At C-Level

It's in the Bags at Southwest

Is anyone else as completely impressed as I am over Southwest Airlines latest campaign about baggage flying free?  If you've been watching sports on TV lately you can't miss them--burly Southwest baggage workers taking pride (with tongues in cheeks) about not making your bags pay for the lousy seats in the cargo hold, or getting all teary-eyed about their special relationship to your bags?

Much of Southwest's historical success can be traced to staying with its low-price strategy.  So when the other major airlines saw an easy profit opportunity by charging $20 to check a bag, SWA swallowed hard and said "No."  But the brilliant part was making this a symbol of Southwest's value commitment vs. its competition.  This is a creative departure from the longstanding advertising approach of value with whimsy and a price point.

The campaign is absolutely on strategy, 100% in character and powerfully leverages a principled strategic decision the company had the guts to make, even in challenging financial times.  And who would have thought an airline could have built an ongoing campaign around baggage?  But obviously it's working because they've been running these for some time.  Very cool!

Turning on the Jets

I was intrigued by an email I just received from Jet Blue, my favorite domestic airline to fly.  For $599 I can fly anywhere on their system, as often as I'd like, for one month--from Sept. 8 to Oct. 8.  My mind immediately began racing.  Do I need to go to the East Coast during that period?  Well, maybe, but probably the first week in September.  Any other needs?  Because wouldn't it be fun to zip down to Atlanta to see a friend, then maybe a weekend for some diving in Aruba?

Alas, it probably isn't going to work for me.  But the deal definitely got my attention.  And I suppose for JetBlue it isn't as risky as it may sound.  (They do reserve the right to stop the promotion if need be.)  It's a low travel time, meaning a good portion of their trips will be incremental, and they have the capacity on the flights.  And it's a great way to get a quick revenue lift.  The only "catch" is you have to register for their frequent flyer program.  That's easy for consumers.  And good for Jet Blue.

Creative and aggressive pricing.  It's what's called for in this economy.  It makes me feel all the better about Jet Blue.  And I can't stop thinking about the sandy beaches of Aruba.

Back to Basics

Since the economic collapse virtually every business has been taking quick and dramatic action to survive the drop in consumer spending and the tight capital markets.  What have they been doing?  Of course, businesses across the board are cutting costs--eliminating all wasteful and unnecessary spending and going without many of the perks and indulgences they had become accustomed to.  Frivolous advertising and sponsorships have been axed.  Cushy retainer relationships are canceled. 

What else?  Well, everyone is concerned with giving customers the best value, resulting in lower-prices and value-oriented promotions.  New products that delivered more sizzle than steak have all but disappeared.  Meaningless line extensions that were little more than marketing filler aren't being funded.  Only real innovations with game-changing potential are still capturing the excitement and imagination of retailers and consumers.

More?  Casual dining and upscale restaurants--a category hit as hard as any--are all talking about customer service.  And I just read that new Toyota CEO Akio Toyoda emphasized that the one of the keys to the company's turnaround will be the ability to refocus on the needs of the customer.

And it strikes me that all of this is pretty basic stuff--time-honored principles for success that have been around for centuries.  Maybe we need a recession every now and then to remind us of these principles of how best to conduct our business, or perhaps to reinforce their importance. 

Wal-Mart Plays Big Casino

It would be easy for Wal-Mart to gloat.  Every other retailer is suffering from horrendous sales, shrinking margins, disastrous profitability and the dull realization that consumer spending isn't going to bounce back.  So while their retail  competitors look forward to nothing better than rolling over the precipitous Q4 '08, the perfectly positioned giant from Bentonville revels in 5% sales growth driven by new traffic from more upscale customers doing more downscale shopping.

So how does new CEO Michael Duke respond?  By taking a bow?  Negotiating his option package?  Nope.  Word is he's making a strategic change of cataclysmic proportions--shifting the concept ever-so-slightly upscale.  Sam Walton might think it blasphemous, departing from that simple, single-minded almighty lowest-possible-price mantra that has resulted in a staggering $400 billion in sales.  This isn't just poking at a sacred cow, it's slicing it into hamburger, eating it for dinner, then washing it down by playing drinking games with the Holy Grail. 

What will it mean to consumers?  More premium brands like Dell and iPod will find space on the shelves.  More capital will be put into stores, making them more inviting and appealing.  More labor will lead to better service. But not more value.  On the contrary, since none of the above come freely, we can, in the future, expect to pay just a little bit more than we might have without these improvements.

A few observations:
1. The logic makes some sense.  Wal-Mart has picked up a new breed of customers.  If the retailer can keep them coming even after the economy picks up it's a tremendous long-term benefit, while avoiding the hard fall if these customers return to their old buying haunts.

2. Now is the time to do it, when the economy is down.  Capital improvements are cheaper and all the competitors are cutting back.  Net, Wal-Mart will get more bang for every buck invested in the stores.

3. It's the riskiest bet a CEO can make--to make fundamental changes in the strategy while times are good.  It reminds me of the famous Microsoft shift to focus on the Internet.  It could be a colossal mistake, a momentum killer resulting in long-term derailment. Or it could be exactly the right thing, at the right time. This is Michael Duke playing Big Casino, and it's the type of bet most CEO's would never have the guts to make. Right or wrong, you've got to give him props for the nerve to raise the stakes and go all in.

I hope it works.  Maybe we can get cheaper iPods.

A Grand Slam?

What a gutsy and aggressive move by Denny's.  For those that missed it, they bought a $3M 30-second ad on the Super Bowl announcing that they will give away a FREE Grand Slam Breakfast to everyone in America on Tuesday, Feb. 3 (tomorrow) from 6 a.m. to 2 p.m.  There's a lot of reasons why I think this is brilliant, and only one why it may be a big mistake.  Here goes:

1. It makes a statement that Denny's is happening.  And after all, one of Denny's biggest issues is its image.  How cool is it to announce one of the biggest giveaways in restaurant history on the Super Bowl?  The answer is: Very cool.

2. It has generated tremendous publicity.  As of 11 a.m. today (Monday) Denny's website had 14 million hits.  OK, it's not an ecommerce site, so the value of a web visit is open to debate.  But all that web traffic certainly makes the media investment look better.  Not to mention the more than hundred million impressions from the Super Bowl itself and all the news coverage afterwards, easily getting the TV CPM lower than $30.

3. Retrial is the right strategy.  We've all been to Denny's, but when was the last time?  Anyone actually been in one of their retro units?  Seen their new decor?  There's one near my house, and it's not bad.

4. They lead with their signature product.  We're not giving away a grilled cheese sandwich here.  It's the Grand Slam Breakfast.  I love it.

5. The economics could be pretty good.  Now I don't have any inside info from Denny's, or the time to go get it.  But let's make some broad assumptions.  First, disregard labor.  Yes, it will be costly, getting ready, getting prepped and cleaning up.  But it's for one day.  Plus, the labor leverage will be pretty high. Let's also assume that the cost of a GS Breakfast is $1.  That's probably high, so it's conservative.  So, on unit level economics, let's say you'd normally get 200 customers into a Denny's during that eight-hour period, and let's say 80% of these decide to get the free breakfast instead of their usual $6 plate.  That's $960 in lost revenue, and probably a bit more in extra food cost.

Denny's expects 1-2M people to take advantage of the offer.  With about 1500 units, that's 1000 giveaways per unit, less the 160 current customers, that's an additional 840 plates.  At $1 food cost, that's $840 in food cost.  So your unit losses are up to almost $1800 ($960 + $840).  BUT ... how much revenue and profit are you going to pull out of each of those 840 incremental customers?  All you need is $2.15 incremental margin per customer to break even.  So any combination of soda or coffee (very high margins), sides or desserts (70-80% gross margin) or tagalong friends who order something else and you're even for the day (again, excepting labor).  Throw in the value of goodwill, marketing opportunity and future visits and the numbers start to look pretty reasonable.

Now the risk.  The experience had better be good.  First of all, you can't change your staff for one promotion.  Your server is not going to look like Jennifer Anniston or David Archuleta.  If you like the perky college students at The Olive Garden, you're likely to be disappointed.   Nevertheless, you can bet that every manager will have their restaurants super-staffed and every employee wearing clean uniforms and a big smile and on their A-game. 

However, despite best efforts, it's hard to manage restaurant throughput during volume spikes.  Things can turn ugly quickly.  And if I have to wait 45 minutes for a free breakfast I'm not likely to feel very good about Denny's, or come back again very soon. And at many restaurants, that's a very real possibility. Backfire.

In any event, I'm going tomorrow.  The Grand Slam is not my type of breakfast.  But the promotion I have to see.  And a shout-out to Denny's management.  I like your style.  And your guts.  Good luck.

Farmers Marketing

The other day I stopped at a roadside produce stand that I have visited for several summers. The family that operates it is friendly and has a farm north of the city. I like to buy fruits and vegetables there because they usually taste great, and I’d rather support a local farmer, for both quality and environmental reasons.

Local peaches are coming in season and so on my last visit I asked how they were. “Try for yourself,” the teen-age girl said. She grabbed a peach and with a sharp knife sliced a big juicy wedge for me. Ahhh, sampling. Best marketing device in the world. Shows confidence in the product. Puts the customer in the right frame of mind to buy. But I noticed there were some soft spots in the peach, visible from where it was cut. I asked about those. “Yes, those are little bruises,” she explained. “They come because we pick them closer to being ripe. But you know, they’re the best tasting part.” Wow! Good explanation. I popped the proffered sample into my mouth and she was right, it was delicious.

I immediately decided I wanted those peaches, but considering myself a savvy shopper, I felt the need to check the price. Seven dollars for a basket, she told me. Gee, I wonder how much per pound that is? Having no idea, I proceeded to fill the basket anyway. More smart marketing. I’m sure they were priced higher than grocery stores, but pricing by the basket is a different metric that doesn’t invite comparisons. It’s the Costco and Sam’s Club trick.

The experience reminded me of an old friend of mine who had a small and very successful farm in New Jersey. He often sold directly to customers who came from the city to buy. When I met him I was a young executive at PepsiCo with an MBA and domestic and international marketing experience. But I remember thinking that my friend Ronnie might be the smartest marketer I had ever met. He told me how local farmers had to fold the cauliflower leaves over the white vegetable or else it would yellow from the minerals in the rain. One year he was late doing that. So he called them “Golden Cauliflower.” Turns out they sold better than ever. In fact, he never took the trouble to cover his cauliflower again, and people came back year after year for the great-tasting Golden Cauliflower.

Once a visitor from New York pointed to a pile of rocks that he had cleared from his field. “How much for the rocks?” he asked. Now Ronnie had never sold a rock, and hadn’t any idea what they might be worth. Not wanting to under- or over-charge, he asked the man to pick which ones he wanted. Then Ronnie asked, “What do you think is a fair price for that one.” “Oh, maybe two bucks,” the New Yorker replied. “OK,” says Ronnie, and how about that one?” And before long, they had struck a bargain with both sides pleased. And Ronnie had quickly internalized that often elusive economic principle that price should have nothing to do with cost, and everything to do with market value.

MBA’s take note.

Pricing With Inflation

Not to dwell on the theme of pricing, but the Labor Department just reported very bad news on the inflationary front--the July Producer Price increase was up 1.2 points--twice what was expected.  Anyone that doubted if we were teetering on a dangerous inflationary cycle should now be believers.  You don't need to be an economist to know that high inflation is a nasty illness that's hard to recover from.  Wage-earners see their buying-power diminished and the fixed-income struggle to survive.   As a result, demand in most industries declines, causing corporate cutbacks, increased bankruptcies and the like, all stirring the flush down the economic toilet.

If pricing was important a month ago (see the blog on Sara Lee below), it's going to be exponentially more important if inflation continues to climb.  Business leaders need to keep their fingers on the pricing pulse and reexamine this issue every week.  In an inflationary environment, NOT taking a price is often like having a sale, complete with shrinking margins.  That may be the right thing to do, but if so, make the decision overtly and not by benign neglect.  On the other hand, taking price in-line with cost increases may lead to a shelf-price disadvantage and decreased demand.  Be ready for that. 

Further, start dealing with the issue now--are you going to price to maintain dollar profit or percent margin?  There's a lot of businesses that have a long history of measuring their success based on percent margins.  Now might be the time to think about a cash flow model.  Consider providing more value with larger volume (the super-size strategy).  Have at the ready a new product option designed for a tough economy, maybe under a different brand name or line.

Who's going to win?  Well, the price brands for one.  Also, it always helps to be in an industry that's insulated against demand cycles--say cemeteries or toothpaste (vs. say, new cars or jewelry).  But for most markets, the challenge is fundamental.   Does your product provide a truly differentiated value that's important to the customer and that you can price profitably?   If not, consumers will either quit buying or find a cheaper alternative. 

Santa's Not Coming This Year

Almost everyone in the retail sector ought to be bracing themselves for a very challenging fourth quarter. Some hopefuls might point out a few rays of light in the economy, but it’s too little, too late. Now that the effects of the stimulus package are fully played out, the grim reality is settling in. Nordstrom just reported 2^nd quarter profits down -21%.  Kohl’s was -12%. Both due to sizable drops in same-store sales. Macy’s is down. Tween Brands took a -44% stock hit and looks to be on the ropes. Back to school spending was below projections and virtually all mid- and upper-end brands are suffering. The only good news coming from the retail sector is Wal-Mart and other low-price positioned retailers and brands. Wal-Mart’s Q2 profits were up 17% on +4.5% same-store sales growth.  It’s got the right positioning for the economic times, bolstered by an impactful and strategically smart ad campaign: “Save Money. Live Better.”

I expect these trends to continue, and if I had a retail brand that relied on fourth-quarter sales I’d prepare for the worst.  Help is nowhere to be found. Oil prices won’t make an impact, even if they do turn slightly. Housing won’t rebound in time (although Alan Greenspan just predicted early 2009 for them to stabilize). Unemployment won’t get better. Neither will the stock market. And the November elections can only hurt, not help.

And don’t look for help in the electronics sector, typically the high-profile driver of holiday sales. HDTV penetration is already at 50% in the U.S. and I doubt we’ll see anything like last year’s consumer enthusiasm for it. Blu-Ray DVD is still too expensive and not ready. Video players are mid-cycle, although Wi availability will give it a boost, particularly if they price down to $199. But what’s the big consumer idea? Uhhh … iPhones? I don’t think so. Not broad enough in appeal or availability.

Now is the time to cut costs, scale down production and compete on price to drive inventory turnover. And if you’ve got good cash reserves, early 2009 will be a good time to look at acquisitions. There should be good buys available as companies reel from a disastrous 2008.

Is the Price Right?

Sara Lee came in with a nice fiscal fourth quarter, with a 12% sales increase (10% over the full year). Although the stock price doesn’t reflect it, CEO Brenda Barnes has done a terrific job (as I would have expected), sorting through the hodge-podge of brands, selling off those that don’t make sense, scouting for acquisitions and trying to build a solid foundation for growth. I’ll get back to the Sara Lee strategy in a later blog. But the real story to the recent success is that Barnes and her team made timely decisions to take price before the P&L was buried by increased commodity costs, and they are already poised to do it again.

In contrast, how many earnings reports have you read recently where the CEO accounts blames profit declines on increased costs and slow pricing response ? (Reminds me of something John Kenneth Galbraith once said: “A wrong decision isn’t forever. It can always be reversed. The losses from a delayed decision are forever. They can never be retrieved.”)

Although the importance of proactive management cannot be underestimated, that’s not the only point to be made here. All the cost and pricing tales of woe highlight an often overlooked truth—pricing actions are some of the most impactful decisions made in a company. If there’s anything that should cause a CEO to dive into the messy details, it’s a pricing issue. There’s nothing that will more quickly generate profit than a price increase, so it’s hard to justify leaving it on the table. But get greedy and you dig yourself a competitive hole that will cost you momentum and market share.

It’s too early to tell which companies have responded to escalating costs with the right pricing decisions, and which have made the wrong ones. But the stakes are so high that the CEO needs to be intimately (and proactively) involved.

Unilever finally throws in the (freshly washed) towel

I read today that Unilever has bailed on the North American laundry detergent business, selling it to Vestar Capital Partners, a private-equity firm. The matter is of sentimental interest to me because back in 1985 as an Assistant Brand Manager at Procter & Gamble I coordinated the defense efforts for our laundry brands against Lever’s massively funded introduction of Surf, their first big U.S. laundry detergent. They first tested in Houston with remarkable success, grabbing a hefty share in a very profitable category that Procter had long dominated.  Based on those test results, they expanded quickly.

I took over the project just after that first test market. We had spent a lot of money in Houston, deep-discounting the largest sizes (we called them “hernia packs”) of our leading brands.  The plan was to encourage consumer pantry-loading through the initial Surf spending blitz of advertising, coupons and store discounts. So we gave the grocery trade an unprecedented deal, which was expensive, but justified given the risk. Sensing a loss leader opportunity, the stores dropped their margins and discounted even further, chopping the normal $6.49 price to as low as $1.99. We moved a ton of soap, but it didn’t look like it affected Surf at all.

Armed with these facts, I headed for Houston where I met our sales reps and we called on individual store managers to figure this out. What we learned was surprising. The Procter laundry prices were so cheap consumers hadn't just loaded their pantries, they had loaded their garages. Prompted by the unprecedented prices, store customers had bought Tide, Cheer and Gain by the truckload, causing the stores to sell out quickly. Despite big volume, we impacted a lot fewer customers than we had thought.

So the first thing we did was to change the deal to $4.99 pre-priced cartons, which pre-empted trade price wars and still gave consumers a very good deal. And in fact, it was a more effective defense vehicle, protecting our brands and consumers better as Surf rolled out. Plus, on a national basis, it saved P&G about $40 million, which was big money back then.

It was early in my career, but I took home a couple of powerful lessons. One was that pricing too low could be dangerous, and dumb. But the more profound takeaway was the importance of learning from the field—traveling with our sales reps and talking to the individual store managers, the only ones who really knew what was happening.  Yes, talk to the consumers (a Procter guiding principle). But as importantly, talk to those on the front line who are selling to the consumers.