Poloroid Redux - Gaming Industry Lock-In?

For some time, Polaroid's tragic response to arguably its most important growth and sustainability challenges has endured as a popular and fascinating case study of how a company and its leaders can let outdated beliefs ambush their future.

Polaroid was founded in 1937 by Edwin Land who went on to introduce the first instant camera in 1948. From that point forward the company's dominance of instant photography technology remained unsurpassed, and it was not surprising that the company moved aggressively into digital imaging long before its competitors. In 1991 its prototype of a high-resolution megapixel camera had a performance/price ratio far superior to most other products on the market. Yet in one of the most stunning illustrations of framing lock-in, Polaroid’s digital market entry was an utter failure, and the company exited the business within five years.

Four critical management beliefs created the framing lock-in that drove the company’s demise in digital imaging. First, Polaroid’s culture did not value market research as an input to product development; instead, it was believed with a passion that Polaroid’s technology and products would create markets. Second, there was a firmly held belief that customers valued physical instant prints. As a result, products such as video camcorders were not seen as competition. Third, there was an obsession with matching the quality of traditional 35 mm prints, driven by a belief that customers required ‘photographic’ quality.

Finally, and most importantly, there was a strong belief in the razor/blade business model pursued to-date. While Polaroid had initially made money on both camera hardware and film, a decision was eventually made to adopt a razor/blade pricing strategy. The firm dropped prices on cameras to stimulate adoption and demand for film. Film prices and margins were increased, and the strategy was extremely successful. Over time a fundamental belief developed: Polaroid could not make money on hardware, only software (i.e., film).

These deeply held management biases also meant that important areas were not invested in. To compete successfully in hardware using a business model different from the traditional razor/blade approach, Polaroid would have to have developed low-cost electronics manufacturing capability and rapid product development capability—two areas that remained weak. And the firm never invested in developing any sales or marketing capability specific to digital imaging or new distribution channels.

Polaroid’s fatal management decision-making limitations can be felt acutely when a then new Polaroid Digital Imaging hire from outside the company described top management’s struggles:

“The catch [to our product concept] was that you had to be in the hardware business to make money. ‘How could you say that? Where’s the film? There’s no film?’ So what we had was a constant fight with the senior executive management in Polaroid for five years … We constantly challenged the notion of the current business model, the core business, as being old, antiquated and unable to go forward … What was fascinating to me was that these guys used to turn their noses up at 38 percent margins … But that was their big argument, ‘Why 38 percent? I can get 70 percent on film. Why do I want to do this?’...”

Fast forward to mid-2009, and we're seeing signs of a potential shift in the gaming market as the products evolve from mostly "serious gamers" with sophisticated and expensive gaming hardware and software (and lots of time to play!), to a more mass-market opportunity with "casual gamers" who pursue spurts of gaming for 5-10 minutes on the iPhones, and to a lesser extent other smartphone devices.

So how are the leading game device and software players responding? Here are how executives at Nintendo and Sony indicate they are viewing the situation:

"At the end of the day you buy an iPhone to make calls, and the (Sony) PSP to play games" (June 29, 2009)

"No one can match (Nintendo's) years of experience in the hand held (gaming) market" (June 29, 2009)

How might the ghosts of the old management team at Polaroid counsel these firms?

Is Private Label Taking on Water?

RetailWire reports that according to numbers from The Nielsen Company, sales of private label goods in food, drug and mass lost share year-over-year for the period ending April 18, 2009.

For retailers who were simply sourcing for higher gross margin, the picture is bleaker as they factor in all the costs of taking responsibility for a category, including innovation, quality and safety control, inventory, promotion, and logistics to name only a few. And what about the loss of vendor support funds? And national brands have been fighting fire with fire, " introducing value lines or lowering the cost of existing items to cut into the price advantage held by retailer brands".

Unless the retailer is as dedicated to private label as, say, a Trader Joe's, the strategy will often backfire. Of course, this begs the question: instead of getting revenge, wouldn't smart independent brand players use this opening as a chance to structure new relationships built on trust, system wide improvement, and win-win results?

Safer Foods Take Closer Cooperation

Responding to a rising tide of safety problems, the U.S. Food and Drug Administration has just announced that it plans to start coordinating with peer agencies in other countries, where some of these problems have originated. A spokesman says, “For us to do a better job at home, we have to do a better job with our counterpart agencies around the world.

The Associated Press reports that the FDA now has offices in Asia, Europe and Latin America, that the agency is “moving beyond border inspections” and back up the supply chain overseas.

It’s a sign of the times. Organizations must take more responsibility for assuring their own constituents about just what their disparate (and often distant) partners are doing. Increasingly, we are what we guarantee.

In a complex value chain, guarantees take cooperation. Just as the FDA is starting to realize it can’t do its job alone, so also must the manufacturers and retialers involved in the overall food industry. They must get more collaborative in how they share information, determine who is best qualified to perform specific safety-enhancing activities, and negotiating how much each activity is worth in the overall scheme of providing value to the end customer. Cooperation to this degree and of this importance takes more effort, new skills, and new-found diplomacy at the top levels of management teams across companies.

Let’s not be naive. There have been similar but cautionary situations where a company invested heavily in social benefits and received no recognition from customers for leading the charge. In the 1990s, Frito-Lay was first to reformulate its products for reduced cholesterol content. But even today when we think of high-fat foods, what comes first to mind? For many, its Doritos, Tostitos, Cheetos, and Fritos.

It won’t be any easier for brands to achieve competitive advantage by doing “the right thing” in safety. But branded manufacturers owe it not only to consumers but to themselves to try. Whether they want it to or not, the safety bar is rising. It’s an opportunity as well as a burden. And smarter cooperation within their value chains is one way for brands to prevail over retail private labels.

New Distribution Habit for Car Companies?

The Times certainly hit a nerve Sunday with its feature asking  whether Americans will kick the new car habit.  In 24 hours more than 200 reader comments have poured in. The majority appear to be critical of Detroit and tilted toward holding on to their old cars longer.

It’s a biased sample, no doubt. Times devotees are often stereotyped as niche consumers  by self-described 'mainstream' Americans.

On the other hand, we’re in a tough economic era now.  And “we” isn’t just Times readers or even Americans. It’s most of the world. In a cash-poor climate, will new car sales surge in China, India, Southeast Asia? Certainly you couldn’t supply the pent up demand in the tomorrow’s elephant markets using just the levels of production they have running today. But how much will those people be able to afford new cars if their employers can’t export to the U.S., Europe, and Japan?

Imagine a world in which new car production stayed depressed. What would happen to the balance of car production and car distribution activities? Surely a lot more work would have to be done in the distribution system: more servicing, more spare parts sales, more aftermarket parts manufacturing to service older vehicles, more varieties of warrantee, more effort to get a used car or truck to its next owner. Lots of things. The shape of the auto industry would be very different.

What would a major car company look like then? Producers (that survive) would still have the best chance of dominating, you’d think. But their mix of legacy activities and incumbent investments would have to change. In a scenario of fewer new cars, influence and market power wouldn’t emanate as strongly from the point of production.  It would be much more diffuse, and centered downstream closer to customers. I.e.: in distribution channels.

Maybe car companies, which have relied forever on a franchise system of stagnant dealerships, will want to rethink their creaky distribution model. In this regard, their weakened financial condition may actually provide an opportunity. The handcuffs they’ve been forced to wear by state regulators is falling off as bankruptcies move forward. In any event, car makers have already announced they must shed thousands of dealers. Auto distribution is going to look different, one way or another. Could one way for the majors to prosper in a new, leaner world be to forward integrate into distribution like Apple did? The question then would be, What is the smartest way to enter retailing?

For investors seeking long-term returns in automotive, my guess is that the thing to look for is a management team that knows the nuts and bolts of distribution and has the strategic vision to reinvent the system. We haven't yet seen any indication of that in the new government financed playbook.

 

Togues Off to Sysco

Kudos to Sysco, the world’s biggest broadline food wholesale distributor. And hats off to Business Week for catching them doing it right.

Restaurants, Sysco’s prize customer group, are teetering on the brink. It doesn’t matter whether they are big chains or small independents, upscale or downmarket, virtually without exception they’re starving for business as consumers stay home more to eat.

As in any vertical value chain, when the retailer suffers so do its suppliers. So Sysco is stepping up to help restaurants. It’s offering classes at its warehouses to teach better and more economical cooking techniques, showcasing foods and ingredients, and generally trying to give its business customers the boost they need to stay alive.

"The company has a weapon it hopes will save customers and lead to greater market share during the slump: a free consulting service called the Business Review. Along with selling cases of napkins and three-gallon containers of ketchup, Sysco is using employees . . . to help clients design menus, train waitstaff, and market their businesses. The company has turned its warehouse kitchens into schools for its customers. "We felt if we could improve their business, that would improve our business with them."

I love this! In many industries, when business is off, manufacturers and distributors don’t respond this way at all. They don’t bend to the task of improving their distribution system. They step up their advertising.

There’s nothing wrong with advertising. But isn’t it great when companies make a material contribution rather than a symbolic one? And maybe in this new (hopefully temporary) economy, material contributions will start to get the recognition they deserve.

Time to Reduce Frictions

Today’s Wall Street Journal traces demand for an electronics product all the way from the consumer-facing retailer, Minnesota-based Best Buy,  around the world a couple times, and finally to a California machine tools shop near the opposite, upstream end of the supply chain.

As the Journal shows, the chain doesn’t really function as a unified system. It’s more a series of one-to-one contractual interactions. Separate pieces only connect with each other in a logistical sense.

Almost miraculously, and not through any real planning, the product (a DVD player) takes shape as it progresses from supplier to supplier back to Best Buy. Nobody in the process has a clear idea what’s happening with everybody else.

In good times, this crude set-up works well enough. But when demand or supply shifts suddenly in one part of the chain, the others get jolted. The thing is, because the data and strategy linkages are so weak, responses to the change in one place are apt to be too big in some places, too small in others. As a result, upstream suppliers have been caught with millions of dollars in unsellable excess inventory and the need to lay off much of their workforce.

Downstream, retailers haven’t had enough inventory to catch the wave when buying restarts.

I’m delighted to see this important issue getting press coverage. Businesses have to get much, much better at working together as integrated routes-to-market systems. Technologically and operationally, giant suppliers like Procter & Gamble and giant retailers like Wal-Mart have been discussing and dabbling in this for years. But strategically, “partners” in a value chain system rarely work together as partners.

As the Journal article shows, there is an urgent need to shift from frictional relationships to smooth ones.  And that is fundamentally the new generation's top management challenge.

 

New-Style Marketing Efficiency

In an interview Sunday with the New York Times, Steve Balmer registered his impatience with management presentations that “take the winding road” instead of declaring their message upfront and letting the group debate it.

Mr. Balmer is well known to be a no-wastage guy when it comes to time. And now that the economy is threatening Microsoft’s  thirty straight years of growth, he wants to push that spirit of compression deeper. Microsoft has to shift to a culture of efficiency. “Organizations need to do more with less.”

I have a suggestion for increasing efficiency and effectiveness together. Possibly Microsoft does it already, but not if it functions like most large companies.

In my area, marketing and distribution channels, it’s customary to precede initiatives by testing the waters with large, comprehensive quantitative market research and strategy initiatives. It’s an expensive and slow way to start. Worse, though, it almost always kills momentum, as people question methodological purity, insist on greater accuracy, and quibble about segment definitions.  A penchant for exactitude often snuffs out action.

Companies get off the dime faster and cheaper with small-scale actionable efforts done internally. The nimble ones use facilitator content expertise to pull insights out of a handful of conversations they hold with well-placed managers around their company and representing its partners. In business-to-business settings, they use the same extended discussion format to understand key customers’ chief business issues and opportunities. In consumer businesses, they may conduct a few customer focus groups. Usually they find that ninety percent of what they need to know – and almost always the critical ninety percent – can be pulled out of what people simply talk about when you listen and respond intelligently.

I don’t mean, these companies just do what customers tell them to do or fix what customers are dissatisfied with. Instead, smart listeners pick up on clues in their subjects’ remarks. What are their aspirations? What’s getting in their way? Help them imagine the unimaginable.  Surveys aren’t good at detecting what would, in the now over-used term, delight customers. And delight is the basis of exciting new businesses, which may require wholly different strategies, operations, and distribution.

Quantitative research has its place. But it isn’t first place. The new efficiency in marketing will increasingly rely on strategy beginnings that are deeply insightful and open to adventure and unanticipated discoveries. They really will do more with less.

 

 

Say It Ain’t So, Mike

Abercrombie & Fitch, one of the lone holdout brands steadfastly upholding its image and price premium, has finally capitulated. 

CEO Mike Jeffries announced yesterday that Abercrombie had to drop its resistance to  "a headwind where the consumer is reluctant to spend on premium brands." The company website already has a huge SUMMER CLEARANCE sign plastered across its landing page.

Say it ain’t so, Mike. Talking with a friend just hours earlier, I extolled your virtues as the bravest of brands. The rearguard defender in the struggle against commoditized mass merchandising and brand equity decimation. If you too are withdrawing from head-to-head combat, maybe there really is no other choice for now. Still, I hope you and your like will regroup and reengage soon under the 'value=benefits' banner.

Post-Crisis Retail Taking Shape

The dominant mindset among branded product makers and retailers struggling to survive in today's tough economic environment is not only clear and homogeneous across companies, it's logic is rarely challenged by the media and Wall Street pundits:  cut costs, lower prices, improve "value" to the consumer.

But it may be that the current economic crisis is only giving short-term cover to painfully outdated management thinking just as the old efficiency-obsessed leadership models are taking their last breaths.

Don't get me wrong, efficiency is a [very!] good thing. I like efficient routes-to-market business models. But efficient at what? If the only end game for efficiency is lower prices than competitors, where does the treadmill stop? Efficiency must serve a higher master - effectiveness. And the only correct arbiter of effectiveness in consumer markets? Of course it's the end consumer, and their view of whether their total package of retail experience elements are being met. It's simply insulting to consumers to suggest that they - as a large, single issue group - care only about lowest price. For example, where do salmonella and melamine fears fit in to that equation? Where does 'healthy' fit in to that equation? Trusted? Reliable?

The good news is that signs of more forward-looking retail strategy are already emerging. Zara has always been a favorite of mine (fast fashion AND reasonable prices), and they're growing share and profitability over rivals Gap and H&M who are clearly stuck in the past. The Wall Street Journal reported on another great example - regional apparel retailer Buckle.

The Journal article explains the fresh appeal of the Buckle retail model: "Buckle's appeal seems to be fit, selection and service, not some quirky fashion trend, like Crocs footwear. The merchandise isn't cheap (the company says it sells "medium to better priced" apparel) but still represents value to customers. They end up buying more than they planned on". 

Listen to the voice of the customer for evidence:

"[The salespeople] are always really attentive and friendly and they always end up bringing you so many other cute jeans and shirts to try on ...and then you end up buying more than you planned on."

"I [like] the type of clothing they have, which is different from other places like AE, Hollister, A&F... I feel the clothes they sell are definitely worth the price".

But what about results? Is this model working?

 Here's what the Journal had to say about that important question: "The formula seems to be working. Last week Buckle reported an 18% increase in same-store sales for April, its 21st consecutive month of double-digit gains. And this during the worst recession since the Depression. Buckle is gaining market share (Abercrombie same-store sales were down 22% and American Eagle's were down 5% in April) and is planning to expand into the competitive but potentially lucrative Northeast market".

It's still early. Wall Street and media pundits, along with some old school business leaders, will continue to pile on the low cost-low price path to riches. Old generals are always fighting the last war. But no worries, free markets will eventually self-correct.

Remember CompUSA and Circuit City?

What does a Mother Want?

Let’s mash up two insightful news pieces and see what we get.

--  Story 1: Branded food processors are fighting off store private labels, usually by dropping prices or giving more food for the same price.

-- Story 2: Women are more risk-averse than men, research shows.

Not exactly news flashes but both pieces, from veteran journalists  Stuart Elliott of the New York Times and Jason Zweig of the Journal, pull out fresh insights.

Now apply the lesson of one article  to the other. Women are most families’ food chooser. Mom makes out the grocery list, even if sometimes she hands off picking to her spouse.  Does Mom care about lowest-price? Sure. But, we now know, not as much perhaps as she cares about food safety. Preserving her family’s health is vital if sometimes costly, whereas food isn’t always the most expensive item in a family's budget to begin with.  So most women may reason, ‘Minimize all food safety risks to my family first. Don’t skimp.’

Branded manufacturers should ratchet up their promotion of 'higher quality and lower risk'. Branded manufacturers have spent decades building reliable, closely monitored supply chains (at necessarily higher cost than private label ones typically) that enhance their quality and guard their image. The best of these quality-control systems reach all the way back up the chain to checking on raw ingredients. Meat packers like Tyson’s and Perdue can practically give you the blood tests and biography of the cow or chicken whose products you’re eyeing in the supermarket cooler. 

Retailers, on the other hand, are new to this back-end product supply management dimension. In my experience even those with established private labels are not doing as much as they need to on supply management. Few of them really want to bear those costs anyways. And frankly, supply concerns shouldn’t be their business.  Retailers have more than enough to do managing  their customers’ in-store and post-purchase experiences. Sourcing and merchandising something as basic and packaged as a safe box of lotion-enhanced facial tissues is not a challenge to be sneezed at.

Independent, national brand managers’ goals should be to help the public  understand the safety benefits of their end-to-end value chains. And of course, they should work hard to maintain and improve those systems' integrity. Operations of upstream partners must be open to inspection – and monitoring must in fact be performed. They need to raise the bar on retailer private label systems - they really can’t afford to dig into the distribution system like that.

Brands that try to compete on price are like generals who fight this war with strategies from the last one. In war, the result is Pickett’s Charge or the Maginot Line. In business, it’s self-commoditization. Why go there?

Deep channel expertise (supported, not overshadowed, by advertising!) is the ultimate reason for existence of a branded producer.

Getting Back on Target

Target Corporation, a strong mass merchant respected for its fashion and branding sense, has watched its stock drop as investors have turned toward Wal-Mart and its hyper-efficient operations. I read today that a big investor is agitating for new strategies and a new board to drive them at Target. In reply, Target management points to its expanded grocery department and ads emphasizing lower prices.

In other words, moves that will make it more Wal-Mart-like.

There are other ways to win against Wal-Mart' ones that Target is well prepared for. The one I favor is distribution-based differentiation. Wal-Mart does compete, vigorously, on this dimension. Using overwhelming market power, it forces suppliers to invest in expensive information and tracking technologies, deliver product to its specifications, and lower their prices to Wal-Mart from one year to the next. In the short term, Wal-Mart’s approach is great for consumers. They get better prices. In the long run, it’s not nearly so good because it leaves suppliers drained of the extra energy and reserves they need to innovate.

There are lots of manufacturers out there, Target, that would love nothing better than to regain healthy margin. I’d bet that many would even happily forgo Wal-Mart volume to get that. 

Just as attractive, suppliers would do handsprings if a market channel like Target worked with them cooperatively rather than punitively. This isn’t a guess. Plenty of manufacturing executives have said it to me; some are already embedding execs inside Target and others. They’ve also said they believe that a manufacturer and retailer  working together can not only devise better customer experiences for a Target, they could do it cost competitively.

And that is something that is very much in character with Target’s traditional, winning strategy.

 

Untapped Innovation Opportunity

Business Week recently published its annual survey of  top executives’ ratings of the world’s “25 Most Innovative Companies.” About 80% are manufacturers. In every case but one, the spotlighted innovations have to do with the manufacturer’s product-service bundle: Nokia’s high-end devices, Samsung’s ever-better memory chips, Toyota’s “green” car interiors, Coca-Cola’s 2800 products (versus a few hundred ten years ago).

So, you may say, What else did you expect?

I expected – or rather, hoped also to see – some innovations in distribution. I was looking for creativity, success, and growing differentiation in the way companies design their channel systems, relate to their partners, create distinctive ways for customers to shop for their products, protect their retailers from competition, surprise their end-customers with whole new ownership experiences. There are a thousand possibilities that have nothing directly to do with a manufacturer’s basic product/service offering and everything to do with the way customers get that offering.

Admittedly, distribution is not always as sexy as creating an iPhone or Tata Industries’ $2,000 car. And that’s exactly my point. Don’t smart businesses seek whitespace where the competition isn’t? Don’t they try to win over the customer on a dimension where copying and fast-following is inherently difficult? If all the action is in new products, add another destination to the mix.

I monitor over a hundred industries for my work and teaching. And if there’s one generality I can safely assert, it’s this: Distribution is not yet the hotbed of innovation it will be soon.

That should tell you something about where the opportunities are today.

 

Channel Champions - The Next Generation

Retail Repairs

Economic tides are reshaping the auto industry’s retail shoreline. New-car dealerships are being washed away, as brands like Pontiac disappear or like Saturn and Hummer are, hopefully, sold. What’s left are repair businesses, nursing more mileage from existing cars (or dishwashers or dress shoes) , as consumers shift their mindset from  a manic buy/use/dispose to  keep/repair/keep longer.

What we are seeing more and more is commoditization of basic product attributes, as the center of differentiation gravity moves into post-production: distribution activities that meet new sets of consumer needs. Smart players will find ways to generate plenty of growth and margin there. It’s going to be continued retail channel  revolution.

At this stage, it’s hard to envision the reconfigured landscape of auto sales and service channels five years out. We do know that there is a lot of raw material out there for tomorrow’s owners and entrepreneurs to work with: service centers, parking lots, parts inventories, skilled automotive technicians, and maybe most important, a mature infrastructure to funnel whatever is needed from suppliers to installers.

The strongest G.M. and Chrysler dealers may flourish, sopping up added business in a more thinly populated franchise environment and buying books-of-business on past sales to take over service contracts. And it’s easy to imagine marginal G.M. and Chrysler dealers converting to service centers without showrooms. Replacement parts and periodic overhauls have long been for most dealerships where the real money is.

A big question is how the automakers will adapt. Obviously they’re going to have less market power. Remaining dealers, probably multi-brand or service-only, will have more. The way that Detroit comes at this new equation will have much to do with its survival.

 

Low Price - Low Equity?

No surprise, but department stores and other medium- to upscale emporiums are throwing their big name labels overboard in an attempt to keep their own ships afloat. The Times has given its story today an amusing, or terrifying depending on which end of the chain you sit, title: “Never Mind What It Costs. Can I Get It 70% Off?” 

For manufacturers, one big implication is pretty depressing: Never mind creating ‘manufacturer’s recommended prices’ at retail. All it’s good for is as a denominator for the store’s bid for more floor traffic and clearance sales.

A store can, I suppose, be excused for thinking that price cuts are the only game in town these days. But they’re not. Products and services can still sell; on trust, quality and long-term payback. And manufacturer/retailer distribution systems can still outdraw rival channel systems by offering superior customer experiences. Even in a very down market, may the best value win.

Best value isn’t the same as lowest cost. Jim Anderson, my colleague at Northwestern’s Kellogg School, underlines that Value = Benefit – Cost. Benefits – the good stuff, what people actually want – are half the equation. Heck, they’re at least half the equation, aren’t they?

Manufacturers are potentially giving retailers too much room to destroy their equity with consumers. They don’t have to. They should insist on a “no lower than” for their goods – not necessarily their initially recommended price but something that doesn’t debase the brand either. In 2007 the Supreme Court gave manufacturers new latitude to write contracts specifying resale price minimums. The litmus test of RPR legality? Genuine benefit to end customers must be demonstrable (get legal advice!).

I would only add, no manufacturer wants to alienate its downstream partners by strong-arming them or depriving them of room to maneuver against their competitors. The spirit of partnership has to be there. I think it can be. Resale price maintenance agreements” can be an instrument to promote rather than destroy that spirit.

 

Who to trust?

The more distant and complex our market systems become, the more consumers seek out providers they feel they can trust.

The list of groups we no longer trust as before grows weekly. Toy makers, peanut butter processors, banks of all stripes, companies with strong balance sheets and outstanding reputations that have been hammered by a global collapse in demand. Even the AARP has not been immune from criticism about conflicts of interest in controversial healthcare products they recommended and profited from! 

Now credit card companies – the ones were supposed to  trust – are under fire. No less than the U.S. President himself says so: 

“Those who are issuing credit [should be] able to make a reasonable profit, but . . . in a way that is responsible, [where] consumers are not finding themselves in a bad situation that they didn't anticipate." 

Over-priced fees, obscure penalties, unexpected rate hikes after luring consumers with low sign-up rates, and possibly sharing customer data with others are among the manipulative practices charged against card issuers.

Nobody buys a credit card transaction, not really. They buy a shirt or a sit-down meal or something, and pay for it with their card. The card is a convenience, an afterthought, a facilitator of the main business.  At the moment of credit-card truth, people’s mind is usually elsewhere – how great the food tasted, where to shop next, etc.

No one is better positioned to take responsibility for everything involved in a commercial transaction – product or service quality, payment conditions, shipping, warranties – than the immediate vendor. Can we as consumers trust that the vendor has done all we expect to fulfill that expectation?

Consider all the new (free!) online consumer service platforms hitting the web. For example, mint.com, the on-line place that offers to help you manage your money better. Mint says, approximately, “We’re your trusted financial advisor.” If that’s the case, should part of the deal be trust that they are looking out for your interests?  When you must deal with credit card companies they recommend, should you assume they are looking out for your best financial management interests? Surely they’re better positioned to do that than you are. 

But what if mint.com is concerned about losing valuable commission money from the credit card companies they recommend? Are they holding these companies to task for the same practices our president is coming down hard on? Should they? Do they have an obligation to warn consumers that a low initial rate at credit card company X is often followed by rate hikes?

In fact, what is mint.com? A wonderful free service for consumers or a credit card broker with a free front-0end service?

My point isn’t to criticize mint.com. Many consumers need and benefit from financial management advice. My point is that in today’s world of fast-changing markets, trust is the new basis of differentiation. So companies new and old need to be diligent about their transparency and cautious about their partnerships and alliances. And not transparent in the fine print or buried in layers of web pages.

Over time, the market will sort out the wheat from the chaff, and winning face-to-the-customer providers will be those who maintain a true fiduciary responsibility to their end customers. They will be trusted.

Fighting the Wrong War?

There’s a price war on among the large on-line hotel booking services, started by Orbitz and followed grudgingly by Travelocity and Expedia. Savings to the Orbitz consumer should run around $7 per night, on average.

I don’t see how Orbitz can come out ahead on this. Can you?

Of course, price-cutting typically does make sense when shoppers can see no real difference between competing alternatives.  And I’d be willing to bet that in 99 out of booking 100 occasions, they can’t - in either the price or the overall shopping experience. Why should a consumer think twice about minor disparities in rival booking fees?

 Bigger considerations will wash over all of this. Hotels vary in look and feel, amenities, location, and prestige, not to mention base price and daily deals.  Personally, I don’t think consumers can even tell if Orbitz is saving them a bit of money. I decide based on the all-in package deal. Don’t you?

More to the point for bookers, don’t on-line consumers prefer a website largely for its navigation characteristics? Personally, I hate sites that force me to reenter the airport names, number of tickets, time of departure, and so on every time I try a different destination or travel date. The aggravation and lost time cause me to write off the site entirely. Grrrrr....

More value in the customer experience is where on-line bookers should be competing head to head. Ironically, on this front Orbitz may already doing well. I know scores of Orbitz loyalists. Their repeat business has nothing to do with cuts in price, and everything to do with Orbitz’s cleverness in cutting their time spent and improving their ability to find a great destination.

Shouldn't they hold the line just like physical stores that have something better to offer? Didn't research just come out that discounts cheapen consumers' perceptions of a product long after the discounting stops?

 

 

Is Vertical Integration The Future?

One distribution system design question is popping up in more and more markets in the U.S. and globally:

do product makers need to own their distribution channels to make them high performing?

For over twenty years, companies like Pepsi have marketed their brands and managed growth in their global product portfolio by consolidating their independent channels (bottlers) and influencing them at arms length through minority stakes (usually in the 30% to 40% range).

Last night Pepsi reversed course. It’s completing its forays into forward integration, by buying virtually all of its two top bottlers, which together command 80% of  capacity in Pepsi’s carbonated soft-drink (CSD) business.  Pepsi has offered at least three reasons for its decision in the WSJournal and NY Times:

•  Gain “greater flexibility” to direct capacity at fast-changing consumer tastes
  
  
• Build advantage in the fastest-growing portion of the nonalcoholic beverage market – waters, juices, energy drinks, Gatorade – all of which are now distributed more and more through non-CSD bottler routes-to-market
  
  
•  Reduce the number of margin-takers in the product pipeline to anticipate a long down-market in which overall system profits are smaller
  

Pepsi puts a spotlight on the two biggest demands on marketing channels today: adaptability and speed. Both seem to suffer in traditional distribution structures. As a result, we're seeing a decided uptick in companies concluding that collaboration and partnering with third-party distribution players is simply too difficult, too slow, and too costly. 

That may be. But Pepsi paid a heft premium of over $1 billion for its distribution partners. That will be very hard to earn back. And the company now has added considerably to its balance sheet, putting increased pressure on asset productivity. It's distribution 101 time: you can cut out the middleman, but not the activities (and costs).

 

And Now Drywall?

Everyone knows that when it comes to drywall, it’s all about price. Right? I mean, come on, this is a commodity business guys. Construction is in a massive funk, pricing pressures are debilitating, and smart buyers will find the lowest cost sources they can.

We know what that means. No-name branded drywall made in mysterious factories far, very far from consumer residential markets here in the U.S. But that’s OK, because transport costs are (usually) low, and heck, it’s only drywall, not food or baby toys…

Now comes homeowners in Florida (see WSJ article), moving out of their houses because of fears about toxic effects of cheap, but allegedly dangerous, overseas drywall used to build their homes and the freshly painted bedrooms for their kids.

New school marketers are carrying the flag of a forgotten, but basic, Marketing 101 principle:

VALUE = Benefits – Costs

In contrast to how old schoolers use the term, Value is not to be confused with low price. While it’s just common sense, it seems that reliable, safe, high quality product is indeed part of the benefits most consumers are seeking. Much of the responsibility for ensuring those benefits rests in channel systems, and with commercial buyers. Managing by Gross Margin, while it leaves plenty of time for the quick golf game or long lunch, does little to address the more complex supply chain and distribution trade-offs that a relentless pursuit of lowest price surfaces.

I’m reminded of a little story a CEO told me about his eye-opening negotiations with mid-level buyers at a major home improvement chain. The buyers indicated that if the branded product CEO didn’t get his sales team to lower their prices down to foreign import levels, they would push the products off the shelf and substitute lower cost house brands made  overseas. He knew how those price points were accomplished: using inferior and unsafe materials, cutting corners on design specs, etc. He refused to play the game for both moral and business reasons.

Consumers demand and expect that the entire system that delivers them a product or service – at any price point – is trustworthy. That means the product itself (WHAT they buy) as well as all the activity that occurs in the channel system (HOW they buy).

A new generation of business leaders is going to have to clean up the messes left behind by the old school guard and their advisers who thought so much about efficiency and low price that they forgot about the end customer. Big changes to come!

Sony, Where Are You Going?

Another storied powerhouse in branded product innovation may be throwing in the towel. It seems that Sony’s USA operation is fixated on bringing lower priced, contract manufactured, me-too cheap products to market as their primary growth play. What happened to the Apple-esque Sony who brought us the famed Walkman? What happened to the Sony whose core competence in miniaturization was unparalleled and drooled over by academics and authors of the day?

Are me-too, low priced products sold through uninspired consumer electronics customer experiences the future for Sony? Look where that strategy led CompUSA and Circuit City.

“We have no alternative but to dramatically change the fundamental ways we do our business” said CEO Howard Stringer not long ago. Is the new “under $200 Webbie HD” squeezed into current retail shelves with a 4X4 inch promotional sign three years after rival products were introduced, the evidence of those  new business model changes?

If so, the bar has been lowered not raised. As an old Sony devotee it really saddens me.

 

 

 

Into the (Discount) Looking Glass

You have to admire Eileen Fisher, who designs luxury women’s apparel and sells it through department stores. She’s exasperated with her retailers (not uncommon among manufacturers).  They’re deep-discounting her entire line, along with others, almost as soon as her garments touch the racks. And she’s doing something about it (not common at all).

 The Wall Street Journal reports Ms. Fisher has suggested retailers use “scalpel markdowns” to prune only the weak SKUs while preserving margins on the vast majority of her items. She’s also preparing to rent space in host retailers herself. Store-in-store, as this technique is known, will allow her to control merchandising and impose needed discipline on pricing. 

She  might want to consider another alternative.

A couple years ago the Supreme Court showed new-found openness to certain types of price discipline.  In ruling on Leegin vs. PSKS, the Court basically reversed a sweeping precedent created almost a century ago, a time when manufacturers were the only ones that were big and strong,  and retailers were almost all small and relatively weaker in setting market policies. Today’s situation is nearly the reverse; it’s now the manufacturer who often stands in need of legal recourse.

If a producer can demonstrate, the Court has now decided, that it's distribution system is doing extra things to create more choice for consumers, then it should be permitted to require its retailers to uphold the price minimums needed to fund those extra costs. Not in all cases, and only under certain circumstances, but a watershed new channel strategy opportunity nonetheless.

I think Ms. Fisher should look into some new contracts. Establishing legally structured price management tools to ensure adequate activity in the retail system would likely be a lot easier than forward integrating into company-owned retail. If she approaches her partners adroitly, and it looks like she’s good at this, I predict the stronger influence she seeks over consumers' experiences will actually lead to stronger working relationships with retailers. 

Of course, she should work closely with her lawyers to do all this in a legally defensible way. They always want a piece of the action!

 

 

 

super-ReValu?

SuperValu, America’s no. 5 food retailer, just announced it will stop delivering goods that consumers order on line.

The end  of a distribution channel?

Not exactly, and that’s what caught my interest. 

SuperValu has listened to its customers (in surveys 60% of on-line shoppers say in-store pick-up is actually more convenient for them) and they’ve looked at the economics of individual specific operating activities (channel flows). They aren’t eliminating the channel. They’re sculpting it. Shoppers will still get the convenience of on-line ordering and store-staff picking of selections from the store aisles. They just won’t get that ($$$) drop-off at their doorstep that is so hard to coordinate and frustratingly inconvenient.

Retailers — and manufacturers — should do a lot more of this: determine what experience provides end customers the most benefit. Compare that benefit to its cost to you.  Will shifting some activities to a partner (e.g., delivery via local trucking companies) improve net value? Will restructuring the offering in a novel way that comes at consumers’ need from a different direction (e.g., pick-up at loading dock available when store is closed) add more value?

There are always improvements to channel systems and better alternatives. As a rule of thumb, the most resilient distribution systems are multichannel and adaptive. 

Bottom line: avoid shutting any route to market entirely. Try reshaping it instead.

Solution = Product + Distribution

"Most electronic health record solutions on the market today do a very bad job of supporting new work processes and true interoperability".

– Physician user, letter to NYTimes, April 11 

Better products are certainly part of a better solution. But the real opportunity for makers of medical devices of all stripes lies in better distribution—helping that practitioner or administrator through the complex process of identifying what he or she needs, evaluating the options, making the purchase on affordable terms, implementing the solution, training staff, and figuring out how to adjust work processes . 

Because buying medical technology is not straightforward, there is a fascinating set of channel issues that are begging to be explored. Whoever gets the distribution angle right first in their category—health informatics, monitoring devices, orthopedic implants, surgical gloves, whatever—is going to surge ahead relative to competition.

 

 

Web 2.0 and the News - Allow me to Grieve

Caveat right upfront: I'm a news junky, and my favorite way to start a day is at my local coffee shop with at least three newspapers of varying slants and orientations. (Lately many of them are delivered directly to my new Kindle 2, a wondrous distribution innovation.) I like diversity of view, vetted reporting, checked sources, and provocative angles. It seems I'm in a rapidly shrinking niche minority. I am concerned that quality news information is in jeopardy, and don't believe that's a good thing.

A quick digression for context. I have written much about the perils of private label programs for gross margin-seeking retailers unable to differentiate the customer's experience in their outlets. It all seems so easy - find a low-cost global source, knock off the independent brand, create a few forecasts and voila - we're in the money. Right?

Maybe. It seems that consumers like the prices, but also are concerned with quality. Is the grocer doing as much as possible to ensure that the products being shipped to them by long-distance overseas contract manufacturers of peanut butter are salmonella-free? Can consumers be confident that fantastically low prices don't mean corner-cutting lead paint in toys? Maybe not.

Here's the rub: when you add in all the agency costs of expat salaries for quality control supervisors, higher quality contract manufacturers, product design and management, recall expenses, reassurance advertising, logistics and handling supervision, refrigerated warehousing, and the like, it's not always clear that private label is really more profitable for the retailer. Or better for the consumer.

So back to the news. The alternative to traditional newspaper-style media is Web 2.0 news. The wonders of mass market wikipedia-style aggregation of individual consumers' blogs and opinions, along with headline snippets. Well I'm all for the democratization of information, but there comes a time when I would like a WSJ or NYT editor on the case looking over the shoulder of an experienced and trained journalist. Do I really care what Johnny from Des Moines thinks about the riots in Bangkok?

I remember years ago asking a friend of mine who was a highly successful writer and producer for Cheers, Frazier, and others what he thought of the then new explosion of capacity offered by the 500 channel cable system. His answer was prescient for anyone who scans the current lineup: "500 channel capacity does not mean there's enough talent to fill it with material people will want to watch".

Web 2.0 news runs the risk of being nothing more than low-quality, inexpensive private label news. But definitely worth what you pay for it.

Imported Beer Going Flat?

Sales of mature imported premium beers Corona Extra and Heineken’s have fallen far faster than lower-priced domestic brews, according to the Wall Street Journal. Could uninspired and commoditized marketing and value-added downstream in the retail system play a part? It seems so easy these days to simply blame global consumers’ “new frugality” as largely responsible.

In any event, the premium brands are reported to be raising ad budgets and lowering case prices to hang on to business. Sounds like an expensive rear-guard defense. Why don’t the imports go on the attack instead, by doing more with their retailers.

For instance, inventory is a big issue for off-shore brands. How can they reduce retailers’ inventory-carrying costs? Given the length of import pipelines, there have to be postponement strategies these brands haven’t fully exploited yet, like tightening data exchange so that cases show up at the back door just in time. Done right, postponement helps both the upstream and the downstream partner.

Or helping the retailers provide chilled product to consumers as Diageo is doing (see my earlier post). While these distribution-intensive types of growth investments are sizable, so are old-school, me-too ad budgets. Whatever they do, it should be something of real value to the beverage server or store. But Heiniken knows all this, as public comments they have made make clear.

‘‘Now more than ever, you need to give consumers a reason why you’re worth paying more for,’’ said Christian McMahan, chief marketing officer at Heineken USA (Jan 2, 2009)

With smart help and new experiences from the brewer, retailers might just push these brands harder. And focusing downstream, especially on the consumer, might just earn both brewer and retailer the right to maintain prices in hard times as well as good.

But beware old school generals and their management advisors, who are always fighting the last war. They will make the case for comoditized actions like discounting, promotion pricing, and private label products. Yawn! RIP!

History and the Bollywood Distribution Wars

For a little perspective on the Hollywood version of the nascent developments in India (see my earlier post here), look at what was happening in the movie industry-pay TV distribution wars in 1982 as the Reagan era antitrust transformation was building steam (a parallel battle was well underway in the movie industry-theatre chain front as well):

The studios also complain bitterly about HBO's move to bankroll independent producers. The firm already has reportedly invested as much as $4 million in such promising properties as "Sophie's Choice," starring Meryl Streep and Kevin Kline. "If we don't stop them, they will control all aspects of moviemaking," says Paramount's Diller. "There would be no reason for studios to exist." Most of all, Hollywood resents what it perceives as HBO's arrogance. One insider says that an HBO film buyer told a studio executive bluntly: "I know your movie is worth $2 million, but I'm going to offer you $1 million. We know you'll take it because you're all whores." "Their arrogant attitude and way of doing business has needlessly angered almost everyone they have dealt with," Diller says. Moguls: In response, HBO executive vice president Michael Fuchs points out that no one is forcing the studios to give away their pictures. "They need our revenue, and we need their movies," he notes. "If we're unfair, then let's not do business. If the deal was unsatisfactory, then I don't know why agreement was reached." As for the charge that HBO is arrogant, Fuchs says that given the way many Hollywood moguls have conducted business over the years, "we sort of consider that a compliment. I can remember the early days of HBO when we were almost petrified to go into the studios for fear we would be eaten alive." (Newsweek, 11/15/82)

You can see clearly how distribution issues, when much is on the line, are up close and personal.

Those involved in India’s struggleds might want to remember the old adage:

"Generals are always most prepared to fight the last war”

Bollywouldn’t

The world’s biggest film market, India, is now embroiled in a classic distribution channels battle.

Just as the battle played out in U.S. markets decades ago (with Supreme Court anti-trust implications!) Bollywood movie makers want to slice the box-office pie one way, the big theater chains want to cut it another. Film producers are demanding a straight percentage split, exactly the same for every movie. Chain owners say that when the film is a dud they should only fork over a smaller share of its receipts.
Both sides are right.

As The New York Times story describes, the problem isn’t that one side is trying to be fundamentally unfair to the other. It’s that even though both are in the movie business, a producer’s commercial realities have only one thing in common with those of a theater owner: ticket sales.

Otherwise, they’re looking in opposite directions. Movie producers have to raise money, then create and manage giant short-term businesses. Theater-owners’ eyes are riveted on the fixed costs tied to their real assets: debt, rent, maintenance, wage labor. The movie becomes just a medium of exchange.

When two ends of a distribution channel don’t understand each other’s business – and these two clearly don’t – we see channel conflict. Bollywood movie makers are withholding films, theater owners are bad-mouthing the producers in public. Much of their combined energy, time and money is being dissipated as waste heat.

Channel relationships very often become dysfunctional like this. Therefore, a big part of my teaching and advisory work aims to turn distribution system antagonists into more collaborative partners.

The first step is always the same: Help each side appreciate the economics and operating constraints that govern the other side. Help a supermarket chain understand what it’s like for a consumer packaged goods to worry about new product development and supply chain quality control. Help the manufacturer see why the retailer isn’t paying much attention to the manufacturer’s products but is obsessing about store sales per square foot.

It’s not easy to develop a language that bridges between these mindsets. When you manage it, however, you have the makings of a bigger system. More efficient, more intelligent, more competitive.

Pocket Vehicle, Pocket Dealerships?

One ray of sunshine for General Motors this year has been the warm attention that is greeting P.U.M.A., its enclosed two-wheel, two-person version of the Segway, in partnership with that company.

Myself, I'm intrigued at the thought of climbing into a P.U.M.A. for the three-mile commute between my home near Wrigley Field and my classrooms downtown or in nearby Evanston. But others might be worried that a city bus or SUV could squash them without even feeling the bump. They might ask, What are the odds you’d make it to class?

Thankfully, Chicago and New York aren’t GM’s target markets. It’s imagining places like Singapore where vehicles are smaller and congestion is ten times thicker. P.U.M.A.s could be as practical there as rickshaws, bicycles, or skateboards.

Assuming the P.U.M.A. ever gets beyond prototype to commercial product, how would it be sold? Where would it be sold? It’s hard to think of a scenario where a typical U.S. car dealer, say in New Jersey, would want to expend much creative, new generation-style retailing energy on customers looking at a P.U.M.A.

Maybe GM's targeted dealers in Hong Kong or Cairo would have retailing models with customer experiences, inventories and profit models that are different enough from the standard American ones to make this work.

My question is really: How is GM thinking about the P.U.M.A. at the point of sale? In a long-ended previous era, strong, consumer-focused Dealerships made GM what it is as much as any best-selling Olds or Corvette. But they kept that model in a bizarre frozen state of suspended animation,. It's as if they believed that car buyers in 2009 are essentially the same as car buyers in 1950. While that's a clear sign of management senility for traditional auto products, it's sheer lunacy for new-age products aimed at new generations of buyers.

What should emerging-product and -market dealership look like? How can G.M. use P.U.M.A. to make that dealership more viable? Without more attention to the marketing channels question, new product idea after new product ideas will continue to languish and wither on the vine.

Remember my colleague Phil Kottler's Marketing 101: the FOUR P's....

Winning at Retail: It's the Consumer, Stupid!

In the rough and tumble world of bland consumer products offerings, thin-margin retailing, and global economic crisis, Diageo is breaking from the pack. Not rocket science here, but good,solid marketing and channel strategy thinking. They started with a basic question that other consumer market players facing horrific results would be wise to focus on.

How do we improve the customer’s experience?

Beer bought at grocery is usually consumed within a few hours of purchase. It’s also usually drunk cold. Diageo, the alcoholic beverage giant, has put those two facts together and come out with a new display space it calls a pod to act as a mini-liquor store right in the middle of a standard grocery aisle. How well it fits with grocers’ standardized formats (see photo), we will just have to see. At least one chain has already pledged to try it.

What I applaud is that Diageo isn’t going brewers’ standard route: splashier ads placed in more media. It’s looking for real differentiation at the point where consumers (and retailers) benefit directly. If its bet pays off, Diageo could boost participating retailers’ store magnetism considerably. If you as a consumer need to buy ten grocery items, one of them being beer, where will you shop today?

An business question left unexplored in the Wall Street Journal story is who is funding the innovative Diageo merchandising solutions. At over $10,000 a unit and many valuable square feet of floor space, it’s certainly worth running some numbers to estimate value-added and value-derived for each partner. Diageo and its partners should share costs just as they already practice with co-op advertising.

Here, though, the costs and the benefits are tangible.

Not Our Problem? Better Think Again if Private Label

The FDA is clamping down on pistachios. Just another sourcing problem in a (more frequent these days?) string of supply chains gone awry?

A single processing plant, a supplier to Kraft Foods, is the focal point of investigation and the object of repeated citations. Kraft apparently is not to blame. It alerted the FDA in the first place and has been on top of its supply chain.

Now, imagine a different situation: Instead of Kraft, the name on the pistachio products belongs to a supermarket chain. It’s a private label or "house brand" as the trade likes to call it now lest it be confused with something "generic".

Consumers might ask: "Did the retailer perform adequate levels of inspection and oversight? Was the retailer adequately screening and supervising its contract nut processors? Was the retailer spending as much on supplier quality control as independent national brands typically do? Was the retailer allowing corners to be cut to make a price point? Was the consumer bearing the real cost of those corners being cut?"

Retailers might worry as well: How would the consumer perceive that retailers' broader line of "house brands" now? Would the recall affect the line in other categories?

When retailers go into private label it’s often with euphoria – We can brand what we sell, make it our own, merchandise exactly as we want to on our store shelves, and reap a fatter margin too.

Investing in costly quality control is often short-changed, and what thought it does get is on the order of, ‘That’s our contract processor’s responsibility (even when they're thousands of miles away on another continent?) ...see my earlier post on quality control and trust here.

Well again, maybe it is, or maybe not. Certainly when safety problems are uncovered, the local contract processor gets hit hardest. But the consumer brand does not escape entirely. If subsequent investigation suggests lax or negligent oversight, brands get burned. Remember Mattel and lead paint?

Here’s the real concern for private-label retailers. How far will the collateral damage spread? Will the public think, ‘Oh, it’s just a pistachio problem; we’ll stop buying Safeway's house branded nuts’? Will the retailer's label itself become suspect, and people turn away from private label cereal, salad dressing, paper towels, the whole line for fear of inadequate downstream accountability?

Or worst case, will the store itself be implicated, fairly or not, and might people just stop shopping there altogether? Maybe not. Or maybe.

With private label, there’s a lot on the line. Defending it in advance, through supply chain vigilance across widely varied outsourced products – soup to nuts – is a lot of work. Expat salaries for overseas quality control is very expensive and complex. Risks are high and not always avoidable. National ad campaigns like Jif ran to reassure their peanut butter consumers are very expensive.

Here's the point of all this: for a retailer who might have to reassure consumers about a recall, Jif's ad costs are certainly more expensive if they have to run a campaign for their house brands. In the past they simply told consumers: "we've pulled the offending brand from our shelves - tsk tsk on them" (remember the contact lense solution problems and the speed with which retailers distanced themselves from the brands by very publicly yanking them off the shelf?)

When the retailer's CFO looks more fully at ALL the costs of house brands - not just sexy Gross Margins, -do those independent national brands look more attractive? I'll bet they will to more and more retailers in the next few years.

In the end, Branding is a lot more than pricing and Gross Margin...

Postponed – And That’s a Good Thing!

Why would a Chinese fabric supplier buy a downstream furniture manufacturing customer in the U.S.? As a fascinating look at the furniture business in today’s Journal points out, labor costs in China are under $1 an hour whereas they’re closer to $15 in North Carolina. Doesn’t that mean more expense for the furniture supply system, not less? Labor costs do turn out to be part of the answer, but to get at the real answer, you have to read between the lines.

In a word, the answer is what distribution and supply chain academics call “postponement.” Component value added and final assembly activity is delayed longer in the system - typically closer to end consumption points, to reduce the risk (and costs!) of big inventory and availability bets placed long in advance.

In fact, in a under-appreciated shift emerging in global industries and their supply chains, once passive overseas component manufacturers (read: China) are making bolder moves downstream in local market distribution. To get closer to their ultimate end customers.

For good reason in the furniture example: 90% of exported fabric ends up in U.S. homes. Forward-integrating into local market assembly gives the Chinese a much more complete and timely picture of their prize market, reduced inventory carrying costs, improved end product availability, reduced supply chain disruption costs, and smoother production levels and scheduling back in Asia. And that's just a start.

The Chinese benefit from ownership in several other postponement-related ways as well. They shift some of the assembly costs from North Carolina to China, lowering final product costs and raising competitiveness, by shipping to what is now a US "assembler", pre-cut, pre-sewn Chinese fabric “kits” designed to the State-side assembler’s requirements. And a tighter materials/assembler supply chain gooses U.S. demand by helping the assembler assure on-time, to-spec delivery. The local market "assembler" wins new business by impressing retail furniture chains with its ability to develop living room “settings” unexpectedly fast and better than the retailer hoped.

Meanwhile, competing manufacturers in the US, with their arms-length fabric supplier relationships (and tensions) suffer miserably, even as they brag of "lower overseas manufacturing and sourcing costs".

Side note: one unstated moral of the Journal’s story seems to be that if a supplier wants postponement benefits it has to buy its customers, maybe even their customers too. While I don’t think ownership is always required, it certainly helps. It has other risks I'll discuss another time.

You can get postponement other ways. But that’s also another story.

Whose Job is Safety and Quality?

Anyone who has ever exercised in a neighborhood fitness club recognizes him. The meat head with arms and chest muscles bulging from his scissor-cut tank top, growling and grunting from machine to machine. But upper body muscles are the easiest to crank up for show, and indeed a quick glance at our meat head's rail-thin undeveloped (read: skinny) legs shows he's unwilling to do the harder work of creating a balanced weight lifting physique.

Or as they might say about him in Texas - "all hat and no cattle".

The same "go for show" mentality pervades the world of marketing, especially when it comes to managing product supply and distribution channel systems. Fears are growing that companies may be cutting big corners in their quest for uber-efficiency. They often get to wondrously low price points by pursuing long-distance suppliers with unbelievably low prices who provide the necessary performance enhancements that goose gross margins.

But just like the meat head at the gym, a big part of the process - trusted, quality-controlled and safe products - is overlooked. It's a game of chance that will increasingly catch up to shortcut takers in today's economy.

So it's with admiration that I read that Millipore, a mid-sized Biotech products company, has instead built a global quality control organization of over 350 employees. With expat salaries and other costs factored in, it's very possible they could be spending over $70 million a year on such activity. That's significant for their size; roughly 70% the size of their total R&D budget!

Why spend so much? the army of fresh-faced, hired efficiency consulting advisors might ask?

Millipore knows that trust is increasingly the new currency of global marketing.

Not Only a Matter of Time

Shipping is the circulatory system of the global economy. And as the economy’s metabolism gets sluggish, it appears that shipping is slowing down with it – quite literally. Freighters and tankers are steaming at reduced knots per hour.

Today’s Wall Street Journal also shows how boats are going the long way round to avoid toll charges at the Suez Canal. Supply chains are affected, all the way down to consumer and business buyers. Channels are feeling the pain.

Cost-cutting is certainly needed. But I hope owners aren’t decreeing half-speed ahead and manaña deliveries across the board. Efficient, long supply chains are fine, but it would be a serious miscalculation to let all their container vessels (read: valuable and costly inventory!) be caught at sea when smart competing skippers are racing into port.

Trade- and end-customers with time-sensitive cargos will defect, and once the economy rebounds they may not come back. Conceptually, these customers might appreciate that providers have to lower their costs to stay solvent. But no customer fully gets it that benefits to them – availability in this case – should have to fall too. And that is why shippers (and buyers?) who figure out how to maintain at least the illusion of a satisfying shipping experience for their customers will come out of this period stronger than ever.

Side-by-Side

Yet another story of electronic medical records this morning in the New York Times. What intrigues me most about this one is the accompanying photo. It shows a doctor and patient reviewing her data on screen side by side.

Side by side. That is a huge shift in the relationship.

I don’t know how your doctor deals with you but mine walks into the examining room with a paper file folder of records he keeps on me and scans his notes. Sometimes he tells me what he’s reading, sometimes he doesn’t. Either way, it’s privileged information – privileged to him. He would never think of showing me what he’s written, and I would never think of asking for it. It’s his.

Pretty soon, his records will be mine. And not only his but the case histories on me compiled by all my doctors, hospitals, and (hopefully this is pretty far out) my nursing home, pacemaker, motion sensors, and other smart devices. I’ll have a password and some sort of editing powers. Sure, I won’t be a doctor but I won’t be just the subject of his investigation either. I’ll be the chief administrative officer. Doctors will be coming to me, to my database, for the most complete – the best – information on me.

Which reminds me of something I heard from web guru Andreas Weigend. Andreas was chief scientist at Amazon when Amazon was putting in place the amazing business/technology model that has captured the high ground in retailing. In the past, Andreas said, consumers came, hat in hand, to companies. They searched for what they needed then snuck a peek at the price tag.
In the future that will change, dramatically. And not just for medical records, but for all kinds of business transaction. “Make me an offer,” Andreas says, is going to be the consumer’s opening gambit. “I need a 46-inch plasma HDTV that turns itself off at night,” the consumer posts. Companies submit their bids. Search work shifts to the provider. Power shifts toward the consumer.

That’s huge change, basic to any business. If you’re an executive, take another look at the guy in the scrubs above. Imagine he’s you. I need to think more about this but here are some implications. In a customer-centered business world, companies that offer the most complete, most narrowly targeted package will win.

This will require unprecedented levels of cooperation between providers in the end-to-end distribution system. And the provider in the best position to take charge and design that customer-specific solution will no longer be the retailer. It will be the manufacturer.

New Health Care Game, New Routes to Market

Two more major corporations have jumped (further) into the exploding information market centered on the U.S. health care system.

This time it’s GE Medical and Intel in a partnership to improve remote motion-monitoring devices and networks used in hospitals, nursing homes, and private residences. Last month it was Wal-Mart’s Sam’s Club unit bringing together hardware from Dell Computer and software from eClinicalWorks to provide tens of thousands of small medical offices with affordable electronic record-keeping.

And in February, Google and IBM announced a partnership aimed at linking up vital-signs monitors to provide a more complete real-time picture of individuals under care. This can’t be the complete list of recent health information big moves and shakes. Microsoft, for one, is quite active, I’m told. There have to be others out there as well, poised to go.

Most of the technology is probably off the shelf. I’m no expert in this field, but I’d be surprised if product breakthroughs are driving this spate of partnerships. The real action is in marketing and distribution. The exploding opportunity – demographics plus government funding – is going to be captured by companies who nail their routes-to-market strategies.

Just look at the structure proposed by Sam’s Club. Remarkable without a doubt. But dubious-till-proven in its premise that physicians who shop for home with their Sam’s Club card are going to entrust Sam’s with the creation of a brand-new nervous system for their business. Perhaps a big chunk of them are indeed wandering Sam’s aisles looking for office supplies and solutions. I sure would like to see the data on that!

Regardless, Sam’s moves must be pointing to significant gaps in current small office healthcare products channels, and the move is certianly a loud wakeup call to any established device makers, systems providers, or their channel partners that might be running on autopilot.

They better take notice - the health care distribution game is wide open and evolving fast.

Fighting the New (Marketing) Wars

Most reporting about the government's auto industry bailout describes highly conventional restructuring plans: limit executive pay, eliminate “golden parachute” severance packages, sell corporate jets, reduce debt, make wage and benefit cuts, close factories. Not surprising, given the stranglehold that old-school financial engineers have had on corporate strategy.

And as military historians point out – current generals are best prepared to fight the last war, or Harvard philosopher George Santayana: Those who cannot remember the past, are condemned to repeat it. As the New York Times reported after former President Bush announced the first round of auto company cash infusion: “a visibly relieved (GM head) Rick Wagoner added he had no plans to step aside: Do you think I would have gone through the past two months if I didn’t want to stay?” It is folly to hope current auto executives and their cost structure-obsessed management consultants will lead what’s truly needed: a market-focused revolution that catapults these dying companies into the new consumer markets era.

Outside-in transformation – fighting the new marketplace wars - happens only when an industry taps new thinking, fresh ideas, and courageous strategy. It means letting go of familiar levers - efficiency, scale, acquisition, discounting - in favor of more vigorous and defensible long-term advantage through differentiation.

It's time for marketing engineers to pick up where the number crunchers have failed.

Disintermediate Strategy - Buy MBAs Direct

It’s getting harder and harder to find an industry that’s immune to the economic tsunami wreaking havoc on global marketplaces today. Sure, in the U.S. we read that education and health services, mining and logging, the federal government, and oil extraction continue to see expanding workforces.

But industries that are the primary engines of employment, national output and long-term economic growth are certainly hurting. The most recent numbers reported in the press are clear on this. February employment levels compared to a year earlier continue their free fall: down 11% in construction, 9% in manufacturing, 5% in transportation, 4% in wholesaling, and close to 4% in retailing.

It might be surprising, in the midst of all the belt tightening, that one very healthy sector of the U.S. economy is focused on providing companies with outside management advice. Even as overall service sector employment fell by over 5% in February, the management advisory sector saw its ranks swell. In fact, three new management and technology consulting positions were created as every one hundred goods producing employees were laid off.

I’m perplexed why companies facing painful budgetary challenges don’t simply hire more of this talent directly.

What might happen if companies looked anew at bringing this new leadership expertise in-house, rather than leasing it from outside advisers? Firstly, hiring new thinking and expertise often costs considerably less. The norm for management consulting firms is to mark-up their employee salaries by four times or more when billing clients, and while trumpeted as temporary workforce, at most big companies there’s always a next assignment.

Secondly, insiders often create considerably less distance between idea creation and marketplace action. And most importantly, as companies engage in fierce market share battles, hiring the brightest, newest thinkers is typically a more defensible way to grow proprietary competency within the company.

Either way, it’s worth remembering that investing in fresh thinking and new ideas has historically fueled our economy’s adaptability and growth. While there are many situations where leasing this new talent certainly makes good business sense, there are also plenty of solid reasons to buy it.

And there’s great news: graduation is only three months away!

Will Sundays Be the Same?

I’m saddened to read that another local paper, The Chicago Sun-Times, is going bankrupt, one in a string of recent Chapter 11 filings by newspapers across the country.

Yes, I know that newsprint is just a medium not the message. And I'm not even a Sun-Times reader. But I’ll certainly add my name to the long list of mourners for the passing of that simple routine, holding the world in our hands, or one newsroom’s view of it, for a few minutes each morning.

I’m pro-technology. In fact, my favorite handheld device is my Kindle2. So any mourning I might profess has less to do with the loss of the print format, than with the looming loss of a specific type of content - vetted information from sources and individuals I trust.

The Internet has brought many blessings, and greater knowledge and easier access to it is certainly one. But there has been unfortunate collateral damage too. In a "wikipedia content world", each of us has thousands more viewpoints to choose from than twenty years ago. But group-think, especially with little to no contribution accountability, feels weak and dangerous. Pundits argue that the "crowd" will discipline contributors. As in the Salem witch trials? Ugh...

And most importantly, in aggregate, do thousands of spontaneous opinions give us a more balanced picture, or more pleasure, than one single beloved print copy arriving at the front door?

And Don't Forget The Channels Part

Manitowoc, the maker of huge cranes used in construction projects, just announced a (not surprising) big sales and earnings drop (Wall Street Journal, March 31), and their stock has sunk like a stone. We all know that new commercial construction is on the skids, but the Manitowoc news is still sad to hear. Especially since they’ve evidently already done what you’re supposed to: squeeze out production efficiencies, stretch working capital, go back to the table with lenders. Keep the ship afloat.

Is there anything left that they could do to get sales growth under way again? I think there is. While I know nothing about what Manitowoc is actually trying on its marketing strategy front, there are a couple things they’d do well to explore, if they haven’t already. And we’re not talking bank-breaker stuff. Early stage exploration costs almost nothing.

First, since sales are way down in European markets, this is a good time for Manitowoc to revisit its foreign distribution partners and their business models. I don’t mean raise their prices, or insist they load up on inventory. I mean revisit and reinvent everybody’s activities down at a granular level, in search of new value-creating levers. What’s effective, what isn’t? What will help end customers most, what doesn’t add much value? Who’s good at what? How should we reapportion our division of labor?

When everybody’s desperate to reignite sales, they’re going to be more cooperative.

Second, look for ways that Manitowoc can reposition itself from a product manufacturer to a solutions provider. Cranes are a focal point in any large-scale construction process. Schedules get planned around them, very carefully. Manitowoc may be able to get more mileage out of that centrality than it has exploited thus far. Why not be sure there isn’t a way to sell the crane as the anchor to a larger solution that pulls together other equipment, other contractors, and makes portions of the entire construction process run more smoothly.

Even a cash-strapped company can afford to investigate new, innovative routes-to-market possibilities. And now isn’t a bad time. In fact, it’s an excellent time.

Big D distribution

Surviving the distribution revolution won't be easy, and is not for the fait of heart - espefcially in the current global economic environment.

But there's way to not only stay out of the line of fire - but thrive. It's through big D-style distribution. And you achieve it by building differentiation, diversification, and discipline into your routes-to-market strategy.

A few words about each.

Differentiation. Start with a straightforward strategic exercise: figure out experience gaps most important to customers, evaluate the current distribution system’s capabilities to create the desired outcome, and proactively negotiate “who does what” to close critical performance gaps.

• Market leaders take an end-customer view of distribution and from it create precise refinements in how their channel systems meet the distribution needs of end customers. Their ultimate goal is ensuring that end-customers’ distribution experiences with their own products are demonstrably better than with competing products.

Diversification. Market leaders know deep down that there is peril in viewing distribution needs as homogenous. They work diligently to see the trees for the forest. They ensure that unique channel solutions are crafted individually for every potentially profitable segment of customers. Diversification is just as essential in distribution as it is in other portfolios. One-size-fits-all never works everywhere or always.

• Thus, attractive as low-cost channels can be, both Dell and Wal-Mart have seen their growth stall as they reach the saturation point of efficiency-minded customer segments. Both are now struggling to branch out. If they are successful, it will be by structuring direct sales, the Internet, and channel relationships into a portfolio of activities designed for unique customer distribution experiences.

Discipline. There is a critical distinction to be made between unhealthy channel conflict and healthy channel competition. Conflict tends to be marked by price wars between distribution channels that lack differentiation from each other. Healthy competition, on the other hand, flourishes when different channels create distinct sets of distribution experiences to attract different segments of end customers.

• Minimizing conflict and invigorating competition requires discipline in channel portfolio design and management. Above all, it requires making sure that channel mix, intensity, and management decisions are true to customers’ experience demands and shared manufacturer-distributor beliefs about how customers segment.

* * * *

Manufacturers and distributors can do a much better job of acting in concert with each other, assigning and coordinating downstream programs and activities to create powerful new total customer experiences.

By focusing together on experience innovations, they will give end customers higher, more desirable value and drive market share and profitability gains.

Border Wars in Distribution

There’s a war raging in global business markets these days between those that make products and those that distribute them. And the stakes of turning distribution into a zero-sum game are rising fast. At risk is the position, power, profitability – perhaps the very future - of branded product manufacturing.

After years of doubling down on cost, efficiency, sourcing, and operations, alarm bells are going off across the landscape of powerful global product players.

The reason is that more and more consumers and business customers are dissatisfied by rampant commoditization and sameness in their product acquisition and service experiences. These customers are demanding more fulfilling ways to learn about, compare, buy, as well as own, use and maintain new products.

In today’s markets, real differentiation occurs far from plants, warehouses, and advertising meetings. It’s happening in end customer’s total buying and owning experiences, and it’s created downstream - by distribution.

For manufacturers, it is no longer enough simply to supply. Increasingly, they also need to find win-win ways to become involved in the distribution of their products.

One reason is that distribution remains a virtual greenfield of untapped distinctiveness. Another reason is that large distributors have gained sufficient scale to tip the balance of power away from manufacturing. Understanding a product’s end customers better than the distributor that makes the ultimate sale is the best way to rebalance supply chain partnerships. Manufacturers tightly focused on a subset of the product breadth carried by dominant retailers and wholesalers have unique category insights, competencies and resources that can be laser-focused to create improved distribution experiences for end customers. A third, and to our minds predominant, reason is that adopting a genuine distribution mentality implies sharpening the company’s focus externally on end-customers.

Apple Inc. provides a sensational recent example of a manufacturer innovating its distribution. Over several decades, Apple has built an awe-inspiring track record of product innovation. Frustrated that its products weren’t being sold effectively, Apple attacked the problem head on and created a network of best-in-class stores virtually over night. Even though consumer electronics is crowded and mired in price wars, Apple’s retail sales-per-square foot, gross margins and ‘zero to $1 billion in revenue’ speed have set U.S. records for acceleration.

After building a new direct channel from scratch, Apple then proceeded to dominate indirect distribution channels, and in an entirely different product category.

Leveraging fever-pitch interest in its new iPhone, Apple dictated terms to wireless commutations carriers. It told them how to market, where to sell, what to price, and more. The new precedent effectively restructured conventional third-party carrier handset distribution. For any manufacturer, let alone one new to a category, to seize such command of distribution is unheard of. To do so in both direct and indirect channels is as amazing as it should be inspirational to branded manufacturers.

And consider the case of German power tools maker Stihl, which has been running a provocative advertising campaign under the banner: Why is the world’s number one selling brand of chain saws not sold at Lowe’s or The Home Depot? With competitors fleeing small, local channel partners for the promises of obscene volumes from these national Home Center chains, the question posed in Stihl’s ads is more than a rhetorical one. But the company knows that more sustainable market share and profitability growth can occur only if their retail system outperforms on seven specific customer experience needs. These needs, Stihl believes, are best met through independent Dealers. So far, at least, it appears they are right.

While tools competitors are struggling to avoid being elbowed off big box shelves by private labels and imports, Stihl and its dealers are enjoying sales growth well over 10% annually and price premiums the rest of the market envies.

What is the lesson? We believe it is that to be successful, branded manufacturers must absolutely be in distribution. But we’ll all be distributors is a state of mind, not a matter of ‘owning’ every channel. Stihl certainly does not, and even Apple does not go that far with the iPhone. In fact it is usually a mistake for a manufacturer to forward-integrate into distribution (or for that matter, for a distributor to backward-integrate into manufacturing). These two business models call for very different competencies, cultures and investments.

Still, the model for branded manufacturing going forward seems to be that strong, proactive market winners get involved downstream.

Playing Politics With the Auto Bailout

A recently published letter to the editor (NYT, 12/13/08):

Your Dec. 9 Business Day article about car dealers opens the door on one of the most challenging impediments to growth in the American auto industry: inefficient and uninspired retail distribution.

Though there’s plenty of blame to go around in this national marketing tragedy, Mark Aleve of General Motors is correct in pointing out that if there were fewer dealerships with higher sales, they could invest more in facilities, people, training and advertising.


In the end, the auto industry has been caught up by a powerful change sweeping consumer markets. A long period of retail cost-cutting and price discounting has led to consistent underinvestment in broader consumer experiences.


Instead we’ve had poor service, me-too assortments, little assistance and declining trust in product quality. Luckily for Toyota, it figured all this out well before building its American retail system.

It’s not too late for G.M., Ford and Chrysler to get back in consumers’ good graces.

Too Smart for Your Own Profit?

In "Marketing in the World of the Web" (op-ed, Nov. 29), Tom Hayes and Michael Malone warn of dire implications for marketers that fail to adapt to new realities they call Marketing 3.0. They suggest five calls to action: pay distracted consumers for their attention, listen to feedback from (mostly unhappy) customers, target smaller niches, pay consumers' trusted friends to evangelize for you, and use brick and mortar as showrooms for online inventory.

Their evangelism goes on to assert that "there isn't a smart company today that isn't implementing some kind of online community, wiki or blog strategy."

But the authors raise and fail to answer the important strategic question: "how to leverage this phenomenon into actual profits?" Whether their advice describes a two-generation leap forward from "classical marketing" or not, it certainly drives home the real challenge facing marketers today: consumer inertia. After years of myopic focus on efficiency and low price, most U.S. retailing -- offline or online -- today is simply boring and uninspired.

With the dot-com bubble of 2000 still fresh, however, truly smart and strategic marketers are being extremely careful to sort out the wheat from the chaff in the ever-expanding glossary of Internet lingo.

Nimble and relevant are indeed important business goals. So is the classical one of profit.

[Letters to the Editor, WSJ, 12/6/08]

Case Study: Retail "Free Riding" Hurts Technology Adoption

Back to the Future:
Color Television Retailing Slows Adoption

In January, 1954 RCA introduced the first color television set with a striking color telecast of the Tournament of Roses parade. In today’s dollars, the revolutionary new technology represented a $7,000 upgrade over a consumer’s black & white set. Even so, initial demand surged, and within ten years was approaching one and a half million units per year. By 1962, hundreds of color television manufacturers were emerging, with Sylvania achieving a 1-2% share of the national market through a vast and loosely managed network of independent local television retailers.

Yet by 1966, color technology had still only penetrated 17% of all TV households, and evidence was mounting that the traditional black & white television retailing system was hindering adoption of color. With over 350 models on the market, upgrading to color televisions was seen as an increasingly confusing process and consumer word-of-mouth was becoming a problem. Indeed, families were finding that a color television repair would be 50% more expensive than with black & white, a new set might not get quality reception in their particular home, and the products were extremely fickle and sensitive to careful placement and tuning when delivered. There were also signs that while traditional black and white TV dealers would sell color, most could not repair the new products, and were unwilling to provide no-obligation in-home trials.

After careful review, Sylvania determined that accelerated growth would require a dramatic change to it retail distribution system, if it hoped to get beyond a national market share hovering at 1-2%. As a result, the company moved away from loosely managed, saturation retailing to a more selective franchising approach involving only approved retailers willing to rigidly adhere to performance specifications for every element of an exceptional new consumer buying experience.

Territory protection was an essential element of the franchise strategy. Without it, a Sylvania retailer in one geographic area might free ride on a franchised retailer in an adjacent geographic area, by using lower prices to steal consumer sales away from the local franchised retailer (who would presumably have higher costs from investing in the new consumer experience in areas such as product education, in-home trial, repair service, etc.). Within three years, Sylvanias’ national share had doubled, with share in high priority geographic areas reaching as high as 15%.

But in 1977, a renegade Sylvania retailer entered an adjacent territory in which it was not authorized to conduct business, advertising significantly lower prices to those offered by the local Sylvania retailer. Sylvania promptly terminated its entire business relationship with the offending retailer, who sued on antitrust grounds.

In one of the most discussed and debated antitrust cases in history, the U.S. Supreme Court upheld Sylvania’s right to protect its products against intra-brand price competition. The court found that competition between brands – its primary concern – could actually be lessened when consumers lacked the retail experience required to discriminate between manufacturers. Put positively, the court determined that by offering a differentiated retail experience, consumers would be in a stronger position to make informed choices, and inter-brand competition would increase.

Signs of New Distribution Era Emerging

Signs are everywhere that a sea change is occurring in how branded product makers and their channel partners chart growth strategies together. Many will start moving away form old-school adversarial relationships to find new ways to re-focus on providing consumers with the benefits of trusted brands.

For too long, manufacturers and their dominant distribution partners have danced around the trade-offs that price- and cost-only systems create. The trade-offs are especially acute when a marketplace is supplied by long, overseas supply chains where oversight and quality control are more difficult to assure. While long supply chains are an important part of the global economy, they still demand operating oversight which drives up costs and investment. Contract manufacturers (and distribution channels building their own store brands) are finding out there's more to sourcing than "spec and buy".

• NYT on risks of cost-only sourcing: a sales manager at a company in southern China said leaded paint was about 30 percent cheaper than paint without lead...it depends on the client’s requirement, if the prices they offer make it impossible to use lead-free paint, we’ll tell them that we might have to use leaded paint. If they agree, we’ll use leaded paint. It totally depends on what the clients want.”
  
• WSJ on toys supply chain: After a summer of toy recalls, toy licensors and trade associations are counting on stepped-up safety pledges to reassure parents before the holiday shopping season...some industry analysts question the effectiveness of tighter safety measures by companies that own brands and images but may have little manufacturing know-how...licensors have less experience... toy manufacturers such as Mattel and Hasbro Inc. are better seasoned at quality control.
  
• NYT on government oversight: A working group appointed by President Bush recommended preventing problems by building safety into manufacturing and distribution, intervening when risks were identified and responding quickly after an unsafe product made its way into the country...Representative Rosa DeLauro [said] the plan should detail how bad actors will be held accountable, how strict safety standards will be developed and enforced, and how such a system would be funded

What's important about this development is the impact it has on total system costs and end prices. It turns out that buyers who came back from overseas sourcing trips exclaiming - "it seems too good to be true" - were spot on. It was, and consumers are getting more and more concerned about who to trust.

In a related development, earlier this summer the U.S. Supreme Court seemed to anticipate such developments when they overturned a nearly 100 year old ruling to give manufacturers the right to set minimum resale prices. Why would the court suggest that higher prices are better for consumers?

The underpinnings of the court’s new reasoning were developed long ago by economists at the University of Chicago who argued that allowing manufacturers to stipulate prices on branded products can lead to greater benefits for end consumers when increased retail margins are used to fund required service levels. In reaching its new decision, the 2007 court acknowledged and embraced this view of consumer market dynamics, and concluded that any given instance of resale price maintenance is now within the law – if the manufacturer can show it has not concentrated market power to drive a supplier or retailer cartel, and if it can show that in setting a minimum price at retail, it is promoting consumers’ best interests and driving up overall demand.

Current consumer sentiment seems to be supportive of the Supreme Court's direction. None of this, however, suggests that manufacturers and their resale channel partners have free reign to drive up prices beyond what customers are willing to pay. But watch for new developments. In the new era of distribution, forward-looking manufacturers and their channel partners will once again offer trusted products at price points required to actually deliver on the brands' promises.

Hybrid-Channels Dominating Strategy Debates

Just as big branded product makers are getting their arms around reasonably consumer-friendly websites, the online world is demanding a more nuanced, and complex go-to-market response. It seems that consumers’ initial awe around the ease and efficiency of internet transactions – especially when compared to clunky, old, dusty retail environments and blue light specials – is being replaced with a more balanced view about the role of the Internet.

Consumers are still voracious users of online channels. But much of that activity is related to information gathering. Forrester research published as far back as 2004 has shown that over 60% of active online shoppers are frequently making the purchase offline through in-person channel options.

The key to optimal channel systems is recognizing that a channel system is not an all-or-nothing online vs. offline decision. It never was, but it certainly is not today. In today’s environment, branded product makers and retailers alike are being forced to separately evaluate each individual channel activity (or marketing flow) with regards to how and where it is performed. Should activity X be provided via an online mechanism? Via telephone? In-person infrastructure? So it goes for information activities, selection activities, buying activities, servicing activities.

So it’s not surprising that the best performing channel “systems” are hybrid. Some portions of the channel system online, others elsewhere. Sure, there will be pure plays. But those systems will see more and more flattening of sales as they settle in to their natural segment of buyers. It seems a major share of consumers want to learn online, discuss by phone, check in with friends back online, trial it at a store close to home on the weekend, get advice from an expert back online where they’ll make the payment, and then pick it up at a local store by their office a few days later.

That’s the type of hybrid we're going to see much more of. That’s back to the future of distribution.

Looming Distribution War Faces Gaming Industry

At this year's big Gaming industry event (E3 Media & Business Summit), much attention was lavished on the question of evolving hardware and software strategies for success. There is growing recognition that mass market growth ambitions must be matched with offerings that appeal to market segments other than rabid teen gamers.

Alex Pham of the Los Angeles Times quotes a senior executive from Disney's Game Group on the company's growth strategy in the Gaming market: "as the game industry grows, it needs to reach out to a broader audience...the industry has built its $40 billion empire on customers who camp out overnight to buy a next-generation console or the latest installment of Halo. But that audience is getting tapped out".

But what's noticeably missing in all the Gaming industry buzz is any fresh thinking on go-to-market retail distribution strategy for reaching this broader market.

Disney and other game product and service companies would be well-advised to take a page from Steve Job's play book:

1. Match product innovation with go-to-market distribution innovation


2. Simplify the customer's total experience - not just the
   product


3. Forward integrate selectively if external go-to-market options are
   inadequate

Whether it's Disney, Ubisoft, Microsoft or one of the rest of the Gaming market gang, advantage will accrue to whoever widens their strategy lens to understand and improve the mass market consumer's overall experience. Get ready gamers: the next battlefield is go-to-market (retailing) strategy.

Pop-Ups Aren’t Start-ups

What’s behind the move to so-called “pop-up” retailing? Pop-ups are small boutiques that sell a very specific and timely set of merchandise out of opportunistically procured retail spaces for a temporary period of time. They may surface and disappear in a matter of weeks. They're fast, and they're fashionable.

The latest blitz, into trendy parts of Manhattan, was just launched by Target Stores to merchandise John Derian for Target, a line of home furnishings by a name-brand designer. Target’s is backing the store with advertising bombardment that creates excitement, buzz, and walk-in traffic.

But when I said ‘what’s behind’ a pop-up like John Derian for Target, I meant that literally? How does a retailer do it? After all, there’s a lot of behind-the-scenes work involved: Getting fashion designers on board, connecting their new patterns to manufacturers, running the fabrication operation, QC-ing the output, coordinating all these retail route-to-market efforts so that the consumer-oriented activities fire at the right moment, not too long and not too short. It’s hard. And it’s not really something a retailer like Target normally does.

The answer is limited backward-integration. Target takes responsibility for orchestrating the work performed by varied players in its supply chain. Indeed, that’s very different than traditional retailing.

But let’s not confuse backward-integration with backward-ownership. Especially where pop-ups are concerned, you don’t want to own any more than you have to. That would be too slow, too risky, and too long-lasting. Get in, get out (if nobody comes). Pilot new customer experiences, or products. Limit your risk, maximize your impact. That’s the ticket.

And that’s what I like best about pop-ups. They decondition the management reflex to buy first, integrate later. With pop-ups, the reverse is far better. Even a product manufacturer can do it for awhile, then if you have to for expansion purposes, buy into retail later.

More than likely, the demonstrated results will provide real muscle in campaigns aimed at influencing key retail partners to move in a new direction. Real sell through data. Real sales per square foot data. And most importantly, real customer response and satisfaction data. The kind of information a product maker needs to create expertise - and consumer-experience influence.

Pop-ups. I love ‘em.

Resale Price Maintenance Commentary

For some intersting commentary on the U.S. Supreme Courts recent Resale Price Maintenance ruling read what Harvard economist Greg Mankiew has to say here:

Greg Mankiw's Blog: Resale Price Maintenance

RE: The Fakebook Generation

Me thinks Alice Mathias doth protest too much (“The Fakebook Generation”, NYT, OpEd, Oct. 6). After stripping away all the requisite “old folks don’t get Facebook” façade, what Alice really lays bare is the oft-commented on phenomenon of the coddled generation’s struggle for identity and connection.

Her argument about the dangers of Facebook users being able to see who’s been visiting their profiles is essentially this: we like to be lovingly fawned over and observed on our own personal performance stage, but are terrified that anyone might find out how much we crave relationships. Alice asserts in closing that Facebook is a form of escapism for young people. Yet the deep insecurity exposed by her own arguments suggest that for young people, Facebook is really about searching.

Perhaps what makes Alice most uncomfortable, is that the grown ups are making more public just how serious social networking is to young people like her.

Branded Product Wars - Best Buy Fires Warning Shot

While branded product marketers are focusing more and more on just how their retail partners are thinking, they better pick up speed.

Originally, their interest in these retail relationships was simply an after-effect of years of acrimony and antagonism, and vicious margin-sharing wars. They focused initially on ramping up their 'key account' activity; learning more about retailers' concerns, objectives, store equity and images and how these companies go about creating bonds with shoppers.

But times are changing fast, and the window for branded product action is closing fast. As Advertising Age ominously warned a few weeks ago:

"Today's retailers are evolving far beyond their historical role as simple points of distribution for selling national brands. They have changed their approach, marketing their stores as their own brands and systematically building better, stronger relationships with shoppers.

Believing that their long-term growth is tied to shopper loyalty, retailers increasingly want to develop their own shoppers. And because it is easier to get additional shopping trips, and increased purchases per trip, from shoppers who like your store, retailers are consistently using organized, data-driven, shopper-insight approaches. Retailers are creating better touch points and shopping experiences to build stronger, more-loyal shoppers. This is largely the result of the creation of their own voices-their retail brands".

And now comes Best Buy, the latest national retail player to announce what will ultimately herald another round of branded product market share loss. The company, long focused on the tough task of improving customers' experiences, has shifted more aggressively into traditional and comfortable retail strategy territory: private label or house brand products. Apparently the company's new Blue Label house brand is a result of collaboration between Best Buy and technology companies in which Best Buy gathered insights from customers and worked with contract manufacturers to design products.

We know these type of private label programs take a massive amount of management attention, logistics investment, and product development risk. It's too early to tell if Best Buy's new House Brand development program will distract the retailer from its core mission of creating a differentiated customer experience. We certainly hope it doesn't become the slippery slope it has for others.

But in the end, it's branded product players that should take note. And it's simply inadequate to say this is a weeding out of weak players; the branded player strategy problem is too systemic for that. As their available shelf space and retailer support continues to dwindle, their opportunities for growth and differentiation head in the same direction. It's time for these players to step up and recognize that old-school marketing and distribution models are broken and require new forms of strategy and leadership.

Marketing Channel Strategy - Expert Advice

CHICAGO STRATEGY ASSOCIATES works with corporations in all major markets to focus their business operations and distribution channels on customer needs in ways that are differentiated, practical, and profitable.

CSA is a specialist strategy consulting practice founded in 1992. Its core practices are customer-focused growth strategies, distribution channel strategies, and management alignment required to better optimize entire value delivery systems. CSA strategies marry key benefits that customers need with our client's own corporate objectives, operating strengths, organizational processes, and financial capabilities.

Faculty of prominent business schools, recognized thought leaders in their fields, are closely affiliated with the firm.

http://www.chicagostrategy.com/

Microsoft Jumps in to Customer Experience Revolution

Competition in consumer markets is restructuring in daring new ways right now. The more familiar battleground of product against product or retailer against retailer is being trumped by larger contests between coordinated systems.

This new go-to-market landscape has product manufacturers and retail partners collaborating to create new business models that win over consumers from other combinations of players. To beat competitors and gain share, companies are starting to see they must create tighter and more strategic system wide alliances to drive differentiated new experiences for consumers.

And now, we find Microsoft the latest branded product maker to jump head first into this new customer experience revolution. While pundits debate the merits of an idiosyncratic ad campaign, we are very impressed with the company's early forays into go-to-market system thinking.

As part of its new $300 million marketing campaign and image makeover, Microsoft Corp. plans to deploy its own customer-service representatives at retailers such as Best Buy and Circuit City to help people with their PC purchases.
The world's largest software company plans to have 155 "Microsoft Gurus" in U.S. stores by the end of the year, and expand based on the project's success, said Tom Pilla, Microsoft's general manager of corporate communication.

The experts will answer questions about PCs and Microsoft products and demonstrate how the company's products work together -- help designed to get customers "thinking Microsoft."

"Think of that as borrowing a page from Nordstrom, with that retail customer experience," Pilla said, referring to the upscale department-store chain known for customer service...." (Rachel Metz, Associated Press)

I have for some time lamented the absence of branded product manufacturer leadership in growing consumer markets. And their abscence is not only bizarre, it’s the norm. Branded product manufacturers long ago ceded customer experience responsibility and retail system influence to downstream players, helping to fuel these retailers growing power.

So I applaud the company's strategic direction and predict that if they follow up these initial marketplace moves with more, it will fuel what is at best today a brush fire of change in the consumer electronics and software marketplace.

RE: "Hail to the Twitterer"

In response to: “Hail to the Twitterer” (NYT; August 3, 2008).

A candidate’s mastery of new digital technology should be of less concern than the level of intellectual curiosity they exhibit about how the world is changing.

Just as engaged parents need not experiment with drugs or anorexia or unsafe anonymous sex in order to help their children navigate to maturity, I could care less whether John McCain blogs or blathers online. What we should pay attention to, however, is a senior leader’s intellectual curiosity and engagement with the world around us.

And technology continues to profoundly affect our world and our country in ways both hopeful and despairing. From international criminals like Al Qaida building effective global organizations on the back of digital networking, to gaming systems that let twelve year olds in Enid, Oklahoma play live with teens in Vietnam, it’s alarming that a major candidate like McCain continues to exhibit the digital equivalent of a blank stare.

The long-ago dust-up around George H.W. Bush’s odd delight in the wonders of scanning technology was not that he had never used a scanner. It was that he really didn’t understand the world around him.

M&A Watch: Should Bass Pro Shops Acquire Brunswick?

I was asked recently what I thought about the possibility of Bass Pro Shops acquiring struggling boat and recreational products maker Brunswick Corporation. I would be very supportive.

With Brunswick's stock in the tank it's certainly a good time to buy. But the strategic opportunity is what's most intriguing. Retailer-owned Corporate Brands are becoming a more popular and attractive growth path in sectors dominated by 'sleeper brands' and slow-moving independent national incumbents. It would appear that the recreational products marketplace, and boating specifically, would benefit most from a shake-up in its go-to-market models.

Here's some interesting background on why a Bass Pro-Brunswick marriage might make sense. Consider the current mood at Brunswick as reported in a June 30, 2008 Plastics News article by Rhoda Miel:

The sluggish U.S. economy is prompting recreational boat builder Brunswick Corporation to shutter most of its fiberglass-boat production for the month of July, while the firm also prepares to close four plants for good by the end of 2009. Brunswick already has cut eight other plants from its North American manufacturing, through sales of noncore brands and by closing other plants.

"Simply stated, in light of the well-known difficult economic conditions existing, we are downsizing Brunswick so we can be profitable even if these conditions continue, and be positioned to grow earnings when conditions improve,'' said Chairman and Chief Executive Officer Dustan McCoy. "We believe it prudent to plan as if no catalyst for growth exists...'' he said.

And then compare that to the mood at recreational powerhouse Bass Pro Shops, whose optimism was recently reported on by Sarah Butrymowicz and Jayne O'Donnell in USA Today earlier this month:

The line between retail and entertainment blurs further among such stores as Adrenalina and Bass Pro Shops. About 30% of each of Bass Pro Shops' 50 stores are dedicated to a theme associated with its location, bringing in elements of a natural-history museum, an art gallery and an aquarium. Each store is singular, from the Florida shop that features the hull of a sunken ship to a 30-foot-long blue whale displayed in Massachusetts. And each receives more than 3 million visitors a year, the company says.

Bass Pro Shop stores have assumed the status of a tourist destination, the company says, and some people are spending vacations driving from store to store. Malls, or even whole cities, will often help pay for construction, investing in the store to help attract customers as well as other retailers. Bass Pro Shops typically pays the money back over time through rent. "A lot of malls come to us to be the anchor for them, like a Sears or a Penney's used to be," says Larry Whiteley, manager of communications for Bass.

We're bullish about Bass Pro using this buyers' market to buy Brunswick and use the assets to create a product development and brand engine. They clearly have the skills and competencies that this industry craves - and are best positioned to create an alternative to the broken boat dealer go-to-market system.

But most importantly, consumers would relish a little more fun and entertainment in the category!

Winning Upstream - Online Distribution Battles Heat Up

The go-to-market battle for new consumer technology products is as heated as ever, and we're seeing signs that a major restructuring of the retail landscape may be in motion. After years (decades?) of lackluster retailing models, retail strategy buzz is more and more about improved customer experiences. We're finding that it's increasingly old-school thinking to assume that differentiation and market share growth will accrue from myopically focusing on global supply chain efficiency and lowest price.

But influencing the consumer's total experience in favor of your company's products and solutions does not require capital intensive forward integration into end retailing, especially of the brick-and-mortar variety.

Consumer products manufacturers are finding instead that social network-intensive online environment can be leveraged as a valuable go-to-market distribution lever. Jonathan Yarmis of AMR Research writes brilliantly in his AMR Research blog ("The iPhone and the Kindle: Backing Into the Retail Store") that 'it is imperative for organizations to think about how they exploit the usage-based systems to complement, and in some instances supplement, their selling-based systems.' I highly recommend reading his description of the accelerating encroachment of hardware manufacturers and Internet retailers into the retail space.

Successful 21st Century consumer product and service marketers are changing the playing field in three important ways:

1. Focusing go-to-market strategy on critical Service Output Demands - individual elements of end consumers' desired experiences.


2. Restructuring marketing channel flows by leveraging online communities and applications to link target consumers with winning solutions


3. Locking in marketplace advantage by pre-emptively building partnerships with new types of intermediaries and go-to-market partners

Winning Upstream - Online Distribution Battles Heat Up

The go-to-market battle for new consumer technology products is as heated as ever, and we're seeing signs that a major restructuring of the retail landscape may be in motion. After years (decades?) of lackluster retailing models, retail strategy buzz is more and more about improved customer experiences. We're finding that it's increasingly old-school thinking to assume that differentiation and market share growth will accrue from myopically focusing on global supply chain efficiency and lowest price.

But influencing the consumer's total experience in favor of your company's products and solutions does not require capital intensive forward integration into end retailing, especially of the brick-and-mortar variety.

Consumer products manufacturers are finding instead that social network-intensive online environment can be leveraged as a valuable go-to-market distribution lever. Jonathan Yarmis of AMR Research writes brilliantly in his AMR Research blog ("The iPhone and the Kindle: Backing Into the Retail Store") that 'it is imperative for organizations to think about how they exploit the usage-based systems to complement, and in some instances supplement, their selling-based systems.' I highly recommend reading his description of the accelerating encroachment of hardware manufacturers and Internet retailers into the retail space.

Successful 21st Century consumer product and service marketers are changing the playing field in three important ways:

1. Focusing go-to-market strategy on critical Service Output Demands - individual elements of end consumers' desired experiences.


2. Restructuring marketing channel flows by leveraging online communities and applications to link target consumers with winning solutions


3. Locking in marketplace advantage by pre-emptively building partnerships with new types of intermediaries and go-to-market partners

The Lost Lesson of Rubbermaid

Rubbermaid announced today that their "scale-driven low cost operations and discount retailer strategy" has lost steam and is finally puttering out. It's about time.

Stephanie Chen of the Wall Street Journal (7/16/08) quotes Steve Pawl, vice president of marketing for Rubbermaid as saying..."we're developing more innovative solutions that are more value-added to the consumer...".

This is a welcome strategic shift that should have been pursued decades ago, instead of the ill-fated decision to climb on the commodity bandwagon.

Let's start by turning the clock back fifteen years and hearing what Wolfgang R. Schmitt, then CEO of Rubbermaid, said about Rubbermaid's strategic distribution decision to rely increasingly on a small number of more commodity-oriented mega-retailers (in December of 1992):

..."In addition, it's typically the bigger suppliers that can form the sort of close partnerships that retailing's behemoths are increasingly demanding. The goal is to boost sales and reduce costs for both sides by slashing inventories, shortening lead times, and eliminating error: ''There is a healthy interdependence between us and people like Wal-Mart. We need them; they need us,''

And then we start to see the damage ten years later. As any student of strategy knows, exceptional volume gains at ever lower profitability is a fool's game. Here's what Jim Hopkins wrote about Rubbermaid's go-to-market decision in USA Today over four years ago (in January of 2003):

..."History has shown that suppliers suffer if they run afoul of Wal-Mart. Rubbermaid raised the prices it charged Wal-Mart in the mid-1990s because of an 80% jump in the cost of a key ingredient in its plastic containers. The retailer responded by giving more shelf space to lower-priced competitors, helping drive Rubbermaid into a 1999 merger with rival Newell, says John Mariotti, a former Rubbermaid executive. Rubbermaid earned Wal-Mart's wrath by not giving it the best deal," he says..."

So the lesson that students of consumer market growth need to focus on is the often disastrous effect that short-term go-to-market distribution decisions can have on longer-term branded product health. Don't let the seduction of big orders and plant utilization over-take reasoned strategic judgement about sustainable profitability. Don't get on a commoditization treadmill that moves inexorably in only one direction.

Winning retail go-to-market strategy serves one dominant master - end consumers. Low price, stripped down customer experience, commoditized retailing solutions may indeed win for a certain segment. History has shown, with exceptionally unique economic times aside, that the segment does not typically offer as attractive and profitable a growth path as independent national brands deserve.

Retailers Morphing into CPG Players?

I've been describing for some time the danger to 'old school' CPG manufacturers of the ravenous retailer appetite for private label growth. In fact, for some grocery categories it's getting harder and harder for shoppers to find anything new and interesting - unless it's private label.

Ouch, that must hurt when the subject comes up in executive meetings at national brands and big name CPG companies.

And now we see retailers rubbing salt in the wounds, or maybe showing mercy by driving a stake through the CPG players' hearts. Strategy advisors to these retailers have encouraged them to take the last step and actually become "integrated CPG manufacturer-retailer" powerhouses.

Translation: forget independent manufacturers and brand developers - we can do it all ourselves!

That's certainly very big news, and only the tip of the iceberg froim what I'm hearing.

And check out this striking news from a recent New York Times article by Rob Walker:

..."Safeway has initiated the Better Living Brands Alliance, with the highly
unusual goal of selling these two store-brand lines in places other than the chain that created them — school cafeterias, foreign markets and, ultimately, other U.S. grocers. In the judgment of the trade publication Refrigerated and Frozen Foods Retailer, which recently named Safeway as its retailer of the year, the experiment is “breaking the mold on what we all thought we knew about private label.”

These strategic moves are bound to restructure consumer markets in ways we have not seen before. And it won't be confined to just the grocery sector. Keep your eyes out for similar developments in other markets- especially Home Centers and Consumer Electronics.

Contractor or Architect?

A recent Wall Street Journal article draws an intriguing contrast between Sharp Electronics, the Japanese maker of liquid crystal displays, and Apple, Inc. Sharp, the Journal author says, is becoming a vertically integrated manufacturer, whereas Apple is doing just the opposite, outsourcing all of its hardware fabrication. (See “Sharp Focuses on Manufacturing”).

So, is it smarter to be like Sharp, the 'integrator', or like Apple, the 'architect'? The Journal’s comparison, neat as it appears to be, is a red herring. It assumes that Sharp and Apple are both manufacturers in the same sense, when they aren’t really. By the nature of its product set, Sharp is betting on conventional 'old school' manufacturing. LCD’s are pure hardware, or 99% so. Apple, on the other hand, is more 'new school' solution developer. Granted it’s the programmer sitting right at the hardware interface. But at their business ends, the iMac, the iPod, and the iPhone are all about sexy, exciting new interfaces and software.

Stylish looks aside, what makes an Apple an Apple is innovative functionality, innovation. And what makes Apple a great company is something deeper – an almost uncanny focus on customers, knowing what they want better than they do. Aside from the success of Apple’s products, remember what it’s accomplished with its Apple Stores and its daring, if not entirely successful, gambit to get some of the recurring revenue stream on the iPhone.The real distinction between Sharp and Apple isn’t integrating versus outsourcing. It’s the direction they choose to look. Sharp’s head is turned upstream. Apple’s points downstream toward the end consumer.

Both companies root their strategies in technology bets, but Apple’s has a more solid grasp of the new playing field and where winners in the consumer electronics marketplace are staking out their territory.

Unfair Match?

"Size is the only thing that gives you power these days. Little companies have no chance."

– Richard Heckmann, CEO of sporting-goods maker K2

I question this view. Little guys do have a chance. But I don’t deny that Mr. Heckman’s view is widely shared by executives. In fact, I think lots of incumbent management teams make it the main part of their business strategy. The bigger we are . . .

As reported in the July 7 issue of FORTUNE, Mr. Heckman recently sold K2 to Jarden Corporation so that could play the game as though it were in fact big. Jarden is a holding company that collects overlooked brands, creates joint economies among the little companies it acquires, and injects its own guidance (control would be too strong a word). Jarden’s portfolio now numbers 19 companies so, if Mr. Heckman is right, K2 should be flourishing soon.

I don’t think that selling out to achieve administrative scale economies or greater negotiating power when facing mega-retailers is strategically imaginative. In fact, it sounds more and more like 'old school' growth strategy.

More important, it isn’t particularly successful either, judging from the record. Conglomerates tend to get broken up over time. Good Luck, Jarden. Maybe you’ll be the one to bring diversification back into vogue.

But I have an alternative for little companies. And it can work just as well for the K2’s of this world that have indentured themselves, or even for holding companies like GE that want their business units to be nimble again.

“”Commodity” Mind ........................“Differentiation” Mindset
Leverage scale-based power .......................Leverage unique value-based power
Consolidate operations .................................Innovate the customer experience
Create value upstream ................................Create value downstream

Most big players view their markets as commoditized and think on the left side of the table. It is precisely this old-school thinking that eventually gets them in trouble. They assume that’s the only possible game. But all it takes is somebody working on the right side to redefine competition from low-cost/low benefit to capturing customer’ attention, selection, imagination . . . and expenditures.

You don’t have to be big to approach customers in new, better ways. For that matter, you don’t have to be small either. Just value-oriented and differentiation-minded.

Starbuck’s – Still Opening Near You?

What to make of all the headlines about Starbuck’s? *

. . . That even an outstanding retailer can oversaturate its market and self-cannabilize its stores’ sales?

. . . That risky 'category adjacencies' and product line extensions (for Starbuck’s, into selling CDs and DVDs and breakfast sandwhiches and home wares) are tricky and likely to fail?

. . . That pushing elaborate loyalty programs are becoming the strategic equivalent of a drowning man flailing his arms?

. . . That retail real estate moves are a core competency better handled by local entrepreneurs in each geographic area than a bloated central corporate bureaucracy (a strategic advantage successfully realized by Walgreens and Wal-Mart)?

All sad and true.

The harder lesson, for Starbuck’s or for any company, is to keep its focus on customers from evolving to a company that is 'customer compelled' .

In the end, Starbuck’s remains a terrific company. No better sign of that than its (unusual) ability to recognize when it’s taken a wrong 'go to market' turn, admit that, and correct decisively as it is now doing. I believe with Howard Schultz's leadership, they will do fine. But its emphasis has to shift, from infilling the U.S. to adapting its service and business models to the customer experience requirements and singular distribution challenges of many other country markets.

Not easy. A ton of details. Some relinquishment of central control. But to judge from 95% of Starbuck’s track record, well within its capabilities.

* See, for instance , the latest Financial Times story.

A New Supply Chain Perspective

Last month I had the pleasure of speaking a couple of times to executives and managers from Latin American companies gathered at the annual VISUM conference in Mexico City (http://www.sintec.org/contenido.asp?seccion=128&idmenuGN=85 ).

VISUM is all about supply chains and much of my audience was procurement folks. For them, I had a simple message. If you take the conventional procurement view of a supply chain system (see diagram at right), you believe the chain ends at your company. But that’s a limited view. The company sits in the middle of the real supply chain, which extend s all the way to the company’s end customer.

If you’re a procurement person, why should this distinction matter to you? Because you can’t do your job properly if you don’t take a total system view, you won’t do your job properly. Worse, a limited perspective, which tends to focus on procuring parts and materials for the lowest cost, may compromise the company’s larger vision of delivering an optimal customer experience.
What if, for instance, in going for low cost you trade off timeliness of delivery on a key component?

If the whole assembly of what you make has to wait for this component to show up – late – your customer’s entire order could be delayed. If your customer is a business, its projects could get backed up. Bad customer experience. Your customer’s customers could become unhappy. Bad end customer experience. They could fire your business’s customer. That customer could pull its business from your company.

In other words, saving a little on the component just isn’t worth it.

I concluded by saying, If I manage to convince you of three things today, I’d like them to be:

1. Customer experiences are important. They are becoming the critical factor in whether or not your company’s products sell or don’t sell.
   


2. You in the supply chain help create them. Your work effects not just the price and quality of products. It effects whether a customer has a good or bad experience buying and owning your company’s product.
   


3. Creating them is exciting. You should be looking for opportunities to get involved. It will make your work more interesting. It will give you a bigger role in your company.
   Those suggestions go not only for Latin America but all of the Americas, and anywhere in the world.

Hey GM - It's The Customer Experience!

A few days ago, General Motors announced it was closing four plants that make high gas-consumption vehicles such as trucks and SUVs. Observers have been almost gleeful. Oh how the mighty are falling. They shoulda seen it coming. The Hummer is now a contaminated brand. And so on and so on.

Well, yes. Now let’s move on. How can GM can make the best of a rapidly souring situation? One big lever, largely neglected so far by the press, is to strengthen GM’s dealer system and insulate it from the PR and financial fallout that the car company inevitably faces.

GM has, very roughly, 10,000 independent dealers in its distribution network. These businesses were already struggling to sell vehicles. Now their guilt-by-association quotient has risen, yet again. If it wants to retain any semblance of a healthy distribution system, GM has to get busy with a hundred channel management steps that reduce the hurt that dealers are bound to feel.

First and foremost, GM must work closely with its dealers to fundamentally reinvent the customer experience they offer. Lexus/Toyota’s striking success in that area has been widely discussed for decades. Now is the time to be decisive. Weed out backward-looking, old-school channel partners; invest in the willing.

GM also has to make changes beneficial to dealers in its inventory carrying policies. It has to pitch in with local advertising that plays up dealer virtues and describes GM’s new horizons, whatever they may be. Possibly it has to relax its constraints on dealers taking on other brands, without subsidizing those rivals in the process. In short, GM needs to be accommodating, even paternal, to a degree it historically has not been. And it needs to be creative, to a degree that . . . you get the picture.

As usual, distribution problems barely register in the media coverage. But they are nearly as big for GM as plant closings. They are definitely more significant than an added layer of tarnish on the reputation.

Customer Experience Lost

Borders just announced it is letting go 20 percent of its corporate staff and may put itself up for sale. Its archrival Barnes and Noble is said to be interested. A combined company would have about twice the market share as online retailer Amazon.

Part of the reason to consider selling is of course that in a tight economy consumers cut back on discretionary expenditures. Arguably the most discretionary categories of all is books. Although people do continue to buy them, fewer and fewer seem to actually read them. Partly too, an activist investor is pushing Borders management to sell

But let’s look deeper. When’s the last time you visited a Borders store? I can tell you mine, Christmas, and it was a disappointing experience. The suburban Chicago Borders looked shabby, thinned out, and unrefreshed. The local B&N, where I went next, felt spacious and happening. I couldn’t tell if Borders had lost the money to invest or just the will. Can a chain whose face-to-the-public is obviously on the way down stay open?

I can’t tell you whether Borders will survive. But I can tell you that it has no future if it can’t find its way back to the kind of exciting customer experiences it created, routinely, in its hayday.

Handset Market . . . Precariously on the Fence

No sooner do Motorola, Nokia, Samsung and other traditional cell phone product makers start to feel comfortable that the battle lines have been drawn for wireless handset share, then in marches HMS from Taiwan and Videocon from India.

Who?

It seems that the big consulting firms’ prevailing strategic recommendations to wireless handset makers is to give in to the growing demands of mega-carriers for exclusive, essentially private label handset products. Ugh!

If only these telecom pundits would look at how private label strategies have played out over the past decade in consumer packaged goods. In those markets, much touted short-term, early gross margin gains at retailers pursuing private label and overseas sourcing strategies have more often than not resulted in yawn-inspiring product selections, back-office retail cost nightmares, atrophied promotional expenditures, declining ‘net’ margins for everyone in the system, and commoditizing retail environments and customer experiences. It seems that there is a point in a ‘stripped bare supply chain’ environments when consumers balk, and make it clear they care about more than lowest price.

In the same vein, what would best serve the interests of wireless consumers and product makers is a robust, competitive handset selection and marketplace. New features. New capabilities. New styles. The stuff that Apple’s so good at. What RIM has been doing with the Blackberry. What’s not likely to win any excitement awards are constrained, sub-scale efforts by network and infrastructure bureaucrats to control consumer fashion decisions. Do we really think an AT&T network manager is going to design, let alone launch successfully, the iPhone?

In the spirit of full disclosure, you might find it relevant that I’ve been accused by a wireless network executive as having a “handset bias”. The accusation emerged during lively strategy debates about the best way to gain share in the heated marketplace battles for the heart, mind – and wallets – of end wireless consumers. Maybe I do, but ask anyone under 40 years old what drives their wireless decisions.

Nonetheless, new overseas entrants such as HMS (started as recently as 2002 as a contract manufacturer for Palm, Dell and HP) and Videocon are announcing plans to heat up the battle, with strategies aimed at out-commoditizing the commoditizers. By shifting handset competition to look more like any global private label business. What Nokia, Blackberry, and Motorola – if it remains an independent branded product maker – should do is resist this temptation with every fiber of their strategic being. It’s a sure path to ruinous commoditization for branded players.

Wireless carriers are handset channels – not handset customers. The end consumer should be the focus. Only be allowing new commodity supply chain players to redefine the playing field will branded product makers lose the battle. Will they methodically keep the marketplace focused on national, multi-channel brands and increasing consumer excitement? Will they rise to the branded player’s challenge?

Online Channel Strategy Tightens Scope

As the Internet distribution era matures, there is growing recognition that much of the web-based go-to-market battle is being fought now in a realm less lofty than 'fundamental industry reinvention'. The battle is being fought instead today over new ways to optimize individual channel flows.

These flows are the heart and soul of any distribution system, and represent the collection of individual activities (and costs!) that all the myriad players in the system - across product manufacturing, logistics, wholesaling, and retailing - invest in to create the final experience for the end customer.

Here's a few recent examples of how the scope of once-sweeping Internet strategic predictions is tightening to a more rigorous system-based view of distribution improvement:

In a review of how the Virgin Megastore in Times Square is evolving as a retailer of entertainment offerings, David Carr of NYT writes about hybrid marketing channels - different combinations of in-person and web-based retailing infrastructure - and describes how retailers are struggling to find the optimal approach to consumers' needs for selection, review, browsing and immediate availability. He comments specifically on struggles to find the right business model around Physical Distribution flows:

...you (are) looking at a wasting asset. The need to hold media that
you consume — the physical purchase — is going away...the Web is not competition for traditional media, but a completely different system that empowers both
groups and individuals, a place where choice is not only an option, but an
imperative. In that world, the idea that someone would buy a physical
object that contained a finite number of songs arbitrarily selected by someone
else seems quaint...changing the equation isn’t so much a matter of throwing out
old media as adjusting to hybrid models that enable an infinite inventory on a
digital shelf — embracing, rather than trying to control, choice...

And Ben Charney of WSJ discussed the Selection and Promotion flows, perhaps the trickiest ones with web retailing. While the web certainly makes product suppliers breath easier around managing the inventory implications of burgeoning, almost limitless selection breadth, the right model for consumers is proving evasive. At the end of day, the average consumer simply does not want to trade one level of efficiency (broad selection at low cost) for another (time-consuming an risky - therefore 'costly' - search and selection).

Sometimes turning online shoppers into buyers takes a personal
touch...Shopping online can feel overwhelming, with some Web sites listing
thousands of products to choose from...Online DVD-rental company Netflix Inc.
has been flooded with thousands of responses to its offer of $1 million to
anyone who can raise the accuracy of its recommendations by 10%. But it is
finding that such a substantial improvement can still be a challenge...

Finally, Robin Sidel of WSJ writes an article that discusses how Payment Flows are also in flux. The piece discusses why American Express is dropping its 'fob' program; the highly-touted new payment approach by which consumers carry a small plastic fob on their key chain that is designed to make the retail payment process faster and easier for them.

But Amex and others' experiences reinforce how tricky it can be to decipher consumers' channel needs and successfully navigate consumer's trade-offs between 'experience' and 'efficiency'. He comments how 'key chain fob' payment experiments have flopped as consumers remained loyal to traditional wallet cards:

"...it appears consumers may not be wowed by the devices as much as the card
companies had hoped. In abandoning the fob, AmEx plans to focus on its
traditional cards -- installing computer chips in them that allow customers to
hold the card up to an electronic reader instead of swiping it through a device.
'We have actually found that our customers prefer to use the contactless
technology through our traditional cards' rather than the key fob, said Richard
Flynn, a senior vice president who oversees "cardless" payments at AmEx"

In the end, David Carr's piece asks a compelling strategic question around the Physical Distribution flow that forward-looking marketing executives now realize they must ask for each go-to-market activity. The question points to the need for go-to-market strategy analysis that peels the onion back and digs into the nuances of distribution systems on a flow-by-flow basis:

What would happen to a Barnes & Noble that only had one copy of every book, but could print it on the spot and give it to you? ...the consumers would get their choice and you’d get rid of all the inventory needs, the upstream and downstream waste, and you might be able to turn that sampling into a sales opportunity.

Burger King Reinvents Around Customer Experience

In a sign that efficiency and commoditization are waning as business strategy du jour, Burger King has announced a sweeping overhaul of its go-to-market model. On the surface, the company has sikmply announced a new retail franchise format called the Whopper Bar.

But a deaper look suggests that the company is also responding to consumers' craving - and insistance - on new, exciting experience retailing. A recent WSJ article provides a tantalizing preview of what's to come at BK:

...The Whopper Bars' look will be distinct from a typical Burger King. Workers will place toppings on the burgers in front of the customers "to put a little more theater into it," Mr. Klein said, representing a shift for a company that has always hidden food preparation from patrons. Early design plans call for the bars to have chrome, wood, exposed brick and plasma-screen televisions with images of fire playing on them to evoke Burger King's flame-broiled motto...

...the menu (could) include as many as 10 types of Whoppers, such as the Western Whopper, the Texas Double Whopper and the Angry Whopper, a version topped with spicy onions. One menu sketch has a section called "Pimp Your Whopper," where patrons can chose from additional toppings like jalapeno peppers, bacon and barbecue sauce...

Tough economy or no, it is clear we will see more and more channel champions and stewards crafting fresh go-to-market strategies for driving growth. Branded product makers would be wise to get on the train quickly. Pre-emptive strategy and business model leadership and influence roles are hard to supplant.

Competitiveness and Intellectual Accounts

A recent Op/Ed piece argues that our competitiveness as a nation in coming decades will be determined not only by our financial accounts but also by our intellectual accounts. That same prediction is being made about a less lofty realm as well - at the level of global go-to-market and supply systems.

Power bases are shifting - to expertise, which will always trump its weaker cousins coercion and even reward. Expertise about opportunities to create incremental new value for all the players in these complex supply and distribution systems. From strategic conversations that provide insights directly - in the voice of the end customer.

When marketing channels are championed, or stewarded as Professor Kash Rangan describes, from an external perspective, an end customer perspective, surprising things happen. Customers see new value, and improved buying and decision alternatives. Intermediaries are winners, focused on creating tangible growth-oriented advisory and physical distribution value for both their customers and their vendors. And branded product and solution manufacturers operate on a strategic path of differentiation.

Differentiation in not only product dimensions, but total customer experience. The kind of customer experiences that build excitement and new options for end customers. The kind that grow a marketplace and increase the margin pool. The kind that optimally-structured marketing channel systems provide. Finally. Welcome to the 21st Century.

* * * *

Disclosure - But then I think this could finally be the Cubs' year. The team not only has talent and seasoning, the team has chemistry. And they think. Can they build momentum - from a .500 start?

Ten Years Later: Internet Settling in as Information Channel

It's been ten years since anticipation that the Internet would become a disruptive and dominant retail sales channel reached its frenzied peak. Of course, the early-2000 bursting of the Internet bubble quieted the noise level, but expectations endured that the Internet would continue to displace 'brick and mortar' outlets, albeit at a slower pace.

With time, distance, and perspective, the role of Internet technology in 2008 retail distribution is coming into sharper focus. With a few market sector exceptions (air travel; music) the Internet seems to be settling in primarily as an exceptionally powerful place for product information, solution design assistance, safety reassurance, and peer evaluations.

When it comes to actually transacting a purchase, it appears the fastest growing channel is a hybrid one - online searching and offline buying. For many categories, consumers seem to still desire the opportunity to touch, demo, interact with and confirm their selection.

For marketers managing a portfolio of distribution channels, it's essential to understand that channel structures are simply a "division of labor". By labor, we mean the distribution activities requried to meet consumers needs throughout their entire experience of deciding, buying, and owning/using. The key is to not get hung up on an 'all or nothing' view of the internet and recognize it is simply one mechanism among many for performing specific activities in a distribution "system".

* * * *

Footnote: In a further sign of how quickly online channels are settling in to a less prominent position within the overall retail portfolio, the WSJ and Shop.org report the following survival incentives being offered by online merchants trying to hang on to some piece of the consumer transaction pie:

• Crate & Barrel will allow customers to send gifts to more than one address in a single order and offer new gift-box options.

• Circuit City Stores says shoppers can order products of $25 or more on its Web site and pick them up within 24 minutes at a local store, or they will receive a $24 gift card.

• Gift merchant RedEnvelope gives forgetful shoppers a “shop now, ship later” option, which is free and offered only during holidays like Christmas and Valentine’s Day. Purchases made with this option will arrive between Dec. 17 and Dec. 21.

• Dale and Thomas Popcorn has produced about 40 short videos featuring Chef Ed, “the world’s first Popcorn Chef,” talking about the different flavors and gifts on the gourmet popcorn site.

• Sharper Image is running a holiday sweepstakes, with 50 prizes over 50 days and a chance to win a $10,000 Gift Card.

• Crafts seller Jo-Ann Stores plans a site makeover with over 100 romance images focusing on merchandising promotions and an emphasis on projects and inspiration. It also plans free return shipping, in case a gift needs to be sent back.

• Urban Outfitters’ Anthropologie, a women’s apparel retailer, is offering express shipping options for gift cards ranging from $25 to $200 denominations.

• Internet jewelry merchant Blue Nile is offering free overnight priority shipping this holiday season on all orders, without setting a minimum purchase price. Shoppers previously received free overnight shipping only on engagement ring orders or purchases of $1,000 or more. Starting on Cyber Monday, the first Monday after Thanksgiving, Blue Nile is running a 20% cash back special on purchases made with the PayPal electronic paymentservice. The promotion, a first from Blue Nile, translates into as much as a $50 credit per PayPal account.

• Online bags retailer EBags is also kicking off Cyber Monday with the same special, which it hasn’t offered in previous years

• Jewelry retailer Ice.com is offering free shipping and free returns this holiday season.

Armani Eyewear Fuels Retail Format Correction

"We need to bring retail up to the level of our brands"
Claudio Gottardi, CEO - Safilo Group SpA
(maker of fashion eyewear brands Giorgio Armani and Dior)

The retail industry correction I've been pounding on is gaining steam. More and more branded products are looking at large, scaled-up - but bland - retail chains and turning up their noses.

Stihl, Inc. has for some time been running national advertising under the banner "Why is the World's Number One Brand of Chain Saws Not Sold at Lowe's or The Home Depot". The answer is also in their ads. Those national retail chains simply do not provide the end consumer with the full range of experience components they want.

Over the next few years, leading Home Improvement product makers tell us they are looking hard at abandoning commoditized retailers in favor of fresh, exciting, consumer-friendly specialty stores.

In consumer electronics, CompUSA is gone and Circuit City isn't far behind. Why? We all know what it's like to try and make an educated electronics decision in stores stuffed to the gills with low price signage and untrained, high-turnover staff. And that's only the surface of the problems with commoditized retail formats.

So Safilo, like other smart brand leaders (think Apple!) is reported by Christina Passariello of the WSJ to be taking the tough path of fixing the retail model on their own. We have to believe it's the last thing they want to put their capital towards.

But without a viable retail model, all the new product work in the world won't find its way to the consumer.

Pricing Wars in Canada Fraying Relationships

Wal-Mart announced today that their stores in Canada will no longer be stocking best-selling LEGO building block products. For some time, Canadian's have been lamenting that retail prices of goods sold in canada have been too high relative to what the canadian dollar can purchase in neighboring US markets. It seems that retail prices have not been adequately correcting for shifts in US dollar-Canadian dollar exchange rates.

With a long legacy of building relationships based on muscular strong-arming of suppliers, it's hardly a surprise to anyone that Wal-Mart is looking outside the company to extract retail price relief from vendors. When that doesn't work, they start looking to boost sales of more vulnerable (and compliant!) second-tier products on their shelves. in LEGO's case, that means Wal-Mart is reallocating it's shelf space to Mega blocks (made by Montreal-based Mega Brands).

Two strategic problems with Wal-Mart's old school strong-arming tactics. First, consumers want LEGO brand products. Does Wal-Mart really have research to the contrary? I wouldn't bet your stock investments on it!

But secondly, LEGO products are euro- (or kroner-) denominated purchases. They're made in Denmark. If you look at what's happened to euro (and kroner) exchange rates, you see that it's US retailers feeling the squeeze in 2008 as their cost of goods sold rise in US dollars. LEGO products selling for $35 (CN) today at a 40% gross margin have COGS of $21 (CN). That $21 (CN) is equivalent to 14 euros. And that same 14 euro wholesale price from Denamrk (with similar mark-up) would be priced at $35 in the US. The same pattern holds for kroners.

So where is the pricing gap? (US and canadian dollars are essentially at parity today) .

We know what's really behind the news, and so does LEGO. Wal-Mart is disingeniously using this exercise as a PR smoke screen to strong-arm LEGO into margin concessions. Not surprising.
The good news for consumers is that LEGO is standing firm. Passing system efficiency gains on to consumers in the form of lower prices is smart retailer-vendor strategy. But unhealthy and unrealistic price pressure to simply grab retail share in a tough market can only lead to cheapened products, cheapened brands, and eventually safety problems as subcontractors make risky cost-cutting decisions.

But then, Mega Brands knows that story well. Remember the toy recalls last year? It seems that price isn't the only concern consumers have.

Western Competencies Surge as Supply Chains Falter

“China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse, to the New York Times. “But its heyday is over. We’re going to see higher prices.”

This has to be welcome news for American manufacturers. Maybe offshore price competition will ease a little in the short run. The $64,000 question is what’s the best way for Western branded manufacturers to respond? Most manufacturing executives would redouble their R&D efforts. That’s just going to intensify competition.

My vote is for more attention to distribution.

American businesses know U.S. business systems intimately. They have an advantage in cultural as well as linguistic fluency. They have long and deep relationships with wholesalers and retailers. We’re not talking competition on Internet time here. Well into the future, Pacific-based corporations – even those with U.S. subsidiaries – will be disadvantaged in the nuts and bolts of overseeing how their products are marketed by trade partners.

What’s more, end customers are showing resistance to the low-price pitch when it’s attached to bland, shoddy or possibly unsafe products. Now is the time for mature Western manufacturing enterprises to step it up, and differentiate in a space where their ultra-low price rivals simply cannot: on-time deliveries, in-store training, more flexible returns procedures, and above all by putting superior knowledge of the end customer to work in the retail sales environment.

Customers will respond positively.

What is more, U.S. legal precedent now allows the possibility for manufacturers to set prices for their goods at the retail point of sale (see prior 360 Degree View post: Signs of a New Distribution Era Emerging). In other words, a branded manufacturer can work on distribution differentiation selectively with a few quality retailers, every party assured that a store down the street will not undercut them.

Hitting the Wall at Wal-Mart?

Wal-Mart is going to the next level in its drive to provide more value. Long the king of everyday low prices for consumers, the biggest retailer on the planet now wants to take better care of the planet itself.

Wal-Mart wants to sell electric/hybrid cars, use windmills in its parking lots to recharge them, reduce paper use and improve medicine at the same time by digitizing physician prescription records in its network, and make its suppliers more energy efficient, both in their products and in the processes used to manufacture them. And it will demand offshore manufacturers to comply with U.S. environmental and safety standards.

Wow! That’s a fantastic goal. And who better to create the momentum than Wal-Mart? So it may seem boorish to ask, Is Wal-Mart going about this praiseworthy task in the right way? I’m suspicious.

Wal-Mart is notorious for its heavy-handed application of market power. While early on it delivered low prices through fantastic supply chain reinventions and improvements, it has for some time simply gained the upper hand by squeezing suppliers. More and more, this is less about making suppliers more efficient (which is good), and more about leaving them drained, disheartened, and increasingly less differentiated. That’s not good.

To judge from Wal-Mart chief Lee Scott’s public statements, as quoted last week in The New York Times, Wal-Mart is still resorting to the heavy hand. …”[If suppliers do not fall into line by joining the international environmental standards organization C.I.E.S], Wal-Mart will in fact lead; we will move forward by ourselves.”

I read into that single word “lead” a new application of Wal-Mart’s old strong-arm methods. Wal-Mart will in fact mandate. It’s all for the good of the planet, dear vendor. But all the same it’s our way or the highway. The squeeze is still on.

I wish Mr. Scott had said something more like this: Helping the planet is starting to make competitive sense for all of us. Suppliers that differentiate their products on environmental effectiveness will have an enormous and supportive outlet in Wal-Mart. Come work with us in this better way. We’ll feature you.

In other words, how about a little less strong arming and a litte more partnering, Wal-Mart?

Read The Times’s coverage, “Wal-Mart Chief Offers a Social Manifesto,” at: http://www.nytimes.com/2008/01/24/business/24walmart.html?scp=1&sq=wal-mart++%2BC.I.E.S.&st=nyt

A Tale of Two Retailers

After shopping with his family yesterday, a friend of mine told me two stories that between them show just how good – and how bad – the customer experience at retail can be these days. Let’s start with the bad and get it behind us.

My friend and his wife were on the hunt for a table lamp that would work with 3-way light bulbs. Entering an upscale home furnishings store with, among other things, hundreds of lamps they quickly found something they liked. But when they peered under its shade, there was no light bulb. In fact, none of the nearby lamps had bulbs. Nor was there any indication whether the lamp could accommodate a 3-way. Eventually a saleswoman unearthed a bulb, though not a 3-way, and popped it in so that my friend and his wife could at least judge the lamp on its basic business, providing light. As to the 3-way she assured them that since the socket said it could take 150 watts, 3-way bulbs would work.

She was wrong. Back home after buying the lamp, stopping at the hardware store, and attempting to put in a bulb – my friend discovered it wouldn’t fit. The lamp shade mounting was much too short. Now, maybe he should have figured this out himself at the store. But shouldn’t the saleswoman have known this much? Shouldn’t she at least have verified what she said. She didn’t. Today my friend returned the lamp, his regard for the store seriously damaged. All for want of a few light bulbs and a simple 5-second sales training lesson on the rudiments of one of the store’s major product categories.

Totally opposite, and a thousand times better was my friend’s experience at Border’s, which the family stopped into purely by chance and with zero intent to buy. As he browsed, his twelve-year-old son came up to him excitedly and said, “Hey come here to the CD’s. Now: Pick out a disc and ask me to play you a track from it – any track you want.” And he could. He swiped the CD’s barcode, punched a couple buttons on the store’s equipment, and handed the earphones to dad. Voila, a sensationally convenient and fun way to shop. And a sensational way for Border’s to sell impulse purchases. Only self-restraint kept our trusty consumers from walking out with six new CD’s and an unplanned hit to their credit card balance.

PS: My friend and his wife then remembered that a home furnishings store they visited earlier had lamps clearly marked “three-way” and salespeople who said (correctly) that “most of our lamps are 3-ways.” The couple went back and bought one. At this point in the process, how attractive the product looked was mattering less. What made the sale was a no-surprises, no-wasted effort purchase.

I’ve made things simpler than they are, of course. Retail managers are forever tearing their hair out because they can’t get little things like light bulbs taken care of routinely and properly in their outlets. And for the manufacturers who make the lamps and win (or lose) the sales based on retailer know-how and execution, the problems are only compounded. Still, I don’t think my friend’s case was untypical.

More and more, the product – no matter how upscale – is a commodity that can be purchased anywhere. But how it’s purchased, and how the customer feels about the experience, can vary a great deal from one place to the next.

Leading (the market) is a Verb

More than a few people spend their lives pursuing wealth, status, and possessions. According to Aristotle, they are barking up the wrong tree. Happiness is an action, he said. We find it in the doing. Today, Aristotle might set up instead as a management guru. If he did, his advice to corporate executives would sound a similar note: don’t gauge your company’s market leadership in terms of revenue growth, brand recognition, market share, or capitalization. Pure hubris. If that’s all you aim at, you will go the way of the AT&Ts, the Enrons and, it increasingly appears, the United Airlines and General Motors.

Market leadership isn’t a position. It isn’t an organization structure, a point on a cost curve, a segmentation analysis, or a customer relationship management technology. It’s action. Market leadership comes of leading.

But, how? There is one essential habit of market leadership that is utterly lacking today: true strategic partnering and intimacy with customers and channel intermediaries. In a hyper networked, intensely competitive world market, genuine market leadership demands astute and – this will be especially hard to swallow – unselfish business relationships.

Surely, you groan, we have strategic relationships with key customers already. My response is, I doubt it. Maybe you meet quarterly to negotiate and coordinate with large accounts, but if your company is like most it doesn’t tango. Most companies obsess the industry standard tactics – “Where’s our order?” “When will the new product arrive?” “Can you give me another foot of shelf space?” “What’s my price break going to be this month?” That’s not the hard work of relationship management or partnering.

Here’s how to build more productive – and profitable – relationships with important customers and channel partners, and it may sound odd at first: Large corporations seeking to benefit from a relationship with each other need to work through strategic issues at the highest level of management. together in person

I learned something about this, the hard way. For too many years my colleagues and I in the management consulting business have designed growth strategies for a variety of manufacturers, distributors, and retailers with discouraging results. Despite unassailable analysis and the enthusiastic reception we typically enjoyed, our impact on the business too often was disappointing. Usually our clients admitted as much themselves. “I don’t get it. What do we do with this in the field? “How do we get our customers to cooperate?” How would it look day to day?” For them (and frankly, for us) the practical world of strategic relationships and partnering existed in a separate dimension from abstract market segmentations and Value Propositions.

Management consulting’s mistake? Basing recommendations on in-depth customer and end-user research conducted on behalf of – rather than by - their clients. The better solution, while not foolproof, is simplicity itself. Bring client and customer’s senior executives into the same room to address strategic needs together. Help them hold structured, facilitated, deeper dialogues. In brief, make it possible for them to act like partners and have a true relationship, rather than long-distance correspondence. Nothing mysterious, but it does run counter to executives’ natural impulse to delegate. It also grates against age-old patterns of corporate rangling over pricing, promotions, product specs, delivery dates, returns, and you name it.

Just witness a case where there’s a distinct lack of consumer happiness today: home remodeling projects. The Home Depot sells billions of dollars’ worth of home construction products every year, but depends on thousands of private installers across America to follow up on consumers’ requests for installation of fixtures, flooring, lighting, and so on. The subcontractors’ independence and lack of uniformity makes it all but impossible for The Home Depot to maintain an untarnished brand. For the consumer, it’s the successfully installed product that counts. Which means that for The Home Depot, wood flooring isn't simply a product category any more. It's become a product and service category.

A large vendor cannot dismiss this change as none of its concern. Several years ago, The Home Depot developed plans to reduce its fragmented network of regional flooring product suppliers from over twenty to just three national relationships. Like other national home center buyers, solving intractable installation challenges was at the top of their list of strategic issues. From Armstrong’s perspective, being in the core supplier group was essential. Should DBM or Shaw, strong rivals, do a better job of partnering with The Home Depot to resolve installation and other problems, Armstrong could wake up to find The Home Depot imposing requirements that might play against its strengths and raise its costs. And, because it didn’t contribute to the solution, Armstrong would likely be forced to cut its margins. Worst of all, the wood flooring industry in China was thriving, allowing The Home Depot plenty of opportunity to actively promote its lower priced house brand, Traffic Master if the business commoditized.

The real challenge in most industries, is that thinking hard and strategically about important customer issues – from the customer’s own perspective - is foreign to most suppliers. The farther upstream they operate, the more oblivious they tend to be. Still, there are exceptions. One of the most interesting is the German automotive manufacturer Robert Bosch. Bosch specializes in esoteric automotive components, notably fuel-injection systems and sundry electronics. Its biggest direct Original Equipment customers, the big Western car and heavy truck makers, are mostly financial wrecks just now. Yet Bosch not only sets steep prices, it also holds commanding share in its parts markets. Adding insult to injury, Bosch treats customers with notorious arrogance. That’s “imboschable” is a favorite way of referencing the company. You would think large customers would take their trade elsewhere. Yet why are they still giving most of their business to Bosch?

Feather-ruffling aside, Bosch turns out to be a master at customer relationships. It does so not by sweet talk or golf games, but by sitting down with large customers and tailoring its approach to fit what sets that specific auto or heavy truck maker apart. It might organize its capabilities to optimize fuel efficiency for one, fine-tune engine performance for another, and help design and fabricate vehicles more efficiently for a third. In each case, Bosch is going well beyond product to a total service solution that depends on an intimate customer rapport, built through face-to-face summits between their own managers and customer executives.

By the usual measures, Bosch the supplier and The Home Depot the retailer both lead their categories. But little guys should take heart. Weaker competitors – even upstarts and unknowns – could use the methods I describe just as easily as the big fish. Power isn’t a requirement. Money certainly is not. Time and outlays for a few top-to-top strategic meetings with large customers are a pittance next to, for instance, a cereal maker’s budget for supermarket promotion allowances or the cost of a Sunday night TV spot.

Well done, the impacts are broad, deep, and lasting. Vendors gain an inside track on competitors, target value adding areas that customers immediately relate to, and can often influence their customers’ business practices and structures to better match their competences. Best of all, it’s the only truly sustainable path to differentiation and improved margins. Retailers improve efficiency and differentiation. Supply chains come into tighter alignment and competitiveness improves. Original Equipment customers get more value.

Alternatively, suppliers and retailers can always stick to their old game, us-against-them, and see how it plays out in an era of growing economic uncertainties and accelerating global pace. I’m reminded of the remark by a U.S. Forest Service ranger on the Apostle Islands of Lake Superior, home to moose and packs of timber wolves. A moose’s defense when cornered by wolves is to back up against the nearest tree and lash out with its sharp hooves. As the ranger dryly commented to the Wall Street Journal: “It works every time ... except the last time.”

Better instead for senior executives to focus squarely on productive relationship management and active market leadership. Through real account-level strategy and momentum, not abstract corporate studies, schemes, and objectives. As global market power shifts inevitably toward larger customers and channel intermediaries, it is the single best way to lead.

FIreplace

Customer Experience Innovator Makes Unusual Category Move

Ask any leading retail grocer in the U.S. which competitor has them quaking in their shoes and you'll hear a resounding moan about Tesco, the UK retailing innovator that is opening new formats in California and other markets on the west coast. So it's with much interest that we monitor other strategic moves by Tesco in their home market. Is the US next?

Planet Retail reports that Tesco has acquired PC Guys, a computer support company, and is testing a home IT visit concept from one of their grocery stores prior to a possible national rollout. PC Guys will offer support in Tesco stores, over the phone and in customers' homes. The service will compete directly with Best Buy's Geek Squad (Carphone Warehouse).

Services will include installing TVs ($60) and setting up home cinema systems ($140). The retailer is recruiting IT experts and testing a new zone called Tesco Digital, offering a large computer, electrical and mobile phone sales area, with PC Guys on hand to help.

In Tesco's own words: "we want to help consumers keep up with the latest electronic trends and technologies, as well as provide support and maintenance to those who need a helping hand.''

[Note from last year: When you traverse the aisles of a Tesco store in search of baked beans, you can also grab yourself a copy of Tesco Office -- an alternative to Microsoft Office -- or Tesco Antivirus, which is designed to keep your PC free of viruses. Other programs are also available, including personal finance and photo-editing software.]

Specialty Boutiques Gain Ground on Big Boxes

Circuit City has joined forces with Comcast for the launch of a new retail experiment called Connect at one of its stores in Massachusetts, reports Planet Retail. The format resembles a consumer electronics boutique, rather than a big box store.

Customers are able relax in seating areas around the store, drink coffee, watch local cable channels on large television screens, and work with consultants who help outfit their digital home with both hardware and content. The store will be the first of its kind, and Circuit City and Comcast plan to use the store as a test, trying out new ideas and gauging its success before making a decision about whether to open similar stores in other cities.

Our prediction: Much, much more of this to come...U.S. retail channels are on a march back to exciting consumer experiences and away from bland (insulting?) 'big box' discounters.

U.S. Ships Retail Commoditization Strategy Overseas

While U.S. management practices are still widely followed and emulated around the world, there's one era of distribution strategy our international brethren would be wise to reject. Yet evidence is mounting that overseas retail players are nonetheless escalating the commoditization of their market positions.

We're just now emerging from the commoditization funk in domestic U.S. retail sectors. Frank Blake, CEO at The Home Depot, recently spoke for the industry when he publicly pronounces to over 2,000 vendors that the company was misled by conventional management advisers into a myopic and ultimately fatal "squeeze vendors for low prices" strategic obsession. He lamented the loss of basic 'retail 101': delightful consumer experiences.

What's most frustrating, the strategic tragedy of the 1988-2008 retail commoditization era was well anticipated by forward-looking consumer experience advocates. Here's a few excerpts of a definitive 1989 study for Miles Inc. (maker of One-A-Day brand multiple vitamins) and Kellogg Company (maker of cereal and other food products), which warns about the risks of a single-minded search for lower prices and higher Gross Margins at the expense of robust retailing:

Private-label products present a growing danger to the package-goods industry... forcing marketers to compete with price promotion...private-label products drag down category profitability....the study's results fly in the face of conventional reasoning among grocers, who
look at private-label products as a way to increase margins....Ogilvy Group

When private label gains dominance, other elements start to diminish....unit sales go down, advertising-to-sales ratios go down, volume declines, manufacturer support evaporates and category profits erode...manufacturers, turned off by private label's encroaching share of the
market, tend to surrender the affected category, abandon new-product research, and reduce general marketing and advertising support....most manufacturers are left with no weapon but price.....John Howell, President, Miles, Inc. (One-A-Day vitamins)

Manufacturers are reacting because a lot of category squeezing is taking place and national manufacturers are "looking for excuses" to abolish private label. Private label now accounts for 12.9% of the dollar volume of all grocery products in the U.S. While private brands could drag down overall category gross profits, that's irrelevant. Retailers are concerned
with "getting customer loyalty to the store with private brands not with national brands... private label is a "loss leader" to draw consumers to a particular store rather than a competitor across the street....Brian Sharoff, President, Private Label Manufacturers Association

It's disheartening to see that overseas retailers, many in strong emerging markets, are following their U.S. counterparts and repeating the descent into a commoditization void. We would rather they invested in new retailing models that provide incremental value to all - consumers, manufacturers and retailers. For many consumers, it's simply insulting to suggest that all they care about is lowest price (ask the parents buying lead tainted toys).

In a bid to face the slow down in consumption in Spain, where retail banner sales represent about 15% of Carrefour's entire sales worldwide, the retailer is to increase the market share of its private labels currently standing at 25%....Planet Retail, 12/11/07

Is it too late for these retail leaders to see some light? Perhaps a few "fly on the wall" visits to U.S. retail boardrooms are in order. That might just scare them silly and open their eyes. Come on over!

Cool Power Drives Distribution Channel Innovation

Power - and its more important result, influence - has always been at the heart of channel management and channel conflict. Historically, that channel power has been based on the twp types of power most familiar - and comfortable - to old school leaders. Reward power and its close relative coercion.

In a world where most distribution systems are dominated by a small concentration of large, high-share channel players (think Wal-Mart and Home Depot in retail, Ferguson and Grainger in wholesale), power becomes increasingly central to success. Unfortunately, old school leaders (and they still control most executive teams today) learned about power from the likes of Robert Malott, the former Chairman and CEO of big Chicago manufacturer FMC. Malott spoke for many of them when he declared, "Leadership is demonstrated when the ability to inflict pain is confirmed". (Fortune, 11/28/07).

But today its downstream distribution players that are inflicting all the pain. And traditionally strong branded product manufacturers are struggling with huge management challenges that have emerged in the strategic direction of dominant retailers: reverse auctions to buy product from lowest bidders, backward-integrating into the manufacturer’s domain, contracts that secure intellectual property rights for ideas arising in day-to-day relationships, increased favoritism toward licensed house brands.

But old schoolers' attempts to meet force with force have been largely ineffective, and the brand companies they are stewarding are suffering as a result.

A parallel concentration of four mega consulting firms - advising leading companies on both sides of the manufacturing-distribution struggle - continue to propose worn out strategies: move production overseas to compette better with private label price points, create sub brands and exclusive SKUs, go direct on the internet, hold the line in negotiations, acquiese and build volume. A leading business association's latest management book, ominously titled "Working at Cross Purposes", warns that ..."win-win is dead and shared prosperity – if it ever existed – was a fantasy".

The biggest downside of outdated, muscular (think military) coercive channel management power is the level of distrust, anger, resistance and revenge such actions evoke in their target. While rewards might seem more attractive, remember that offering a reward implicitly pointts to the fact that you can withold it - ala coercion. Luckily, a few signs of fresh air and new thinking are emerging.

New leaders are emerging, and they recognize that there are many more bases of pwer than reward and coercion. A new generation of cororpate leaders are starting to embrace what Harvard's Joseph Nye calls 'cool power', and goes on to say that ..."we need soft power to bring people to share our values and help us pursue common goals. Today's businesspeople are in a similar situation...[but] let's change the terms... generals and CEOs don't like 'soft'...let's call the traditional kind of power that we used to value 'hot power' and the new kind 'cool power' ..."

We like Professor Nye's perspective, and it's one that executives would be wise to adopt when they turn to managing their distribution systems and their largest distribution partners. There are at least four other bases of power that are significantly moreeffective in adversarial environments: Expertise, Referent, Legitimate, and Information. At their heart lies a great deal of lasting influence that accrues to any company - indeed, any person - whose magnetism is based on profiund desire by another party to be associated with them because they are valued experts, provide attractive status, are revered as close advisors, and can provide critical insights.

The best case example? Steve Jobs of Apple Computer. Apple's single-digit market share in computers is by traditional standards meaningless. Jobs has never had any market power, no big distribution network, no giant factories. But a few years ago he had a good idea, the iPod, and even that wasn't a new kind of product; it was a better-conceived, better-designed version of an existing one. He's now doing something similar in phones. He had no hot power, indeed no presence at all in the phone business. Yet the major wireless service providers were competing for the right to offer the iPhone because they wanted Jobs' power to attract customers with his superior ideas. Cool power trumped hot power.

Brand Buyer, Beware

The much heralded new class of cash-rich, global multinationals emerging from China, India, and other fast developing countries will do well to avoid the biggest mistake of the very companies they are eagerly snapping up to gain stronger positions in lucrative Western markets. Of late, former market leaders in Europe and the U.S. have fixated on driving down to lowest-cost position, moving plants overseas, slashing (and burning) years of brand investment. Ironically, that obsession leads straight to the quagmire old-line brands fear most – commoditization. Surrounded by lower priced alternatives, they’ve shot their horses and hunkered down. At best, this is not a winning strategy.

What might yet save the Boeing’s, the GM’s and the Maytag’s is exactly what earned them brand preeminence in the first place: Give customers greater tangible value. And relentlessly find new ways to do so. Above all, don’t equate value with lowest price. Profitable growth will follow clearly differentiated solutions, as they always have and will.

Ultimately, value has to be tangible, and expand the benefits that your customers receive. Traumatized by new entrants, sagging capitalizations, and thinner margins, more than a few companies have utterly lost sight of this behind their walls of cost accounting, functional specialization, and consulting research. They have mistaken honing the same old business model for getting back to basics. At this stage of the game, the real basic they should be focusing on is rediscovering the verb in market leadership.

The path forward is simplicity itself. Get your own senior executives into the same room with your customers’ executive team to do the hard work of addressing real strategic needs together. In brief, act like your customers’ partner and build true relationships. Nothing mysterious, but it does run counter to executives’ natural impulse to delegate, even though effective relationships between global companies demands regular dialogue at all levels, from chairman and CEO on down.

This is something other than quarterly update meetings, golf outings, or key account tours by new CEOs. It certainly isn’t the typical wrangling over the size of this month’s promotion discounts or who’s responsible for a quality problem. It is face-to-face, structured, periodic, facilitated meetings between your senior management and your customers’, aimed at surfacing and solving their ongoing and very strategic business issues. Most companies just don’t do that.

Sure, manufacturers boast of strong distribution networks and big corporate customers may point to sophisticated supply chains. But at the top, there is almost always a startling disconnect. The leaders don’t hear each other, don’t roll up their sleeves with each other, don’t know how to improve their end-to-end system together.

Several years ago, I met with a large industrial company that was experiencing sustained deterioration in its market share and brand reputation. An outside consultant had done extensive analysis and enthusiastically reported back. Their recommendations were warmly received. Nothing happened. No one knew how to bring the insights to life. Strategically, the company never meshed with its customers in any unique way relative to other alternatives. No one could figure out how to move from the day-to-day reality of tactical supply chain issues and me-too product features to presenting customers with tangible value they would instantly appreciate. Not long after, its stock plunged and its reputation tanked.

Today, a global overseas competitor would probably bid for this fallen star. I would caution it to look first for ominous warning signs like these: a strategy overly reliant on cost reduction, a management that crows about abstract CRM technology, few if any references to solving intractable end-user challenges, a bankrupt brand management organization, an executive team that views its channel partners and major customer accounts with undisguised mistrust. Buyer beware.

Supply Chain Momentum Faltering?

These days it seems the easy phase of restructuring operations for global competitiveness is moving production offshore to low labor cost regions such as east asia. The hard part is getting the products to end-users reliably. The challenge goes beyond shipping costs - although problems in supply chains can certainly play havoc on cost structures. CEOs are finding that strategic and highly skilled supply chain managers are worth their weight in gold in today's global marketplace

. . . the surge in global trade in recent years has added to strains and charges for all forms of transport. As a result, some manufacturers are developing costly buffer stocks [to] avoid shutting down production lines, [shifting] to more expensive but more reliable modes of transport, [and] some companies are turning to new information technology to keep supply chains flowing. . . (Manufacturers Cope With Costs of Strained Global Supply Lines, WSJ).

There was a time in the early 1980s when distribution strategy was considered an oxymoron by most executives. Relegated to the bottom of most management team discussions, distribution and marketing channel strategy discussions back then were primarily concerned with shipping and warehouse management issues - hardly worthy of too much senior executive time.

Times have certainly changed, and there isn't a CEO around who isn't looking for a supply chain leader who can craft strategy, manage detailed tactics, structure winning partnerships, and create complex back-up plans and error recovery systems.

Let's hope these new supply chain leaders rise to the occasion. Articles like the one referenced above raise a red flag: buffer stocks and last minute high cost air transport feel like a step back in time!

Internet Shopping and Improved Customer Experiences

There are growing signs that U.S. retailing is continuing its move from an era focused tightly on driving out inefficiencies in supply chains, reducing costs, and delivering environments offering low prices to a new era of benefits-based business models. Early evidence from private conversations and public retailer reports suggest the new era is gaining steam as new formats and vendor relationships start to take hold. The new era of "improved customer experiences" will introduce consumers to greater choices, improved decision-making, more expertise and assistance with solutions, and lifestyle-oriented national brands.

An interesting parallel development is happening on the web. Once viewed narrowly as simply a place to find lower prices, web retailing is moving quickly to stake out new ground. Locational convenience, ease of shopping, speed of transaction, breadth of assortment, and other attributes make web retailing 3.0 look strategically more attractive.

For example, according to a recent NYT article, Brookstone, the hardware and housewares retailer, said it would introduce technology this week allowing visitors to browse a three-dimensional representation of a Brookstone store, with fixtures and signs common to all of the chain’s roughly 300 locations. The 3-D store closely resembles what one might see in the Second Life simulated world (except a missed keystroke will not accidentally take you to a virtual S & M club while searching for a gift for dad).

As in Second Life, Brookstone’s 3-D store lets users move freely through an animated world. In the store, when shoppers pause in front of a product, an item description appears, along with a link to a checkout page. For now, that link brings customers to a checkout page on Amazon, with which Brookstone has a marketing partnership.

And online merchants are introducing revolutionary new search features meant to take even more pain out of the typical shopping experience. Barnes & Noble recently introduced a revamped Web site that is heavy with taped interviews with authors and other video features meant to replicate the bookstore experience. But for buyers, not browsers, a major change to the search function will help speed them through the store’s roughly one million book choices.

These moves by online retailing merchants will continue to put pressure on traditional brick & mortar chains to evolve the customer experience in their stores as well. Expect some fascinating new retail developments over the next five to ten years.

Franchising not a Panacea

As the new era of Retail moves inexorably towards dramatic reinvention of customers' total experiences, there is more and more talk about franchising as a mechanism for accelerating new business model implementation. For retail mdoels heavily dependent on local market services and high-touch customer experiences, franchising is a useful path to generate the sustained committment and leadership requried on a store-by-store basis.

But franchising is not without pitfalls, and it isn't right for every channel design situation. Cyndia Zwahlen writes that it's important to know when franchising isn't a good idea:

The business is new. You may think you have a concept that's perfect for franchising, but experts recommend that you run your shop for a year or two to get an idea of whether you can turn a profit.

The sizzle factor is missing. A unique concept is usually important for success, whether it's the product or the business model. It helps if there are barriers to entry by other companies.

The founder is key to the business' success. If unique personality or skills are not transferable to potential franchisees, you may need to rethink plans.

The concept won't travel well. [Some] concepts may not succeed outside its home region.

Expectations are unrealistic. It [typically isn't] logical or practical to hand out franchises to whoever wants one

McKesson to Focus on Sourcing as Advantage

Just like their retail cousins, large business market distributors are moving to lock in power and marketplace negotiating advantage from their sourcing systems. Pharmaceutical distributors, such as McKesson Cardinal Health, and Amerisource-Bergen, are evaluating opportunities to change out their largest generic drug makers in favor of smaller contract manufacturers. The hope is that increased margins follow increased market power.

Exim-Pharm, an India-based provider of bulk pharmaceutical drugs and formulations, is one company hoping to benefit from the move to more aggressive drug sourcing by leading distributors. In fact, India is a popular destination for aggressive buyers seeking out and evaluating new low-cost generic drug supply opportunities.

Not surprisingly, internet-based portals and services such as "trade2gain.com" have emerged to help eager drug buyers link up with hungry players in the fragmented overseas drug manufacturing sector. Yet the parallel activity in the retailing sector offers the B2B marketplace and its distribution powerhouses some important lessons.

In fact, the largest U.S. retailers are in the midst of a major re-evaluation of what many are now calling an era of "rushing to the bottom" in prices and service levels. After years of obsessive strategic focus on private label and house brand sourcing from overseas contract manufacturers, these retail distribution powerhouses are increasingly calling it quites and returning to their critical roots as 'merchants'. Why? Because end-customers have become numbed into price-only shopping behavior. Not because that's all they care about (look at Apple's astounding retail store profitability!) but because that's all they're being presented with in most U.S. retail systems. And commoditization is an unattractive growth path for anyone involved, be it manufacturers or retailers. It's a treadmill with no upside.

So McKesson - and other B2B distributors - would be smart to balance their short-term drive for sourcing advantages against increased differentiation in service levels. But finding ways to create real 'distribution value' for pharmaceutical customers requires collaboration and more strategic manufacturing relationships. Commmoditization only requires an internet portal.

Commoditization Era Winding Down: Home Depot to Follow Target and Lowe's Lead

In a further sign that major U.S. retail players are putting significant strategic focus on improved customer experiences, Tru-Value is striving to make a major strategic overhaul of its 4,000 company-owned and independent stores. The focus is women, and Tru-Value is making an aggressive "catch up" move to stay relevant in the changing home improvement marketplace.

In a nod to standard practice today, the company is focusing on wider aisles, color-coded navigational signs, softer lighting, earth tones and an expanded array of decorative fashion items. Lyle Heidemann, chief executive of the Chicago-based cooperative, said that "the redesign should be more "female friendly," without alienating the traditional hardware customer...we finally have a retail perspective of what a store should be...in the past, we had a wholesale assortment to pick from...now, here's what we believe is a good retail assortment."

Rival Lowe's has been responding to an increasing role for women in designing and remodeling their homes for some time. They had learned from Target. And Frank Blake announced at a recent meeting of over 2,000 vendors that Home Depot would be following the same path.

Consumers Use Gift Cards to Avoid Commoditized Retailing

Without a "must-have" item or stellar shopping experience, consumers wait for a price deal. And desperate stores are resorting to earlier and earlier holiday start dates to make up for what is essentially an industry wide outbreak of so-so brands and ho-hum services.

"We have to recognize that part of the sluggishness of the consumers isn't just the economy. The industry isn't doing enough to get the consumer excited," said Marshal Cohen, chief industry expert at the Port Washington, N.Y.-based NPD Group Inc. in a Chicago Tribune article.

Perhaps most telling is the rising popularity of gift cards, easy presents for those who can't figure out what to buy or don't want to navigate commoditized retail environments. The Tribune article goes on to report that gift cards for the first time ranked as the most sought-after gift, with 54 percent of shoppers putting it on their wish list. Once considered an impersonal present, gift cards have risen in status, and their ascent means more consumers are spending little time in stores, or no time at all, if they buy gift cards online.

The implication for branded product manufacturers is encouraging. It's only a matter of time - and likely soon - that dominant retailers will be forced to abandon a long era of commoditizing sourcing and pricing decisions and return to their roots as merchants. Retailers looking to be pre-emptive and stake out new in-market differentiation with consumers will soon be striking deals with strong, branded product manufacturers to provide support.

We welcome the emerging opportunity, and encourage the new generation of branded product leaders to use this window as an entree to refreshed partnerships and tighter collaboration.

Top-to-Top Relationships Drive New Era of Distribution

The new era of channel stewardship that Harvard's distribution guru Kash Rangan predicts is gaining traction. And there's a reason that Apple CEO Steve Jobs and Deutsche Telekom's wireless CEO Hamid Akhavan jointly - and personally - announced their new relationship to the world.

Apple has been very very astute in making sure that its impressive product innovations are taken to market by retail partners invested in equally exciting and innovative experience environments. But it's been a long, slow search, with willing partners few. Most consumer electronics retailers are focused on price discounting, overseas sourcing, and private label offerings in stripped-down, low-cost store environments. See my earlier comments about the state of U.S. consumer electronics retail .

So Jobs reluctantly integrated forward and proved to his independent retail partners that lifestyle retailing and consumer excitement sell. But not wanting to limit the company's market share as it did with computers, Jobs knows he needs a robust network of like-minded retail partners. Best Buy in the U.S. O2 in the UK. Deutsche Telecom in Germany.

What's important to note is the top-to-top dimension. Structuring and 'stewarding' these relationships is CEO-level activity.





Steven P. Jobs, left, of Apple and
Hamid Akhavan of T-Mobile introduced
the iPhone in Germany to go on sale Nov. 9.
John MacDougall
Agence France-Presse — Getty Images
as published in the New York Times (9/19/07)

Lifestyle Retailing Moves European Retailers Out of Consumer Electronics Malaise

New-style retail leaders in key European markets are re-focusing their business models away from price discounting to consumer excitement and growth. They're returning to their competencies as merchants by driving new "lifestyle retailing" formats that can be married with equally exciting lifestyle product offerings from trusted branded product manufacturers.

We're seeing the fast decline of a long, painful period in which low price-obsessed category buyers at earnings-driven retailers drove the sector after sector into commoditized retailing. But consumers have balked at all the sameness and general lack of assistance and experience excitement that has followed the rush to low-cost private label blandness. Take a look at some new-style retail leaders in action:

* * * * *
Boulanger, a major retailer of multimedia equipment and appliances in France and Spain is refocusing its growth strategy on making the company's stores a "window to innovative products and services". The stores now include a range of specialty "lifestyle retailing" sections:

• Photo developing services


• Cooking (which includes a selection of cooking utensils, recipe books and wines)


• A 'nomad' section (which includes products such as mobile phones, cameras, MP3 players)


• A cinema-style area (that demonstrates new personal entertainment products)


• A space with consoles for gamers (to try out new video games)


• A ‘Zen area’ for well being products.


• An environmentally friendly products area (with Ecolabel Européen certified goods)

* * * * * *
UK retailer HMV's stores are being reformatted to focus on "lifestyle retailing" with all sorts of new experiential elements for consumers. Says Simon Fox, chief executive: "if you have a store people want to visit you will sell more...this is not a refit, this is a fundamental rethink of how people should perceive us'

• Interactive 'hub' area to log on to social networking sites like Bebo or Facebook


• Minimalist and high-quality store personality (akin to Apple's stores)


• A large plasma screen in the window showing promos for the latest music, film and games


• Xbox machines in a dedicated gaming section for interactive play sessions


• Internet kiosks to scan a CD or DVD and listen to or watch a clip before buying


• Kiosks to order from HMV's website or download free songs to a memory card


• Interactive screens which promote and cross-sell to shoppers


• And there is a Lovejuice smoothie bar for the thirsty shoppers engaged in all this fun

While consumers are starting to reward innovative, helpful, enjoyable retailers with growth, the high road is not an easy one. Short-term financial market players will fail to see the magnitude of what's happening in market after market. Consider these comments from Nick Bubb, a retail analyst at Pali International, who had this to say about all the innovation at HMV (The Daily Telegraph, 9/13/07):

"how will it help restore HMV's profitability? It is not very
'commercial'.... there is no price promotional message and there is a lot of
space given to non-productive 'interactive' play areas...whether it [all] helps
sales at Christmas is another matter.'..

But longer-term, new-style retail leaders need only look across the Atlantic at Apple's stunning lifestyle retailing success in the U.S. After setting a U.S. record in 'speed to $1 billion", the retail chain has one of the most attractive financial performance records in any consumer market sector. They've achieved sales-per-square-foot and profit margins that make retailers (and analysts) giddy.

Lifestyle Retailing Moves European Retailers Out of Consumer Electronics Malaise

New-style retail leaders in key European markets are re-focusing their business models away from price discounting to consumer excitement and growth. They're returning to their competencies as merchants by driving new "lifestyle retailing" formats that can be married with equally exciting lifestyle product offerings from trusted branded product manufacturers.

We're seeing the fast decline of a long, painful period in which low price-obsessed category buyers at earnings-driven retailers drove the sector after sector into commoditized retailing. But consumers have balked at all the sameness and general lack of assistance and experience excitement that has followed the rush to low-cost private label blandness. Take a look at some new-style retail leaders in action:

* * * * *
Boulanger, a major retailer of multimedia equipment and appliances in France and Spain is refocusing its growth strategy on making the company's stores a "window to innovative products and services". The stores now include a range of specialty "lifestyle retailing" sections:

• Photo developing services


• Cooking (which includes a selection of cooking utensils, recipe books and wines)


• A 'nomad' section (which includes products such as mobile phones, cameras, MP3 players)


• A cinema-style area (that demonstrates new personal entertainment products)


• A space with consoles for gamers (to try out new video games)


• A ‘Zen area’ for well being products.


• An environmentally friendly products area (with Ecolabel Européen certified goods)

* * * * * *
UK retailer HMV's stores are being reformatted to focus on "lifestyle retailing" with all sorts of new experiential elements for consumers. Says Simon Fox, chief executive: "if you have a store people want to visit you will sell more...this is not a refit, this is a fundamental rethink of how people should perceive us'

• Interactive 'hub' area to log on to social networking sites like Bebo or Facebook


• Minimalist and high-quality store personality (akin to Apple's stores)


• A large plasma screen in the window showing promos for the latest music, film and games


• Xbox machines in a dedicated gaming section for interactive play sessions


• Internet kiosks to scan a CD or DVD and listen to or watch a clip before buying


• Kiosks to order from HMV's website or download free songs to a memory card


• Interactive screens which promote and cross-sell to shoppers


• And there is a Lovejuice smoothie bar for the thirsty shoppers engaged in all this fun

While consumers are starting to reward innovative, helpful, enjoyable retailers with growth, the high road is not an easy one. Short-term financial market players will fail to see the magnitude of what's happening in market after market. Consider these comments from Nick Bubb, a retail analyst at Pali International, who had this to say about all the innovation at HMV (The Daily Telegraph, 9/13/07):

"how will it help restore HMV's profitability? It is not very
'commercial'.... there is no price promotional message and there is a lot of
space given to non-productive 'interactive' play areas...whether it [all] helps
sales at Christmas is another matter.'..

But longer-term, new-style retail leaders need only look across the Atlantic at Apple's stunning lifestyle retailing success in the U.S. After setting a U.S. record in 'speed to $1 billion", the retail chain has one of the most attractive financial performance records in any consumer market sector. They've achieved sales-per-square-foot and profit margins that make retailers (and analysts) giddy.

Consumers Vent Frustration with Commoditized Retail Environments

Retailing is a tough business. And successfully creating exciting, consumer-friendly shopping experiences seems more and more elusive as retail sectors commmoditize. Some retailers do a good job. Apple stores are most often mentioned by consumers as a fun, enjoyable and helpful place to spend their money.

Yet Laura Landro of the WSJ writes that U.S. retailers last year lost an estimated $40.5 billion to Shrinkage (shoplifting, employee theft, and other inventory losses); as a percentage of sales fell shrinkage fell just slightly to 1.57% from 1.59% a year earlier...one of the most common forms of theft in retail is "ticket switching" where a shopper removes a price tag from an item and puts it on a more expensive one or switches an expensive item into the box of something lower-price. While many stores now use sophisticated radio-frequency ID tags and multiple tickets on an item to head off ticket switching, tech-savvy gangs can now print new tags on portable printers and slap them on merchandise right in the store.

Some retailers are getting more aggressive in loss-prevention efforts; Wal-Mart recommends that local store officials prosecute shoplifters at age 16 and older rather than the prior age of 18. According to the principle known as merchant's privilege, any merchant that believes a crime is in progress has the right to detain and question a shopper and to conduct a reasonable investigation.

So are consumer experience-destroying theft and "shrinkage" programs simply an unavoidable "reality" of U.S. retailing? I sat next to a retail security expert on a flight recently and asked him that very question. The answer is no, and there are many more options that retailers can chose from that enhance - rather than destroy - the end consumer experience. After all, trying a product and touching a product encourages sales for many products.

Is there anything more baffling than a consumer electronics shelf full of innovative new products wired to the shelf and non-working because batteries have been removed? The retail security guy I spoke with shared that the key is the strategic mindset of the executive team running the retailer. Are they all about cost-cutting (take out batteries; cable the products down, and arrest shoppers) or are they focused on consumer experience and growth (add staff to handle questions and monitor traffic; provide more serviced sales versus self-serve; etc.)?

The excerpts below of WSJ "Letters" on the "shrinkage" article provide a wonderful glimpse of how consumers feel:

It is symptomatic of so many poorly run businesses, particularly retailers
and airlines, to focus on internal operational issues rather than on good
customers. Much like the circumstances of flying in coach class, this form of
treatment by retailers forces consumers to consider alternatives to the negative
shopping experiences encountered today. No, online shopping isn't killing
retail; the retailers are committing their own form of suicide.

[this] article summarizes what many people who shop at scrappy discounters
experience on a regular basis: a degrading interaction when a customer has to
deal with understaffed and improperly stocked stores, inefficient check-out
procedures and, sometimes, overzealous and ill-advised security personnel

The good news is that a new era of pro-consumer retailing is emerging, and is being led by new-style "customer experience" merchants. Short-term strategies built on income statement tweaks at the expense of customers are reaching their inevitable dead end.

Industrial Distributors Tracking Consumer Channels' Move to Private Label

Key findings from Industrial Distribution magazine’s 61st Annual Survey of Distributor Operations suggest that channel players in industrial B2B markets are following their consumer market brethren a dangerous move away from trusted brands and greater use of private label products. Key findings form the August, 2007 research:

• Internet sales to end-users not significant
  1- 10% of revenue for over half of distributors
  70% order products from suppliers on the Web

• Distributors ramping up value-added services - 64% do not charge for them
  Engineering capabilities
  Plant audits
  Special lead times
  Set up and installation
  Employee training
  Technical product support
  Integrated supply

• 79% sourcing overseas - over 35% ramping up private-label
  Top-50 Interline Brands, a major MRO products distributor of plumbing, electrical, hardware, security hardware, and HVAC parts says that over 20% of their sales come from private-label product

• Major reason for winning business from customers
  36%: product availability
  20%: technical support
  9%: customer service/relationship or delivery time
  5%: price

But even with all the emphasis on value-added services (albeit without charging for them), distributors say their top rated strategic concern is: price competition (43 percent)

Next CEO at Circuit City to Refocus on Forgotten Consumer

Ask anyone in the business, and they'll be quick to point out that 'retail is a tough business'. Nobody feels that crushing reality more acutely these days than Phil Schoonover, Circuit City's President, CEO and Chairman.

Generals Are Always Prepared to Fight the Last War

Times are particularly brutal for electronics retailers, who created their own worst nightmare by addicting consumers to commoditized shopping experiences and a lust for price shopping bargains. In a recent conference call with investors, Schoonover acknowledged that Circuit City was focusing too much on selling higher-tech televisions when consumers cared more about price. And overseas contract manufacturers are always there to fuel the addiction, with factories adding low cost production lines at a dizzying pace, allowing retailers to keep up with the increased demand triggered by lower prices.

Retail experts convinced Circuit City's leaders that the industry was commoditized, and that the only growth strategy that would produce results was one focused on organizational changes, cost cutting, and store operations fixes. Schoonover announced to Wall Street that his decision to take that advice was flawed.

Kris Hudson reports in the WSJ that sales at stores open at least a year fell 7.9 percent in the last quarter registered and the company saw a decline of more than three percentage points in gross margin (to 21%). Schoonover blamed the wider-than-expected loss on disruptions he had implemented such as shuffling store managers, letting highly paid salespeople go, trimming its headquarters staff and recasting store procedures.

"When Somebody persuades me I am wrong, I change my mind. What do you do? - John Maynard Keynes

A new era of retail distribution is quietly emerging, and it's all about consumer experiences. In a 'back to the future' swing of the pendulum, merchants are back in vogue, with a twist. Merchants are today remembered as those old-school retailers, the ones who were run out of the executive suite for being too much about creative, and not hard-edged enough about the income statement. Buyers rose in power, and private label sourcing fed a preoccupation with scale. Lost in the shuffle was any sense of excitement for the consumer. In a world where all that's different is price, guess what smart consumers make their decisions on?

But consumers are voting with their wallets, and demanding that retailers deliver retail innovations and experiences and leave it to branded product makers to deliver on the promises of trust, quality and innovation in the actual product.

The new consumer era will require new-style leaders from both brand makers and retailers who are willing to work together to drive pro-consumer growth strategies. New leaders that are up to the task of marrying together the creative demands of consumer experience with investor demands for profitability.

In retail, sacrificing great consumer experiences to achieve short-term profit gains is quickly becoming the new “old school” thinking.

Physical Distribution Intermediaries Thrive in Global Economy

With branded product manufacturers focusing more on product innovation, and downstream mega-retailers returning to their merchandising roots, a new window of opportunity has opened for best-in-class wholesale (physical) distribution intermediaries.

In fact, the rapid growth of overseas suppliers to growing U.S. markets has been a major boon to independent wholesale distribution companies that once regarded themselves simply as small warehouse and distribution businesses. Three small to medium-size companies in particular are on the cutting edge of technological and social trends, from Internet commerce to evolving Latino markets, writes the NYT's James Flanigan:

• Weber Distribution has 11 warehouses in three states, 500 employees and more than $120 million in revenue distributing products that come mainly from Asia through the enormous Southern California ports. The company invested heavily in computing and communications systems, and gives clients information about products all the way from factories in China, on ships across the Pacific and through the ports of Los Angeles to final delivery. In its warehouses, forklift operators now use personal digital assistants to keep track of goods stacked on shelves several stories high.
  
• CaseStack has 320 employees and will bring in $74 million in revenue this year through its network of half a dozen warehouses and 1,000 independent trucking firms, linked by the Internet, and transporting goods from manufacturers to retailers nationwide.
  
• Source Logistics helps food companies in Latin America gain access to supermarkets and specialty stores in the United States through its warehouses and distribution centers in Texas and Georgia. It has 50 employees, $7 million in annual revenue and serves 80 companies in Latin America.

And economist John Husing has said that at $900 billion in annual revenue, logistics now accounts for some four million jobs nationwide and it is the largest single source of employment in Southern California.

Another Apparel Brand Faces Key Strategic Choice

Kellwood Company, maker of midtier department-store clothing brands such as Sag Harbor, is considering an unsolicited buyout offer from Sun Capital Securities Group LLC. The strategic question now is will Sun Capital drive to re-invigorate the company's innovation engine and push for stronger lifestyle branding? Or, as Li & Fung and others are doing, make a big bet on continued commoditized retailing and low-cost overseas sourcing and logistics-based suppliers.

WSJ's Cheryl Lu-Lien Tan reports that in recent years, Kellwood's portfolio of midprice brands has suffered as department stores have consolidated and shifted toward lifestyle and designer brands. Last year, Macy's dropped Sag Harbor, one of Kellwood's major brands. Kellwood has since been trying to beef up its stable of unique brands.

Morgan Keegan & Company analyst Brad A. Stephens said, "Sun Capital can unlock a lot of value in the company if it invests in more efficient manufacturing, distribution and marketing of existing Kellwood brands..."

Sun Capital could go in two very different directions if their offer is accepted. Will they follow the path of their premium, innovation-oriented portfolio companies (Creekstone Farms, Dale & Thomas Popcorn, Lexington Home Brands, Lillian Vernon catalog, The Limited) or do they leverage the Sag Harbor brand and other Kellwood assets for quick penentration of declining commoditized retailers still clinging to private label strategies?

Sun's investments in Mervyns', Pamida, Nationwide Warehouse, ShopKo, and Wickes Furniture suggest they might follow the more questionable Li & Fung path. While we think that path would be risky and have short-term benefits at best, it may carry Sun long enough to exit profitably.

It's interesting that Brenon Daly of The Deal.com worried as far back as 2005 that Sun Capital's ShopKo deal "...added another retail chain to its portfolio of struggling stores...they already own out-of-fashion clothing chains Mervyns LLC, Anchor Blue...". It will be interesting to see what direction they take in the new emerging era of lifestyle brands and retail innovation.

Here's some encouraging news in the ShopKo saga from Chairman and CEO Mike MacDonald (quoted in Progressive Grocer):

"You always have to stay fresh -- the customer demands that...what we tried to accomplish with this new store is a softer look and a more inviting atmosphere. The new design incorporates a number of elements intended to give the store a stronger connection to women. The store's color, lighting, and fixturing all have been redesigned to create a warm, inviting, residential environment that allows the customer to easily see the merchandise and visualize how it might look in her home or on her body...."

Industrial Products Leader Focuses Distribution on Tangible Value

French aerospace electronics and systems group, Thales, is making a bold strategic statement about its approach to aftermarket parts and services business. The company has taken steps to localize parts distribution support and has employed Web-based technology to boost service levels.

In a trend we're seeing in more and more industrial markets, Thales has moved its aerospace support and distribution activity closer to its end customers. The moves resulted from abroad strategic review which found that fewer and fewer airlines were choosing to repair avionics systems because the total costs of stocking spares combined with test equipment, training and documentation is uneconomic unless the service provider achieved scale and logistics advantages.

Favorable to the OEM, the company also learned that most airlines preferred to subcontract their electronics maintenance to OEMs. This enabled Thales to develop offerings ranging from turnkey services, which include line maintenance at an airline's stations, to new logistics support for spares, repairs and replacements to individual spares or services.

Here's an example of the innovative distribution servi