Change of Name: 360 Degree View

Please note that this Blog (360 Degree View) has had a name change as of August 31, 2009. The new name is Routes 2 Market and you can find the new Blog link here.

Where the (Retail) World is Going?

In his column Consumed for the New York Times Sunday Magazine, Rob Walker offers us a glimpse of our business future as seen by private-equity. It is a rather unsettling world of The Pure Brand. No assets, no employees. Just a website, a handful of trademarks, and hopefully millions of loyal shoppers.

Of course, as Walker’s article indirectly points out, private equity is uninterested in actually building such a brand. Their preference is to ride the brand down post-bankruptcy. Walker focuses on Linens ‘n Things, which has been “reopened” on the Web by its new PE co-owners, Gordon Brothers and Hilco Consumer Capital, who picked up just the name and site for $1 million. Prior to that, of course, LNT had built its brands by spending $ billions on stores, advertising, infrastructure, and staff over several decades. The residual of that considerable effort is a brand people continue to recognize, visions of domestic goods-laden store floors still stuck in their heads. Over time, those memories will fade however, and the question is whether Web-based brand-building can noticeably slow this inevitable deterioration.

Walker sums up with a quote from Gordon Brothers’ Paul Venezia:

“The economy is cleansing business right now.” The new Linens ’n Things, Venezia argues, is a model of efficiency, offering competitive prices and freeing business from the cumbersome liabilities that come with big-box leases, pricey brand-building campaigns — or a work force. “It really reflects,” he says, “where the world is going.”

Meantime, Smith & Hawken is also liquidating its stores and inventory. But S&H has already taken its site off the Internet and, as far as we know, has no plans to reopen as an asset-less venue. Maybe someone will try to resuscitate it as a sleeper brand someday.

Virtual/online or oblivion. Are those really the only two paths left to struggling retailers?

iPhone a Home Run for AT&T

AT&T gave up a lot to get its exclusive deal on Apple's iPhone. Increased data load on its network, higher phone subsidies, changes to it's customer support and retail practices. Not the kind of power that wireless carriers like to cede to a handset maker. Some pundits have decided that at the end of the day AT&T's exclusive deal with Apple was great for Apple, but just not worth the "gives" for AT&T (see the WSJ's Martin Peer's latest story here).

While I can understand how easy it is to draw this conclusion, upon deeper analysis I think this view is flawed.

Sure, on its surface, AT&T's "new" iPhone customers represent a small share of its almost 80 million subscribers, and a dramatic increase in costly service and support supply activity. But peel the onion on this exclusive arrangement and it becomes clear why the iPhone is so valuable:

• New iPhone customers might have accounted for 25% of AT&T's "Gross" new subscribers in the first quarter of 2009. Success at gaining new subscribers is an important metric that gets lost in the fuzzy math of looking at iPhone's share of "total subscribers" who tend to stay with their carriers.
  
  
• New iPhone customers bolster the significantly more lucrative business of "contracted" customers versus ones that buy minutes at a retail store on a month to month basis.
  
  
• AT&T's overall "subscriber churn" (subscribers leaving AT&T) seems to be dropping over the iPhone's life at the carrier. While wireless carriers tend to have low churn anway (usually around 1.5% of subscribers), they do try to lower it. The iPhone helps.
  
  
• While AT&T's network is experiencing a dramatic increase in performance problems and overall usage load, that trend is happening at all carriers. The iPhone may be spurring AT&T to act faster than its rivals on this future strategic crisis - a not insignificant benefit for slow-moving lumbering carriers that come out of a culture that is still clinging to their landline businesses!

So when you dig a little deeper, it's safe to say that an exclusive deal on the iPhone has Branded Manufacturersbeen a Home Run for AT&T.

Cutting the Commodity Mindset Chains

Upstream parts and equipment suppliers often tell me they feel like the tail on the dog. Most of the market attention goes to the front end of the beast, the final solution sellers. Whether it’s jumbo jets or oil rigs on down to stoves or mobile phones, it’s the final brand product that ultimately designs the product, chooses component suppliers, and gets the order. Boeing, Saudi Aramco, Whirlpool, Nokia. They hold the high cards, and - here's the rub for upstream players - they grab most of the margin as well.

But not always. A recent Economist article has a great example of a Taiwanese microchip manufacturer that suddenly is growing like gangbusters – because it chose to extend its value beyond simply making and providing commodity components such as chips.

MediaTek looked at the manufacturing and design problems confronting its downstream cell phone customers on China’s mainland that were limiting their ability to meet end customer demand. MediaTek then figured out what it could do to help solve those problems better than other component suppliers, while itself avoiding onerous investments in huge new chip facilities. In the process it would remake itself into a high-value-added “fabless” supplier. As The Economist describes it:

In 2004 MediaTek expanded into higher-value territory by making the bundles of chips, or “chipsets”, on which mobile phones rely. Being a latecomer, the firm opted to sell processor-, radio- and other sorts of chips together with the necessary software. This “total solution” makes it much easier for phone makers to produce handsets.

MediaTek’s customers were Chinese shops trying to bootstrap their way into the modern economy with no spare cash. Imagine how their owners felt when Mediatek came along to make this possible:

A handset firm there used to need 20m yuan ($2.9m), 100 engineers and at least nine months to bring a product to market. Now 500,000 yuan, ten engineers and three months will do. As a result, Chinese handset-makers now number in the hundreds.

These customers felt turbocharged, for sure. And the same for Mediatek. In five years, its annual revenues have zoomed from $1.2 billion to $2.9 billion. But The Economist’s excellent coverage skipped over one essential element in the formula:

Rising from a product supplier to a “platform supplier” takes more than new design skills and convincing peer suppliers of other components to tag along behind you. It takes convincing your downstream end-solution (OE) customers they need this service. Fact is, even when they need it badly (and I’ve seen cases of this), they don’t necessarily recognize what they’re missing. You have to help them see the light, and the scale of their opportunity. You have to sell them not just a platform but a service. In MediaTek’s case, it’s: “We can help you get to market three times faster, and with only a tenth as may engineers.”

That’s not just a commodity component. That’s value!

Private Brand Supplier Comes Out

Along with investors, I’ve been watching Ralcorp Holdings closely since it bought Post Cereals from Kraft Foods in late 2007. Post was half as big as Ralcorp ($1 billion in sales versus $2 billion), making it a big gulp to swallow.

Sheer size is one challenge to integrating Post. The other, bigger challenge is in meshing the marketing and distribution.

Up to the acquisition, Ralcorp was a pure-play supplier of private label foods for Wal-Mart and other giant grocers’ house brands. Buying Post Foods changed that. Side by side with Ralcorp’s traditional behind-the scenes processing business, invisible to consumers, Post would be operating in full view with its own name prominently on the box.

Could Ralcorp manage both the PL and name-brand channel relationships at once? Could the executive team align the manufacturing and transactional sales culture which dominated Ralcorp with the marketing mindset inherited from Kraft ?

So far the evidence is encouraging, and more. Ralcorp’s stock has been rising at a time when most of its peers have been losing value. More important, the company’s most recent quarterly report credits Post with making an outsized contribution: $279 million out of $305 million of Ralcorp’s quarter-to-quarter incremental revenue growth.

During a severe recession when private labels have been transcendent, this kind of growth by a branded foods player is extraordinary. It’s clear Ralcorp made a good buy. And they’re obviously not botching it. What’ harder to know from the outside is whether they could be driving their powerful two-horse chariot even harder. Even with Post, Ralcorp is still a distant third in the cereals category to Kellogg’s and General Mills. And at the negotiating table it’s dwarfed by the big retailers. Given those externalities, you have to wonder if there aren’t still opportunities to structure distribution relationships for even faster growth and even higher profitability.

I’d bet there are. When I’ve worked with companies in similar situations, in-depth conversations with branded product managers and retail customers virtually always kick up an attractive mix of short- and long-term possibilities. We then design new programs to go after them. Some are modest, fast, and easy to realize. Others are larger but harder to structure. Either way, my hunch is there’s still plenty of upside left for Ralcorp to optimize its “PL + branded” channel system.

The Factor, Hidden No Longer

The possible collapse of CIT Group brings to light a side branch in distribution channels: factoring. Factoring is a complicated if dusty business. In its simplest form, a factor buys up manufacturers’ receivables as soon as goods are sold, at a nice discount off their face value. In return, the factor waits for retailers’ checks to arrive within 60 days of billing. Very precise calculations of carrying costs and risks are required.

In good times, factoring is a good business. In bad times it is not.

From my angle, the CIT story spotlights the very essence of a distribution channel: its in-between parts. In this case, in between a manufacturer making something and a retailer selling it is a factor greasing the financial gears where the movements of the two rub together. Each player contributes its own specific, and crucial, value to the channel. Each assumes its own specific, and characteristic, risk.

When a manufacturer forward integrates by buying a retailer, it extends its value and takes on unfamiliar activities and risks, the factor’s role included. Same goes in reverse for a retailer that backward integrates into manufacturing. My own view is that companies should be very cautious about integrating their value chains through ownership. While the shorter-term value gains tend to be seductive, the longer-term complexities and the risks are more hidden; so are the costs.

CIT’s peril gives us a surprising, and therefore, excellent object lesson in what some of those risks entail.

Channel Collaboration Brings Wireless Innovation to Market

Sometimes real news isn’t new. Sometimes it’s enough to discover that something you barely noticed has subsequently blossomed.

In today’s New York Times, David Pogue reminds us of a market-making collaboration between two companies more than two years ago. But back in 2007 it was hard to tell how big the collaboration’s payoff would be. Now we know.

The two companies are Apple, maker of iPhones, and Cingular Wireless, a network provider later rebranded AT&T Mobility. Apple had developed “Visual Voicemail,” which would let people check their incoming voice messages by glancing at a list on their phone screen and chosing the order instead of being tied to sequential listening to each message one at a time. No doubt, phone users would love this feature. Problem was, big wireless networks at the time weren’t designed to link with software that converted voice data into visible readouts.

For both engineering and business reasons collaboration was key, and in this case an exclusive relationship between supplier and carrier probably proved indispensible. As Mr. Pogue points out, the engineering costs were too high for Cingular, or any carrier, to absorb without relaible assurances about adequate product sales. In this situation, that was done by gaining sole rights to iPhone’s sales. An exclusive also benefited Apple, which could then concentrate on perfecting a single phone for use on a single network, an approach very much in keeping with Apple’s preference to wait for its pitch then swing for the fences.

Was Visual Voicemail either company’s only reason to go exclusive? I doubt it. But VV probably helped focus executives on both sides to get past the head-to-head negotiation mentality and accent the value for each party of focusing on new solutions and usage experiences for end consumers.

Working together like Apple and Cingular apparently did remains the exception. But intensifying competition in all industries is going to make it the rule. Where relationship exclusivity helped both companies win big, tomorrow’s collaborations will be essential simply to win small.

Healthcare Distribution - A Must-Read

In my twenty-five years of work on distribution strategy, I have never read a more fascinating analysis of distribution system challenges and opportunities as the one recently published by Dr.Atul Gawande, a surgeon, writer, and a staff member of Brigham and Women's Hospital, the Dana Farber Cancer Institute, and the New Yorker magazine.

If you have not yet read his piece in The New Yorker, I strongly encourage you to take the time. It's an absolute must-read analysis for anyone interested in designing and managing higher-performing, lower-cost complex distribution systems.

Enjoy!

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.