by Adam Hartung | Jun 26, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership
"Retailers cut back on variety, once the spice of marketing" is the Wall Street Journal.com headline. It seems one of the unintended consequences of this recession will be forced consumer goods innovation!
For years consumer goods companies, and the retailers which push their products, have played a consistent, largely boring, and not too profitable Defend & Extend game. When I was young there was one jar of Kraft Miracle whip on the store shelf. It was one quart. This container was so ubiquitous that it coined the term "mayonnaise jar" – everybody knew what you meant with that term. Now you can find multiple varieties of Miracle Whip (fat free, low fat, etc.), in multiple sizes. This product proliferation passed for innovation for many people. Unfortunately, it has not grown the sales of Miracle Whip faster than growth in the general population.
Do you remember when you'd go to Pizza Hut and they offered "Hawaiian Pizza?" Pizza Hut would concoct some pretty unusual toppings, mixed up in various arrangements, then give them catchy labels. Unfortunately, what passed internally as an exciting new product introduction was recognized by customers as much ado about nothing, and those varieties quietly and quickly left the menu. Like the Miracle Whip example, it expanded the number of choices, but it did not increase the demand for pizza, nor revenues, nor profits.
Expanding varieties is too often seen by marketers as innovation. I remember when Oreos came out with 100 calorie packs, and the CEO said that was an innovation. But did it drive additional Oreo sales? Unfortunately for Nabisco, no. It was plenty easy to count out the number of cookies you want and put in a baggie. Or buy fewer cookies altogether in these new, smaller packages.
These sorts of tricks are the stock-in-trade of Defend & Extend management. Clog up the distribution system with dozens (sometimes hundreds) of varieties of your product. Try to take over lots of shelf space by paying "stocking fees" to the retailer to put all those varieties (package sizes, flavor options, etc.) on his shelf – in effect bribing him to stock the product. But then when a truly new product comes along, something really innovative by a smaller, newer company, the D&E manager uses the stocking fees as a way to make it hard for the new product to even reach the market because the small company can't afford to pay millions of dollars to bump the big guy defending his retail turf. The large number of offerings defends the product's position in retail, while simultaneously extending the product's life to keep sales from declining. But, year after year the cost of creating, launching and placing these new varieties of largely the "same old thing" keeps driving down the net margin. The D&E manager is trying to keep up revenues, but at the expense of profits.
Simultaneously, this kind of behavior keeps the business from launching really new products. The previous CEO at Kraft said in 2006 that the best investment his company could make was advertising Velveeta. His point of view was that protecting Velveeta sales was worth more than launching new products – and at that time the last new product launched by Kraft was 6 years old! Internally, the decision-support system was so geared toward defending the existing business that it made all marginal investments supporting existing brands look highly profitable – while killing the rate of return on new products by discounting potential sales and inflating costs!
This D&E behavior isn't good for any business. Consumer goods or otherwise. And it's interesting to read that now retailers are starting to push back. They are cutting the number of product variations to cut the inventory carrying costs. As I mentioned, if you now have 6 different stock keeping units (SKUs) for Miracle Whip in various sizes, flavors and shapes but no additional sales you more than likely have doubled, tripled or even more the inventory – and simultaneously reduced "turns" – thus making the margin per foot of shelf space, and the inventory ROI, poorer. Even with those "shelf fee" bribes the consumer goods manufacturer paid.
For consumers this is a great thing! Because it frees up shelf space for new products. It frees up buyers to look harder at truly new products, and new suppliers. The retailer has the chance of revitalizing his stores by putting more excitement on the shelves, and giving the consumer something new. This action is a Disruption for the individual retailer – pushing them to compete on products and services, not just having the same old products (in too many varieties) exactly the same as competitors.
This action, happening at WalMart, Walgreens, RiteAid, Kroger and Target according to the article, is an industry Disruption. It impacts the manufacturers like Kraft and P&G by forcing them to bring more truly new products to the market if they want to maintain shelf facings and revenues. It alters the selling proposition for all suppliers, making the "distribution fees" less of an issue and turning those retail buyers back into true merchandisers – rather than just people who review manufacturer supplied planograms before feeding numbers into the automated ordering system. And it changes what the manufacturer's salespeople have to do.
The companies that will do well are those that now implement White Space to take advantage of this Disruption. As you can imagine, it's a huge boon for the smaller, more entrepreneurial companies that may well have long been blocked from the big retailer's stores. It allows them to get creative about pitching their products in an effort to help the retailer compete on product – not just price. And for any existing supplier, they will have to use White Space to get more new products out faster. And get their salesforce to change behavior toward selling new products rather than just defending the old products and facings.
Markets work in amazing ways. Almost never do things happen as one would predict. It's these unintended consequences of markets that makes them so powerful. Not that they are "efficient" so much as they allow for Disruptions and big behavior changes. And that gives the entrepreneurial folks, and the innovators, their opportunities to succeed. For those in consumer goods, right now is a great time to talk to Target, Kohl's, Safeway, et.al. about how they can really change the competition by refocusing on your innovative new products again!
by Adam Hartung | Apr 16, 2009 | Current Affairs, Defend & Extend, Food and Drink, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
All of America may have learned the jingle "America spells cheese K*R*A*F*T", but that doesn't mean Kraft is a good investment. When the recession first began, investors were excited about buying companies that had well known brands – especially in food. The idea was that everyone has to eat, so food companies won't get hammered like an industrial company (think Caterpillar or General Electric) when the economy shrinks. Second, people will eat out less and in more so food might actually see an uptick in growth. Third, people will want well known brands because it well help them feel good during the depressing downturn. So, Kraft was to be a good, safe investment. After all, even though it's only been spun out of cigarrette company Altria a few months, this thinking was powerful enough for the Dow editors to replace failed AIG with Kraft on the (in)famous Dow Jones Industrial Average.
Too bad things didn't work out that way (see chart here). Although the stock held up through the summer near it's spin-out high at 35, Kraft's value fell out of the proverbial bed since then. Down about 40%. What's worse, as several companies have "bounced back" during the recent stock market rebound Kraft shares have gone nowhere. And now Crain's Chicago Business reports "Analyst downgrades Kraft on volume risk." This UBS analyst has noted that instead of going up, or sideways, sales (and volume) at Kraft have declined. While he might have expected a potential 1% decline, instead he's seeing drops of more like 2.5%. In light of this poor performance, he thinks the best Kraft can do for the next 12 months is a meager improvement – or more likely sideways performance.
Kraft has been in a growth stall for a long time. Since well before spinning out of Altria. The company stopped launching new products years ago. Instead, it has been trying to increase sales with line extensions of its existing products – things like 100 calorie packs of Oreos. There hasn't been a real new product at Kraft since DiGiorno pizza and Boboli crust some 10 years ago. Simultaneously, the company sold some of its high growth businesses, like Altoids, in order to "focus on core brands". All of which meant that while cash flow has been stable, there's been no growth. Turns out folks may be eating at home more, but they aren't paying up for worn-out brands like Velveeta, instead turning to store brands and generics. Shoppers are looking for new things to improve their meals during this recession – but Kraft simply doesn't have any.
Without innovation, Kraft has gone nowhere. For a decade the company has merely Defended & Extended its 1940s business model. It keeps trying to do more of the same, perhaps faster and better. It couldn't do cheaper because of rising commodity prices last year, so it actually raised prices. As a result, customers are quite happy to buy comparable, but cheaper, products setting Kraft up for price wars in almost all its product lines. And there's nothing Kraft can point to as a new product which will actually grow the top line. Just a hope in more advertising of its old products, doing more of the same.
When Kraft spun out the CEO was replaced in order for Kraft to revitalize its moribund organization. Good move. The previous CEO was so in love with D&E management that he bragged about his "strategy" of spending more on Velveeta and older brands – in other words he was wedded to the outdated Success Formula and had no plans to change it.
So he was replaced by a competent executive named Irene Rosenfeld. This was touted as a big move, by bringing in the Chairman of PepsiCo's Frito-Lay Division. PepsiCo is noted for its fairly Disruptive environment, instituted during the reign of Chairman Andrall Pearson who aggressively moved people around (and out) in his effort to "muscle build" the organization. But reality was that Dr. Rosenfeld had worked at Kraft for many years before going to PepsiCo, and was returning (according to her bio on the Kraft web site). And her leadership has been, well, more of the same. There have been no Disruptions at Kraft – no White Space – and no new products. So the growth stall that began during the Altria ownership has continued unabated.
Despite Kraft's lack of performance – and you could say poor performance given that sales and volume are down, as well as profits since she took the top job – Dr. Rosenfeld's salary was increased at the end of March (according to Marketwatch.com "Compensation rose for Kraft Foods' CEO in 2008"). It seems the Board of Directors was concerned that the stock options she was awarded in early February had fallen in value (because the share price dropped dramatically – hurting all investors) so they felt they had to raise her base pay. Since the "at risk" pay didn't pan out, well they felt compelled to make her compensation less risky. Then they invented some excuses to make themselves feel better, like they want the CEO to be paid comparably with other CEOs.
(I guess they don't care about the 20 other senior execs who have seen their base pay frozen. Say, do you suppose I could appeal to my publisher that I want pay like other authors? Like Barack Obama who got almost $3million in royalties last year? Or do you suppose the publisher might tell me if I want that much money I should sell more books – looking at my results to determine how much I should get? I rather like this "comparable pay" idea – sounds sort of like union language for CEO contracts.)
Kraft is going nowhere, and Dr. Rosenfeld is the wrong person in the Chairman/CEO job. Kraft is stalled, and investors as well as employees are suffering. Kraft desperately needs leaders that will Disrupt the organization, refocus it externally on market needs, become obsessive about improving versus competitors in base businesses while identifying fringe competitors changing the market landscape. And above all introduce some White Space where Kraft can innovate new products and services that will get the company growing again! Kraft has enormous resources, but the company is frittering them away Defending & Extending a 60+ year old Success Formula that has no growth left in it. More than ever in Kraft's long history, the company needs to overcome it's Lock-in to innovate – and the Board needs to realize that requires a change in leadership.
