that fulfills people’s needs, you are likely to invest in your passion until you burn through all your resources. Like Crumbs.
The founders of Crumbs had a passion for cupcakes. But, they had no way to control an onslaught of competitors who could make different variations of the product. All those competitors, whether isolated cupcake shops or cupcakes offered via kiosks or in other shops, meant Crumbs was in a very tough fight to maintain sales and make money. It’s not you (and your passion) that controls your business destiny. Nor is your customers. Rather, it is your competition.
When there are lots of competitors, all capable of matching your product, and of offering countless variations of your product, then it is unlikely you can sustain revenues – or profits. There are many industries where cutthroat competition means profits are fleeting, or downright elusive. Airlines come to mind. Magazines. And many retail segments. It doesn’t matter how much passion you have, when there are too many competitors it’s a lousy business.
2 – Trends really do matter
Cupcakes were a hot product for a while. And that’s great. But it wasn’t hard to imagine that the trend would shift, and cupcakes would be displaced by something else. Whatever profits you might have when you sit on a trend, those profits evaporate fast when the trend shifts and all competitors are fighting for sales in a declining market.
Remember Mrs. Field’s cookies? In the 1980s an attractive cook and her investment banker husband built a business on soft, chewy, warm cookies sold in malls and retail streets across America. It seemed nobody could get enough of those chocolate chip cookies.
But then, one day, we did. We’d collectively had enough cookies, and we simply quit buying them. Mrs. Fields (and other cookie brand) stores were rapidly replaced with pretzels and other foodstuffs.
Or look at Krispy Kreme donuts. In the 1990s people went crazy for them, often lining up at stores waiting for the neon sign to come on saying “hot donuts”. The company exploded into 400 stores as the stock flew like a kite. But then, in a very short time, people had enough donuts. There were a lot more donut shops than necessary, and Krispy Kreme went bankrupt.
So it wasn’t hard to predict that shifting food tastes would eventually put an end to cupcake sales growth. Yet, Crumbs really didn’t prepare for trends to change. Despite revenue and profit problems, the leadership did not admit that cupcake sales had peaked, the market was going to decline, competition would become even more intense and Crumbs would need to find another business if it was to survive.
Few trends move as fast as tastes in sweets. But, trends do affect all businesses. Once we bought cameras (and film,) but now we use phones – too bad for Kodak. Once we used copiers, now we use email – too bad for Xerox. Once we watched TV, now we download from Netflix or Amazon – too bad for NBC, ABC, CBS and Comcast. Once we went to stores, now we order on-line – too bad for Sears. Once we used PCs, now we use mobile devices – too bad for Microsoft. These trends did not affect these companies as fast as shifting tastes affected Crumbs, but the importance of understanding trends and preparing for change is a constant part of leadership.
So Crumbs Bake Shop failure was one which could have been avoided. Leadership needed to overcome its passion for cupcakes and taken a much larger look at customer needs to find alternative products. It wasn’t hard to identify that some diversification was going to be necessary. And that would have been much easier if they had put in place a system to track trends, observing (and admitting) that their “core” market was stalled and they needed to move into a new trend category.
Understanding trends is the most important part of planning.
Yet, most business planning focuses on internal operations and how to improve them, usually neglecting trends and changes in the external environment that threaten not only sales and profits but the business’ very existence.
Take Sbarro’s recent bankruptcy. That was easy to predict, especially since it’s the second time down for the restaurant chain. You have to wonder why leadership didn’t do something different to avoid this fate.
Traditional retail has been in decline for a decade. As consumers buy more stuff on-line, from a rash of retailers old and new, there is simply less stuff being bought at stores. It’s an obvious trend which affects everyone. But we see business leaders surprised by the trend, reacting with store closings and cost reductions, and we are surprised by the headlines:
Thousands of retail stores will close in 2014. It should surprise no one that physical retail traffic has been in dramatic decline. Large malls are shutting down, and being destroyed, as the old “anchor tenants” like Sears and JC Penney flail. Over 200 large malls (over 250,000 square feet) have vacancy rates exceeding 35%. Retail rental prices keep declining as the overbuilt, or under-demolished, retail square footage supply exceeds demand.
Business planning is about defending and extending the past.
Given this publicly available information, you would think a company with most of its revenue tightly linked to traditional retail would —- well —- change. Yet, Sbarro stuck with its business of offering low cost food to mall shoppers. Its leaders continued focusing on defending & extending its old business, improving operations, while trends are clearly killing the business.
Almost all business planning efforts begin by looking at recent history. Planning processes starts with a host of assumptions about the business as it has been, and then try projecting those assumptions forward. Sbarro began when malls were growing, and its plans were built on the assumption that malls thrive. Now malls are dying, but that is not even part of planning for the future. Planning remains fixated on execution of a strategy that is no longer viable .
No one can “fix” Sbarro – they have to change it. Radically. And that means planning for a future which looks nothing like the past. Planning needs to start by looking at trends, and developing future scenarios about what customers need. Regardless of what the business did in the past.
Planning should be about understanding trends and developing future scenarios.
For all businesses the important planning information is not sales, sales per store, product line offerings, cost of goods sold, labor cost, gross margin, rents, cleanliness scores, safety record, location, etc., etc. The important information is in marketplace trends. For Sbarro, what will be dining trends in the future? What kind of restaurant experience do people want not only in 2014, but in 2020? Or should the company move toward delivery? At-home food preparation?
Success only happens when we understand trends and build our business to deliver what people want in the future. The world moves very fast these days. Technologies, styles, fashions, tastes, regulations, prices, capabilities and behaviors all change very quickly. Tomorrow is far less likely to look like today than to look, in important ways, remarkably different.
Plan for the future, not from the past.
To succeed in today’s fast changing environment requires we plan for the future, not from the past. We have to understand trends, and create keen vision about what customers will want in the future so we can steer our business in the right direction. Before we even discuss execution we have to make sure we are going to give customers what they want – which will be aligned with trends.
Otherwise, you can have the best run operation in the country and still end up like Sbarro.
Connect with me on LinkedIn, Facebook and Twitter.
Radio Shack is a leader… in irrelevancy… and why that’s important for you
Old assumptions, and the CEO’s bias, is killing Sears
Winners shift with trends, losers don’t – understanding Sears’ decline
The CEO problem and the failure of JCPenney
The RIGHT way to implement planning to thrive in changing markets
How to plan like Virgin, Apple and Google
There is a definite trend to raising the minimum wage. Regardless your political beliefs, the pressure to increase the minimum wage keeps growing. The important question for business leaders is, “Are we prepared for a $12 or $15 minimum wage?”
President Obama began his push for raising the minimum wage above $10 a year ago in his 2013 State of the Union. Since then, several articles have been written on income inequality and raising the minimum wage. Although the case to raise it is not clear cut, there is no doubt it has increased the rhetoric against the top 1% of earners. And now the President is mandating an increase in the minimum wage for federal workers and contractors to $10.10/hour, despite lack of congressional support and flak from conservatives.
Whether the economic case is provable, it appears that public sentiment is greatly in favor of a much higher minimum wage. And it will not affect all companies the same. Those that depend upon low priced labor, such as retailers like Wal-Mart and fast food companies like McDonald’s have a much higher concern. As should their employees, suppliers and investors.
A recent Federal Reserve report took a specific look at what happens to fast food companies when the minimum wage goes up, such as happened in Illinois, California and New Jersey. And the results were interesting. Because they discovered that a higher minimum wage really did hurt McDonald’s, causing stores to close. But….. and this is a big but…. those closed stores were rapidly replaced by competitors that could pay the higher wages, leading to no loss of jobs (and an overall increase in pay for labor.)
The implications for businesses that use low-priced labor are clear. It is time to change the business model – to adapt for a different future. A higher minimum wage does not doom McDonald’s – but it will force the company to adapt. If McDonald’s (and Burger King, Wendy’s, Subway, Dominos, Pizza Hut, and others) doesn’t adapt the future will be very ugly for their customers and the company. But if these companies do adapt there is no reason the minimum wage will hurt them particularly hard.
The chains that replaced McDonald’s closed stores were Five Guys, Chick-fil-A and Chipotle. You might remember that in 1998 McDonald’s started investing in Chipotle, and by 2001 McDonald’s owned the chain. And Chipotle’s grew rapidly, from a handful of restaurants to over 500. But then in 2006 McDonald’s sold all its Chipotle stock as the company went IPO, and used the proceeds to invest in upgrading McDonald’s stores and streamlining the supply chain toward higher profits on the “core” business.
Now, McDonald’s is shrinking while Chipotle is growing. Bloomberg/BusinessWeek headlined “Chipotle: The One That Got Away From McDonalds” (Oct. 3, 2013.) Investors were well served to trade in McDonald’s stock for Chipotle’s. And franchisees have suffered through sales problems as they raised prices off the old “dollar menu” while suffering higher food costs creating shrinking margins. Meanwhile Chipotle’s franchisees have been able to charge more, while keeping customers very happy, and maintain margins while paying higher wages. In a nutshell, Chipotle’s (and similar competitors) has captured the lost McDonald’s business as trends favor their business.
So McDonald’s obviously made a mistake. But that does not mean “game over.” All McDonald’s, Burger King and Wendy’s need to do is adapt. Fighting the higher minimum wage will lead to a lot of grief. There is no doubt wages will go up. So the smart thing to do is figure out what these stores will look like when minimum wages double. What changes must happen to the menu, to the store look, to the brand image in order for the company to continue attracting customers profitably.
This will undoubtedly include changes to the existing brands. But, these companies also will benefit from revisiting the kind of strategy McDonald’s used in the 1990s when buying Chipotle’s. Namely, buying chains with a different brand and value proposition which can flourish in a higher wage economy. These old-line restaurants don’t have to forever remain dominated by the old brands, but rather can transition along with trends into companies with new brands and new products that are more desirable, and profitable, as trends change the game. Like The Limited did when selling its stores and converting into L Brands to remain a viable company.
Now is the time to take action. Waiting until forced to take action will be too late. If McDonald’s and its brethren (and Wal-Mart and its minimum-wage-paying retail brethren) remain locked-in to the old way of doing business, and do everything possible to defend-and-extend the old success formula, they will follow Howard Johnson’s, Bennigan’s, Circuit City, Sears and a plethora of other companies into brand, and profitability, failure. Fighting trends is a route to disaster.
However, by embracing the trend and taking action to be successful in a future scenario of higher labor these companies can be very successful. There is nothing which dictates they have to follow the road to irrelevance while smarter brands take their place. Rather, they need to begin extensive scenario planning, understand how these competitors succeed and take action to disrupt their old approach in order to create a new, more profitable business that will succeed.
Disruptions happen all the time. In the 1970s and 1980s gasoline prices skyrocketed, allowing offshore competitors to upend the locked-in Detroit companies that refused to adapt. On-line services allowed Google Maps to wipe out Rand-McNally, Travelocity to kill OAG and Wikipedia to kill bury Encyclopedia Britannica. These outcomes were not dictated by events. Rather, they reflect an inability of an existing leader to adapt to market changes. An inability to embrace disruptions killed the old competitors, while opening doors for new competitors which embraced the trend.
Now is the time to embrace a higher minimum wage. Every business will be impacted. Those who wait to see the impact will struggle. But those who embrace the trend, develop future scenarios that incorporate the trend and design new business opportunities can turn this disruption into a big win.
On 11 October Safeway announced it was going to either sell or close its 79 Dominick's brand grocery stores in Chicago. After 80 years in Chicago, San Francisco based Safeway leadership felt it was simply time for Dominick's to call it quits.
The grocery industry is truly global, because everyone eats and almost nobody grows their own food. It moves like a giant crude oil carrier, much slower than technology, so identifying trends takes more patience than, say, monitoring annual smartphone cycles. Yet, there are clearly pronounced trends which make a huge difference in performance.
Good for those who recognize them. Bad for those who don't.
Safeway, like a lot of the dominant grocers from the 1970s-1990s, clearly missed the trends.
Coming out of WWII large grocers replaced independent neighborhood corner grocers by partnering with emerging consumer goods giants (Kraft, P&G, Coke, etc.) to bring customers an enormous range of products very efficiently. They offered a larger selection at lower prices. Even though margins were under 10% (think 2% often) volume helped these new grocery chains make good returns on their assets. Dillon's (originally of Hutchinson, Kansas and later purchased by Kroger) became a 1970s textbook, case study model of effective financial management for superior returns by Harvard Business School guru William Fruhan.
But times changed.
Looking at the trend toward low prices, Aldi from Germany came to the U.S. market with a strategy that defines the ultimate in low cost. Often there is only one brand of any product in the store, and that is likely to be the chain's private label. And often it is only available in one size. And customers must be ready to use a quarter to borrow the shopping cart (returned if you replace the cart.) And customers pay for their sacks. Stores are remarkably small and efficient, frequently with only 2 or 3 employees. And with execution so well done that the Aldi brand became #1 in "simple brands" according to a study by brand consultancy Seigal+Gale.
Of course, we also know that big discount chains like WalMart and Target started cherry picking the traditional grocer's enormous SKU (stock keeping units) list, limiting selection but offering lower prices due to lower cost.
Looking at the quality trend, Whole Foods and its brethren demonstrated that people would pay more for better perceived quality. Even though filling the aisles with organic
products and the ultimate in freshness led to higher prices, and someone nicknaming the chain
"whole paycheck," customers payed up to shop there, leading to superior
Connected to quality has been the trend, which began 30 years ago, to "artisanal" products. Shoppers pay more to buy what are considered limited edition products that are perceived as superior due to a range of "artisanal quality" features; from ingredients used to age of product (or "freshness,") location of manufacture ("local,") extent to which it is considered "organic," quantity of added ingredients for preservation or vitamin enhancement ("less is more,") ecological friendliness of packaging and even producer policies regarding corporate social and ecological responsibility.
But after decades of partnership, traditional grocers today remain dependant on large consumer goods companies to survive. Large CPGs supply a massive number of SKUs in a limited number of contracts, making life easy for grocery store buyers. Big CPGs pay grocers for shelf space, coupons to promote customer purchases, rebates, ads in local store circulars, discounts for local market promotions, sales volumes exceeding commitments and even planograms which instruct employees how to place products on shelves — all saving money for the traditional grocer. In some cases payments and rebates equalling more than total grocer profits.
Additionally, in some cases big CPG firms even deliver their products into the store and stock shelves at no charge to the grocer (called store-door-delivery as a substitute for grocer warehouse and distribution.) And the big CPG firms spend billions of dollars on product advertising to seemingly assure sales for the traditional grocer.
These practices emerged to support the bi-directionally beneficial historically which tied the traditional grocer to the large CPG companies. For decades they made money for both the CPG suppliers and their distributors. Customers were happy.
But the market shifted, and Safeway (including its employees, customers, suppliers and investors) is the loser.
The old retail adage "location, location, location" is no longer enough in grocery. Traditional grocery stores can be located next to good neighborhoods, and execute that old business model really well, and, unfortunately, not make any money. New trends gutted the old Safeway/Dominick's business model (and most of the other traditional grocers) even though that model was based on decades of successful history.
The trend to low price for customers with the least funds led them to shop at the new low-price leaders. And companies that followed this trend, like Aldi, WalMart and Target are the winners.
The trend to higher perceived quality and artisanal products led other customers to retailers offering a different range of products. In Chicago the winners include fast growing Whole Foods, but additionally the highly successful Marianno's division of Roundy's (out of Milwaukee.) And even some independents have become astutely profitable competitors. Such as Joe Caputo & Sons, with only 3 stores in suburban Chicago, which packs its parking lots daily by offering products appealing to these trendy shoppers.
And then there's the Trader Joe's brand. Instead of being all things to all people, Aldi created a new store chain designed to appeal to customers desiring upscale products, and named it Trader Joe's. It bares scance resemblance to an Aldi store. Because it is focused on the other trend toward artisinal and quality. And it too brings in more customers, at higher margin, than Dominick's.
When you miss a trend, it is very, very painful. Even if your model worked for 75 years, and is tightly linked to other giant corporations, new trends lead to market shifts making your old success formula obsolete.
Simultaneously, new trends create opportunities. Even in enormous industries with historically razor-thin margins – or even losses. Building on trends allows even small start-up companies to compete, and make good profits, in cutthroat industries – like groceries.
Trends really matter. Leaders who ignore the trends will have companies that suffer. Meanwhile, leaders who identify and build on trends become the new winners.
Alex Robles protests in front of a McDonald’s in 2013, in Phoenix. (AP Photo/Ross D. Franklin)
Horatio Alger wrote books in the 1800s about young poor boys who became wealthy via clean living and hard work. Americans loved the idea that anyone can become rich, and loved those stories. We love them as much today as then, clinging to the non-rich roots of successes like Steve Jobs.
Unfortunately, such possibilities have been growing tougher in America. Today U.S. income inequality is among the highest in the world, while income mobility is among the lowest. You are more likely to go from rags to riches in France or Germany than the USA. Net/net – in current circumstances your most important decision is who will be your parents, because if you are born rich you will likely live a rich life, while if you are born poor you’ll probably die poor.
Organizations like Occupy Wall Street have tried to bring the problem of inequality and jobs to the face of America – with mixed results. But the truth is that 80% of Americans will face poverty and unemployment in their lifetimes. And the biggest growth in poverty, declining marriage rates and single mother households all belong to white Americans today. These poverty related issues are no longer tied to skin color or immigration they way they once were.
It’s safe to say that a lot of Americans are sounding like the famous Howard Beale phrase from the 1976 movie “Network” and starting to say “I’m mad as hell, and I’m not going to take this any more!”
This situation has given birth to a new trend – frequently referred to as the “living wage.” A living wage allows one parent to earn enough money from a single 40 hour per week job to feed, cloth, educate, transport and otherwise lead a decent life for a family of 4. Today in America this is in the range of $13.50-$15.00 per hour.
This, of course, should not be confused with the minimum wage which is a federally (or state) mandate to pay a specific minimum hourly wage. Because the minimum wage is lower than living wage, a movement has been started to match the two numbers – something which would roughly double today’s $7.25 federal minimum wage.
This concept would have been heresy just 40 years ago. America’s Chamber of Commerce and other pro-business groups have long attempted to abolish the minimum wage, and have fought hard against any and every increase.
As the income inequality gap has widened popularity has grown for this movement, however, and now 70% of Americans support higher minimum wages, almost 3 times those who don’t. Whether effective or not, this week fast food employees took to old fashioned strikes and picket lines in New York City, Chicago, St. Louis, Milwaukee and Detroit for higher wages.
Regardless of your opinion about the economics (or politics) of such a move, the trend is definitely building for taking action.
The biggest industries affected by such an increase would be fast food and retail. And if these companies don’t do something to adapt to this trend the results could be pretty severe.
McDonald’s is the largest fast food company. And it definitely does not pay a living wage. The company recently published for employees a budget for trying to live on a McDonald’s income, and it translated into requiring employees work 2 full-time jobs. Rancor about the posted budget was widespread, as even pro-business folks found it amazing a company could put out such a document while its CEO (and other execs) make many multiples of what most employees earn.
Estimates are that a wage increase to $15/hour for employees would cost McDonald’s $8B. McDonald’s showed $10B of Gross Income in 2012, and $8B of Pre-Tax Income. Obviously, should the living wage movement pass nationally McDonald’s investors would see a devastating impact. Simultaneously, prices would have to increase hurting customers and suppliers would likely be pinched to the point of losses.
Couple this with McDonald’s laissez-faire attitude about obesity trends, and you have two big trends that don’t bode well for rising returns for shareholders. Yet, other than opposing regulations and government action on these matters McDonald’s has shown no ability to adapt to these rather important, and impactful, trends. Hoping there will be no legislation is a bad strategy. Fighting against any change, given the public health and economic situation, is as silly as fighting against regulations on tobacco was in the 1960s. But so far there has been no proposed adaptation to McDonald’s 50 year old success formula offered to investors, employees, customers or legislators.
WalMart is America’s largest retailer. And the most vitriolic opposing higher wages. Even though a living wage increase would cost customers only $12/year. When Washington, DC passed a requirement retailers pay a living wage WalMart refused to build and open 4 proposed new stores. Even though the impact would be only $.46/customer visit (estimated at $12.50/customer/year.)
It would seem such harsh action, given the small impact, is a bit illogical. Given that WalMart is already out of step with the trend toward on-line shopping, why would the company want to take such an additional action fighting against a trend that affects not only its profits, but most of its customers — who would benefit from a rise in income and buying power?
In 1914 Henry Ford was suffering from high turnover and a generally unhappy workforce. He reacted by doubling pay – with his famous “$5 day”. Not only did he reduce turnover, he became the perferred employer in his industry – and rather quickly it became clear that employees who formerly could not afford an automobile were able to now become customers at the new, higher pay scale. Apparently nobody at WalMart is familiar with this story. Or they lack the will to apply it.
Fighting trends is expensive. Yet, most leadership teams become stuck defending & extending an old strategy – an old success formula – even after it is out of date. Most companies don’t fail because the leadership is incompetent, but rather because they fail to adapt to trends and changing circumstances. Long-lived companies are those which build for future scenarios, rather than trying to keep the world from changing by spending on lobbyists, advertising and other efforts to halt (or reverse) a trend.
McDonald’s and WalMart (and for that matter Yum Brands, Wendy’s, JCPenney, Sears, Best Buy and a whole host of other companies) are largely unwilling to admit that the future is likely to look different than the past. Will that kill them? It sure won’t help them. But investors could feel a lot more comfortable (as would employees, suppliers and customers) if they would develop and tell us about their strategies to adapt to changing circumstances.
Are you looking at trends, developing scenarios about the future and figuring out how to adapt in ways that will help you profitably grow? Or are you stuck defending and extending an old success formula even as markets shift and trends move customers in different directions?
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Both Coca-Cola and McDonald's have produced good investor returns over the last decade. From stock lows in early 2009, Coke has more than doubled. After shutting many stores and investing heavily in upgrades as well as supply chain efficiencies, over the last decade McDonald's has risen 6-fold!
But recent quarterly returns have not impressed investors as both companies failed to meet expectations. And for traders with a short-term focus both companies are off their 2013 highs. The open question now, for patient investors with a multi-year focus, is whether either, or both, companies are going to go back to long-term valuation growth (meaning they are a buy) or if their value has fizzled (meaning they are a sell)?
This question cannot be answered by looking at historical performance. As all investment documents remind us, past history is no assurance of future gains. Instead investors need to look at trends, and whether each company is positioned to take advantage of major trends as we head toward 2020.
One major trend is obesity. And not in a good way. The USA is fatter than ever, and shows no signs of thinning as one in 3 people are now considered obese. For Coke and McDonald's this is not a good thing, since their products are considered major contributors to what some call a national epidemic.
Over the last few years this trend has led schools to remove fast food and soft drink dispensers. America's first lady has started a national campaign to fight childhood obesity. And the nation's largest city's mayor has tried to make large portion sizes illegal in New York. While all of this might seem like crank activity that isn't making much difference, truth is that soda consumption per capita has been declining since 1998, and 2012 declines now put soda drinking at the lowest level since 1987!
Even if this still seems like much ado about nothing, investors should be aware of the long-term impact when products are seen as unhealthy. Cigarettes were a common consumer staple well into the 1960s, but when that product was determined to have adverse health impacts advertising was banned, consumption was restricted to adults only, dispensing was severely limited as machines were eliminated, taxes shot through the ceiling creating a 20-fold price increase and consumption was banned in buildings and many public places. None of this happened overnight, but eventually these actions caused the sales and profits of tobacco companies to decline — despite their heroic efforts to fight the trend.
If the Centers for Disease Control takse the point of view that soft drinks are a major contributor to diabetes and other obesity-related illnesses, it is not out of the realm of possibility that Coke could find itself in a situation somewhat like Phillip Morris did. If the CDC made the same determination about certain fast food items (such as double-patty burger sandwiches or large french fry orders) the amount of advertising, free toys, discounted product and super-sized packaging available to McDonald's could be severly curtailed. It could become a requirement that Coke and Big Macs have warning labels educating consumers about the possibility of long-term illness from consumption. And product sales could only be limited only to people over 18.
This may seem extreme, even bizarre, and far off into the future. But this is the direction of the trend. There seems no solution for obesity at this time, so public policy is starting to point toward doing something about consumption.
Recall that when alcohol-related deaths showed no sign of decline it didn't take long for much tougher drunk driving laws to be enacted, then for a string of adjustments lowering the level at which people were considered drunk. Public policies that took direct aim at product consumption.
Looking at the tobacco and alcohol analogies, Coke and McDonald's are behaving a lot more like the R.J. Reynolds than Miller-Coors.
Tobacco companies fought the trend, and ended up in a very expensive and long battle they inevitably lost. They denied there was any public health problem, and denied they had anything to do with the nation's, and their customers', health issues. The fight lasted a very long time. Now their customers are often ostracized, and the industry is contracting.
Liquor companies took a different approach. While not admitting anything, they aggressively promoted "responsible" consumption levels. They promoted individual abstinence (non-consumption) in group settings so there could be a "designated driver" while actively promoting product bans for people under age. They did not fight drunk driving laws, but instead worked with organizations to reduce deaths. Though far from angels, the industry players did not fight the trend, and managed to find ways to avoid the kind of bans dealt tobacco.
Coke and McDonald's today are denying the obesity problem and their contribution to it. While they both have healthier products, they remain committed to the least healthy offerings. Watch a Coke ad and you'll always see the traditional, sweetened red label product receive top billing. Likewise, you can purchase a salad at McDonald's, but the ads and promotions always feature the far less healthy burgers and fried foods which characterize the company's history.
Neither company promotes responsible consumption levels, nor does anything to discuss the importance of limiting use of their products. To the contrary, both like to promote larger package sizes and greater consumption – often beyond what almost anyone would consider healthy. Neither works aggressively to improve the quality of healthy products, nor showcases them as preferred products for customers to purchase.
One would not expect Coke or McDonald's to fail any time soon. But the trends which made them huge companies have reached an end, and new trends are headed in a direction which do not support growth. Both companies seem unwilling to recognize the new trends, and find ways to align with them. Future revenue growth is up against a difficult environement, and historical cost reduction activities leave little opportunity to improve future earnings without revenue growth. While the valuation of both companies are unlikely to remain flat, it is hard to identify the bull case for either to provide long-term investors much gain.
Reading reviews of Super Bowl ads I was struck by two observations:
- The reviewers got the value of most ads backwards
- They missed the most important ad of all – on Twitter
Super Bowl ads cost $1M+ to make. Then they cost $2M+ to air. So it is an expensive proposition. This isn't fine art, like a Picasso, with a long shelf life to create a rate of return. These ads need to pay off fast. They need to build the brand with existing and/or new customers to drive sales and make back that money now.
So let's start with one of the best reviewed ads – Chrysler's "God Made a Farmer". Reviewers liked the home-spun approach of using a dead conservative radio commentator voicing over pictures of farmers in pick-ups. Unfortunately, from a rate of return perspective my bet is this ad will end up near the very bottom.
- Firstly, the 50 year trend is to urbanization. In 1900 9 out of 10 Americans had something to do with agriculture. Now it is fewer than 1 in 20. Trucks are used for lots of things, but farming makes up a small percentage. It has been a full generation since most 2nd generation Americans had anything to do with a farm. Showing people using a product in ways that almost nobody uses it, and with a message most of your target market doesn't even recognize, leaves most people confused rather than ready to buy.
- Secondly, first generation Americans are changing the demographics of America quickly. First generation Americans (can I say immigrant?) proved large enough, and powerful enough, to play a spoiler role in Mitt Romney's run for the Presidency. To them, farming in America has no history, appeal or meaning to their lives.
- Thirdly, no one under the age of 35 has any idea who Paul Harvey is. Perhaps Chrysler could have used Bill O'Reilly and achieved its message mission. But as it was, there were two of us +50 people who spent 5 minutes trying to tell the group watching the game at my home who Paul Harvey even was – and why he was being quoted.
A 24 year old boy watching the game with me in suburban Chicago listened to my explanation about Paul Harvey and farming. He drives a Ford F-250 4×4 pick-up. After I finished he looked me square in the eyes and said "Swing, and a miss." And that's what I'd say to Chrysler. Whoever made this ad had more money than market research and common sense.
Simultaneously, reviewers hated GoDaddy.com's "Perfect Match, Bar Rafieli's Big Kiss." This portrayed a very stereotypical engineer enjoying a long kiss with a pretty girl – referring to how the company's products well serve client needs. Reviewers found the ad in bad taste. My bet is this ad will have immediate payback for GoDaddy.com
Have you ever heard of the monstrously successful situation comedy "The Big Bang Theory?" At just about any time you can find this in reruns on at least one, if not more than one, cable channel. The show is so successful that to pull people viewers to its Monday night schedule CBS actually chose to rerun "Big Bang" episodes amidst new episodes of its other programs in January. The show thrives on the tension of male technical professionals seeking to solve the age old question of how a man can appeal to desirable ladies. Politically correct or not, the show is successful because it is a timeless message. Most boys want to be liked by girls.
Today the world of people who have technical, or quasi-technical jobs, is HUGE. GoDaddy's target audience of people buying, and servicing, web domains just happens to be mostly male under-40 men with technical or quasi-technical backgrounds. This little, tasteless demonstration may have upset the high ethics of ad execs (or has "Mad Men" unraveled that myth?) but to its target group this ad was pure gold. And same for GoDaddy.com.
But most importantly, none of these ads will have the payback of 9 words a marketer tweeted when the lights went out at the game. Because it had blown a huge wad of money on a traditional game ad the Oreo brand folks at Mondelez were watching the game with their media agency 360i. Thinking quickly the creatives came up with an idea, and the brand guys approved it – so out went the tweet from Oreo Cookies "No problem. You can still dunk in the dark."
"Booya" as my young friends say. 10,000 retweets and an entire Monday news cycle devoted to the quick thinking folks who posted this tweet. ROI? Given that the incremental cost was zero, pretty darn high. If I was investing, I'd take the tweet over the video. The equivalent of a kick return for a TD.
The world has changed. We now live in a 24×7, real-time, always-on world. We no longer wait for the weekly magazine for analysis, or the daily newspaper for information. Or even the 11:00 television daily recap. We pick up alerts on our mobile devices constantly. Receive highlights from friends on Facebook and Twitter. We want our information NOW. And those who connect to this new way of living for providing us information are not only accepted, but admired by those thriving on the social networks.
This year's Super Bowl social media postings were triple last year's; over 30million. This is the world of immediate feedback. Immediate discussion. And the place were ads need to be immediate as well. Those who understand this, and connect to it, will succeed. Others, who spend too much to make and then distribute ads on traditional media, will not. Just as newspaper ads have lost of their relevance – TV ads are destined for the same conclusion.
The good news is that Mondelez and its Oreos team was ready, and willing, to take advantage. Where were most of the other advertisers? Audi, VW and P&G's Tide also jumped in. But of all those millions spent on once-run ads, these major corporate advertisers – and their extremely highly paid ad agencies – were absent. When the easy money was to be made, they simply weren't there. Off drinking beer and watching the game when they should have been working!
Today we learned Twitter is buying Bluefin to make its information on who is tweeting, about what, in real time even better. This will be helpful for any smart advertiser. And not just the multi-billion dollar giants. The good news is anyone, anywhere in any size company can play in this real-time, on-line social media world. You don't have to be huge, or rich.
Where were you when the lights went out? Were you taking advantage of what we may later call a "once in a lifetime" opportunity?
Where will you be the next time? Are you ready to invest in the new world of social media advertising? Or are you stuck spending too much to come in too late?