peleton marketing branding

Peloton: Turnaround Plan or Growth Plan 

Peloton’s new CEO, Barry McCarthy, recently reported to analysts on his turnaround plan. He stated that a turnaround plan is hard work. He said that in turnaround situations there are always a lot of surprises. He said the turnaround would take a lot of time. If he was looking for support, he did not receive any kudos. Analysts and investors were not impressed.  Maybe this is because most of what Mr. McCarthy said were not elements for a turnaround plan but elements for a conventional growth plan. There is a big difference. 

A conventional growth strategy is not appropriate for a brand in urgent need of a turnaround. A growth strategy is very different than a survival and revival strategy. A conventional growth strategy is for a brand that is on a sustainable upswing. A conventional growth strategy is a longer term outlook. Typical growth plans are either a 3-5 year mid-term plan or a 5-10 year long-term plan. A conventional growth strategy is for going forward, full speed ahead. It is designed to accelerate quality revenue growth. 

The principal components of a conventional growth plan are to:

  • Broaden the brand’s appeal to build a bigger customer base. 
  • Focus on changing people’s attitudes in order to change their behavior – you have time to spend on slowly changing the way people think in order to make them use the brand.
  • Expand to new geographies.
  • More customers (new customers, new segments of people).
  • More occasions (new occasions).
  • Extend the brand offers – new products that appeal to new customers and/or satisfy new occasions.

Implementing a conventional growth strategy for a brand that is in need of a turnaround will only accelerate brand decline. 

A turnaround plan is a business approach for a business that is going in the wrong direction at an accelerating pace.  For a troubled business like Peloton, an aggressive turnaround plan is not an option. It is an imperative. It is not a long-term plan as Mr. McCarthy insists. It is an immediate short-term plan for business survival and brand revival. 

In his report, Mr. McCarthy mentioned many tactics such as rethinking Peloton’s capital structure; growing international users (Peloton’s goal is to hit 100 million subscribers globally, up from the 2.9 million it had at the end of March 2022); focusing on the digital app; shifting to a broader base of users by lowering prices on hardware; attracting more men to Peloton; and using third party retailers. Additionally, there is the discussion of a flat fee for hardware rental plus all-access to classes. Peloton has already contacted current customers alerting them to a monthly increase in access charges. These are tactics out of a conventional growth strategy. These are not tactics for a brand that finds itself in a doom-loop.

A turnaround plan has specific short-term objectives. It has specific actions designed to achieve those specific objectives. It has a specific timeline. At Peloton, the short-term objective must be to focus on achieving specified, measurable turnaround objectives in 24 months or less. With losses mounting and slowing customer acquisitions, Peloton does not have time. The marketplace is already questioning whether Peloton’s much discounted stock price is a reason to buy or a reflection of something incredibly wrong with the brand.

A turnaround strategy is a plan of thinking and action that immediately moves to stop a deteriorating situation. A turnaround strategy jettisons all non-core activities until the brand or business is stabilized in a sustainable manner. A turnaround strategy is all about earning the right to grow again. Wall Street did not hear a definitive short-term plan except for a binding commitment with JP Morgan and Goldman Sachs for a $750 million loan.

All turnaround experts agree that the most immediate “must-do” action when a brand is in trouble is to “Stop the bleeding.” Stop the financial bleeding and stop the bleeding of the customer base. Stopping the bleeding requires a set of quick, decisive decisions. As Mr. McCarthy pointed out in the earnings call, Peloton is “thinly capitalized” burning $747 million in the most recent quarter. This left Peloton with $879 million in cash. 

Some analysts worry that focusing now on expanding the customer base will cost a great deal of money that the brand does not have. Going after new customers is expensive. It costs at least 4 times as much to attract a new customer than it does to maintain a current customer. And, using cheaper fees to attract new customers will attract the wrong kind of customers. These will be customers who love the deal rather than the brand. By attracting deal-focused customers, Peloton’s churn rate may rise. Mr. McCarthy has been extremely impressed by the low churn rate at Peloton. His possible actions may reverse this bit of good news. The short-term turnaround goal should be to reduce capital expenditures by stopping the shrinking of the current base and restoring profitability. As one managing director at an equity firm told Barron’s, the weekly financial newspaper, Peloton should be focusing “…on its loyal customers, rather than chasing growth.”

This leads is the second critical element of a turnaround plan: reinforcing the brand’s core business. The core business must always be protected. The core business is what will finance the turnaround profitability and finance the platform for the future. The main business must always be protected before moving on to a new approach. Moving to a more digital, less hardware, services brand may be a good call once the brand is stabilized. But, for now, the core business needs to be strengthened. The potential introduction of a rowing machine may be a core-strengthening move.

Peloton has a devoted customer base. Mr. McCarthy should be looking at increasing the frequency of usage and the loyalty of current customers. Core Peloton customers already love the brand. The plan should be to focus on Peloton strengths and reinforce these effectively to Peloton core customers. Rather than penalizing core customers with higher fees, Peloton should be creating ways to reward its core customer base. One analyst remarked that with people returning to gyms, you see the draw of the social aspect of working out. Peloton actually has a huge social component. Connections are part of its mission. But, this has never been a part of its advertising strategy.

Peloton is not ready for a growth plan. Yet, the tactics from Mr. McCarthy focus on growth. This is a mistake. The core business needs shoring up not ignoring. Peloton needs to earn the right to grow. 

Samsung brand leadership

Brand Leadership And The Courage To Commit

Many times, brand-businesses have insights about the future but do not find the courage to act on these insights. Lack of courage occurs for a number of reasons. Costs, fear of failure, complacency, the comfort of manufacturing what the business knows how to make rather than what solves customers’ problems, a chief of manufacturing who says, “Not on my line” or a siloed organization: all tend to collapse courage and get in the way of making things happen.

These brand-businesses do not have the will to do. So, something amazing passes through their systems causing lost chances, missed opportunities and the chance to get ahead of curve. Having the courage to commit to a vision or an insight is essential for brand-businesses, especially today in a fast-changing, volatile world. The courage to commit starts with brand leadership. Brand leadership is the key to action.

Brands thrive if leadership sees ahead and creates a plan for winning. Brands need to keep innovating in order to stay relevant. Brands need to keep in touch with their customers. Brands need leaders who love the core products and who want to make these better. But, brands also need leaders who can see ahead, adopt new ideas and act.

One of the criteria for great brand leadership is knowing the difference between being certain and being confident. Looking for certainty is a dead-end street. Brand leaders who seek certainty usually will not have the courage to act. Death and taxes are certain: all else are not. On the other hand, confidence is critical. A brand leader who is confident that an idea is worth investing in has the courage to bring the idea to fruition. Being able to say, ‘No, I am not certain this will work, but I am confident this is the right thing to do,” is a mark of a great brand leader.

Great brand leaders are authoritative, credible, responsible, trustworthy and they have integrity. When great brand leadership is lacking, brands suffer. Those seeking certainty will jettison ideas because there is no way of supporting a world of no doubt. There is no way of having absolute conviction that something is true if it has never yet happened. Great ideas die when the brand leader, presented with a new idea, asks, “Can you give me an example of who has done this before successfully?”

In the early 2000’s, an appliance company created a smart fridge. It was years ahead of the marketplace. This fridge would have the ability to communicate when foodstuffs were going bad; it would be able to order food stuffs that were running low; and it had a computer that allowed you to keep a meal calendar and create meal planning. The smart fridge would be hooked up to your home Internet system and become a communications hub for the family. The appliance company made one of these. This one-of-a-kind smart fridge was trucked around to various cities and company offices. But, the smart fridge never saw the light of day with consumers. Leadership was unsure and non-committal. Leadership wanted to continue to know more. Leadership was concerned more about failure of this product than the product’s success. No one could promise leadership the certainty of a win.

Today, smart fridges abound. Take the Samsung Hub concept. According to its website, Samsung Hub… “… with Alexa built-in, helps you stay connected to your family and home, whenever and wherever. Family Hub™ lets you control your Samsung smart appliances and devices, stream music, share pictures with your family, and so much more, all right from your fridge.” Samsung has always had leadership that respected innovation and accepted risk. As early as 2005, Samsung previewed a digital convergence fridge. It had a home organizer on the front door.  This organizer had categories such as Food remember, Digital schedule and calendar, digital memo pad and digital radio. 

Samsung’s early innovations in clothes washers and dryers, again from 2005, changed the way other manufacturers thought about these appliances. Samsung featured the Silver Nano Health System clothes washer. This feature used silver ions that melt in the water to get rid of germs and provide sterilization.  The video on the Silver Nano indicated that the silver ions decomposed detritus to 1/1000th of a hair width, provided 99.99% sterilization and odor removal and removed irritants thus preventing atrophic dermatitis.

Ten years ago, in 2012, a hotel company had a plan for a net-zero, sustainable hotel. At the time, research indicated that a sustainable, responsible hotel would solve a problem for many travelers who expected products and services to reflect their personal values. The sustainable hotel’s concept was designed around the idea of innovating for responsible living. This hotel was to be a disrupter: a building that would be green from top to bottom. Partners with expertise in specific areas of sustainability and technology were signed; the specific location was identified and the land owner was eager for discussions to start. The innovation hotel would also be a pipeline for the company’s other branded hotels as new ideas could be tested, measured and managed in real-time with winning ideas transferred within the company’s system. Data showed that this sustainable hotel would be a profitable entity for the company, especially when it came to the key hotel-industry metric of RevPar, revenue per available room.

A team worked on the strategy and planned for months. Money was spent, presentations were delivered. And then, nothing… shelved with all the other what ifs. It was the hotel that never happened. At least not at this company. Leadership was worried about short-term investment rather than the long-term profitability of the innovation. Leadership wanted certainty that this sustainable hotel would succeed.

Now, as reported in The New York Times, there are many hotels with the same sustainability concept that are actually being built or have been built, receiving guests. Leadership at these hotels are willing to commit to the greater good. As in 2012, once again new research states travelers commitment to eco-consciousness when it comes to the actual hotel. In a Booking.com survey, 71% of respondents say they plan to travel greener. And, more than 50% of the respondents indicate that they “are determined” to make greener travel choices. The New York Times states that these hospitality options are way beyond the ditching of tiny plastic shampoo bottles and asking guests to reuse their towels. These hotels are focusing on the entire building. These hotels are focused on environmental efficiency and effectiveness, from solar panels to zero waste.

When Boards of Directors, investors and analysts see the present and the future, and if they believe in ing strong, resilient, authoritative, trustworthy brand-businesses that will continue to generate enduring profitable growth, great leaders must be in place to make these insights realities. 

Great brand leadership takes courage. Great brand leadership requires a will to do based on confidence. Great brand leaders know what they do not know and exercise informed judgment. Great brand leaders weigh informed action against inaction: they balance the need to know with certainty against the necessity for a confident decision. Great brand leaders take risks; they take leaps of faith based on informed judgment: they have confidence that these are leaps in the right direction.

Barnes & Noble Brand Books

The Revitalization Of Barnes & Noble

Recently, The New York Times ran a lengthy story about the revitalization of Barnes & Noble, the last book megastore on the American retail landscape. Although some still question the future of the brand, there is no question that Barnes & Noble has come back from the brink. 

In August of 2019, activist hedge fund Elliot Management Corporation purchased Barnes & Noble for $683 million (including debt), taking the bookstore brand private. At the time, responses from the trade and business presses were interesting. Financial Times called the deal “contrarian” while The New York Times hailed the purchase as “a sigh of relief” for book retailing. Elliot Management already owned a UK bookseller, Waterstones and had been successful achieving a turnaround of that UK brand. The turnaround was led by Waterstones’ CEO James Daunt.

Still, for Elliot Management, Barnes & Noble presented a challenge.  The brand had survived close calls many times over since its inception in 1886. (The name Barnes & Noble did not appear until 1917.) The environment for large mega-bookstores was not particularly favorable in the mid-2000’s. Barnes & Noble’s competitor Borders went belly-up in 2011. To counter the onslaught and inroads of electronic books and Amazon’s online sales, Barnes & Noble added non-book items such as music, children’s educational toys, events, and Starbucks’ cafés. Barnes & Noble created its own ereader, Nook, to compete with Amazon’s Kindle, but gave Nook very little attention. Barnes & Noble found itself in the unfortunate middle between Amazon and small, independent stores catering to specific subjects mirroring either the tastes of their owners or satisfying local predilections. Barnes & Noble’s stores became a jumble of books and merchandise unrelated to books. 

The business press and many readers questioned whether Elliot Management could reignite Barnes & Noble for a future of enduring profitable growth. There were many who thought the Waterstones experience was not transferable to the US.

Elliot Management believed that the strategy used by James Daunt at Waterstones – allowing local bookstores to cater to local tastes providing an in-person experience – would work in the US. After all, localization was, and still is, an important driver of sales. So, Elliot Management asked Mr. Daunt to take the CEO position at Barnes & Noble.

As described in The New York Times, “His (Mr. Daunt’s) theory was that chain stores should act less like chain stores and more like independent shops, with similar freedom to tailor their offerings to local tastes.”

When asked about his plan for Barnes & Noble, Mr. Daunt stated that he was not interested in “remaking” Barnes & Noble as Waterstones: he just wanted to make Barnes & Noble a better bookshop. Along with the localization strategy, Mr. Daunt put power back in the hands of the general managers. Mr. Daunt indicated that he would not dictate to the local store managers and staff. Let the general managers select books of interest to that particular store’s customers. Barnes & Noble’s chain strategy had been to fill stores with the same books regardless of geography and neighborhood. 

Mr. Daunt’s strategy for Barnes & Noble’ rejuvenation rested on three critical factors.  Two of these factors are essential for any retail revitalization (1) “Nothing happens until it happens at retail;” (2) “The General Manager is the Brand Manager.” The third factor is essential for all great brands: 3) “Leveraging A Stellar Reputation.”

  1. Nothing Happens Until It Happens at Retail

Revitalizing Barnes & Noble required revitalizing the brand’s in-store, retail experience. This meant articulating the Barnes & Noble brand promise so clearly that every employee understood what the brand stands for in the customer’s mind.  Everything that happens must be focused on bringing this promise of a relevant, differentiated, trustworthy brand experience to life for every customer, every day, in every store.  

According to its website, the mission of Barnes & Noble “… is to operate the best omni-channel specialty retail business in America, helping both our customers and booksellers reach their aspirations, while being a credit to the communities we serve.” Mr. Daunt counted on the desire for personal, human contact when buying books, in contrast to Amazon, which uses technology to personalize online promotions and servicing its brick-and-mortar bookstores.

As The New York Times pointed out, “Buying a book you’re looking for online is easy. You search. You click. You buy. What’s lost in that process are the accidental finds, the book you pick up in a store because of its cover, a paperback you see on a stroll through the thriller section.

“No one has quite figured out how to replicate that kind of incidental discovery online. It makes bookstores hugely important not only for readers but also for all but the biggest-name writers, as well as for agents and publishers of all sizes.”

The concept of discovery is one key reason stores such as TJ Maxx and Home Goods are so popular.

  1. The General Manager is the Brand Manager

No one knows a marketplace locale and its customers better than the store’s general manager. It is the role of the general manager, along with staff, to deliver the brand’s great experience to customers. The general manager brings the brand to life making sure that each and every customer contact meets expectations. It is the responsibility of the general manager to assure the brand lives up to its promises. 

Whether hotels, restaurants or other retail establishments, the importance of the general manager needs to be recognized. The general manager knows the customer’s needs and problems and how to solve these problems. The general manager knows the neighborhood, community and local business relationships. To localize and personalize the Barnes & Noble brand experience, the chain allowed each store’s general manager to be the real brand manager. Each store manager was, and is, in charge of localizing books for locals’ preferences. 

  1. Leveraging A Stellar Reputation

Just because Barnes & Noble was in crisis at the time of the Elliot Management purchase, did not mean Barnes & Noble had lost its positive reputation. The Reputation Institute’s 2018 US Retail RepTrak® Rankings, cited Barnes & Noble as the: “#1 most reputable retailer in America.” 

Data show that brand reputation can alter customers’ preferences for products and/or services they might consider buying. Brands known for being extraordinary in their market gain customers’ confidence. Exceptional reputation distinguishes a brand from brands in its competitive set. A great reputation allows a brand to potentially secure a premium price, generate positive word-of-mouth support and be a barrier to copy-cat brands.

Reputation is based on perceptions that the brand is able to consistently meet the expectations of its stakeholders. The brand must consistently perform its activity over time in a quality manner.

In a dynamic and uncertain world, people seek familiar touchstones of expertise, authenticity and trust. Trust is an increasingly important factor in customer decisions. A strong, trustworthy business reputation contributes to high quality revenue growth. 

Reputation is a source of confidence. Reputation provides customers with authoritative information and credibility. Reputation provides continuity and consistency across all platforms.

Reputation is the overarching evaluation of past performance. A brand can learn from the past and build on that past. For Elliot Management and its Barnes & Noble’s CEO, James Daunt, the key issue was not what Barnes & Noble had accomplished. The key issue was how these past accomplishments were going to drive the brand’s future. What Barnes & Noble did to move forward was not live off of its reputation, but leverage that reputation as a pathway to a profitable, enduring future. 

By focusing on the individual store to deliver the Barnes & Noble brand experience to its local geography and/or neighborhood, the brand succeeded. Barnes & Noble merged its glowing, solid reputation with two other fundamental principles that drive retail, nothing happens until it happens at retail and the general manager is the brand manager. 

A Brand’s Frontline Is its Goldmine

A Brand’s Frontline Is its Goldmine

Employees are the frontline when it comes to customer relationships and delivering the brand experience.  This is especially true in a service business. Investing in a brand’s people should always be a priority.

In March 2022, Starbucks changed its CEO. Kevin Johnson who became CEO in 2017, announced that he was leaving. Mr. Johnson was replaced by Starbucks founder, Howard Schultz. Faced with external pressures and internal unrest, Mr. Schultz is defying the financial norm of purchasing buybacks and focusing those monies on Starbucks’ employees. Mr. Schultz will be investing in the gold mine that is his frontline.

Regardless of one’s position on Starbucks’ unionization, investing in a brand’s employees is the right thing to do. Just because a business is customer-focused does not mean that customers come first. Customers come second. Employees, the brand’s people, come first.

Internal alignment is essential. A committed culture is critical. A disgruntled culture is a crisis. Internal brand pride is a key success factor affecting external attitudes and outcomes. If a brand’s people are not proud and inspired then a brand will falter.

If a brand wants its employees to love the brand then the brand needs to love its employees. If a brand wants its employees to have passion and pride in the delivery of a trustworthy relevant, differentiating quality experience than the brand must demonstrate passion and pride in what employees do and in who they are.

Data show that employees play a powerful role in shaping business perceptions through positive communications with all stakeholders. Proud employees communicate well beyond their place of work. Proud employees’ advocacy of the business enhances perceptions among external and internal stakeholder audiences. Employee pride translates into higher job satisfaction. Employee pride and satisfaction contribute to customer satisfaction. 

The difficulties brand-businesses face due to the impact of coronavirus have just exasperated the difficulties of keeping a workforce happy, engaged and committed to the brand. Keeping a brand’s culture alive when working from home is incredibly challenging. Even more challenging is keeping a workforce that must show up at work committed during a pandemic. 

It is unfortunate that a keen, laser-like focus on employees is something that tends to be put aside when management and investors focus on financial engineering such as extreme cost cutting including job losses, debt accumulation, share buy-backs, increased dividends, forced spinoffs and money siphoned into the pockets of investors rather than invested into businesses. Investments in continuous improvement and innovation are decreased as dividends and share buybacks are increased. Monies are siphoned from employee training and recognition programs, R&D, customer insight research, service and support and marketing resources. 

As for buybacks, data in The New York Times indicates that in 2021, companies in the S&P 500 repurchased $882 billion in shares. The New York Times also reported that analysts at Goldman Sachs expect this year’s forecast to be over $1 trillion in buybacks.

Barron’s, the financial magazine, wrote that there may be a slowing in buybacks. Quoting a variety of sources, Barron’s indicated that where dividends are “sacrosanct,” buybacks are more flexible. Additionally, with a rising interest rate, using debt to buy back shares is looking like a less desirable action. However, Barron’s also notes that there are few examples of companies “de-emphasizing or suspending share repurchases.” There is nothing quite like juicing your stock price.

This is what makes Starbucks’ move so interesting.

The first action Mr. Schultz took in what is now his third term as CEO was to suspend buybacks and invest the money in Starbucks’ people. Mr. Schultz said that stopping the share buybacks would allow Starbucks “… to invest more profit into our people and our stores – the only way to create long-term value for all stakeholders.” The Wall Street Journal reported that during a “forum” at Starbucks’ headquarters, Mr. Schultz told employees that Starbucks had not done enough for them in recent years. He said, “We have to reimagine the role and responsibility of a public company in America today. We have not done enough. I promise to do better.”

Recognizing that there is quantity of growth and quality of growth, Mr. Schultz said, “… Starbucks has a winning strategy and millions of loyal customers and that it was not worth fixating on the company’s stock price. He said he faced pushback when investing returns in benefits for part-time employees when he first started the company, but it was the right thing to do for Starbucks and its workers. He added, “For all of you following the stock price today and that stock is going down, that’s a short-term thing.”

With more Starbucks voting to unionize, Mr. Schultz and his leadership team are out in the field listening to employees express their complaints and concerns. Mr. Schultz wants to better understand how employees feel. Mr. Schultz said employee feedback will “inform” the brand’s “decision-making” according to The Wall Street Journal. In addition, Mr. Schultz has hired a Chief Strategy Officer, Frank Britt, reinstating this function that was eliminated in 2018. According to Mr. Schultz, Frank Britt, formerly of Penn Foster, a workplace development enterprise, has spent his career “… empowering frontline employees to unlock their full potential in work and life.”

As The Wall Street Journal reported, Mr. Schultz is “… reviewing the company’s benefits to develop an expanded employee-benefit package in an effort to better recruit and retain baristas.” It appears as if these benefits will only be for non-union personnel. Legal restraints prohibit alterations to union-agreed terms for unionized workers without bargaining with their union. Mr. Schultz has been clear as to his feelings about unionization. On the other hand, investing in people and stores should not be seen as simply a way to bust burgeoning unions. Investing in people and stores should be seen as a way to build a better brand.

If you think that focusing on building employee pride and passion is less effective than product or service or pricing, you would be wrong. The 2003-2005 turnaround at McDonald’s was not achieved solely by the creation of its continuing “i’m lovin’ it” campaign. There was a concerted effort to build back employee enthusiasm and advocacy for the McDonald’s brand. In 2002, morale among employees, corporate and in stores, was funereal. Unhappy employees at the counters took out their feelings on customers. Reports of rudeness and inaccurate orders rose, bathrooms were not cleaned as frequently, tables were dirty, lines at drive-thru were long and drive-thru times increased.

Then CEO, Jim Cantalupo, publicly defended the reputation of every individual who worked at McDonald’s. He invested in employees and in the quality of the HR department. McDonald’s created an onboarding program, “Learnin’ It, Livin’ It, Lovin’ It” and focused on a lifetime of skills that a job at McDonald’s offered. Not every employee looks for a lifetime job, but they do want a job that delivers a lifetime of skill sets transferable to other jobs. Employees want to acquire skills that can last them a lifetime.

Horscht Schulze, founding president and former COO of The Ritz Carlton Hotel Company, built The Ritz Carlton brand on employee passion. The core guiding employee concept was “Ladies and gentlemen serving ladies and gentlemen. In a 2006 article from Dealerscope, Audrey Gray wrote, “The Ritz Carlton is so intent on empowering their employees to ‘wow’ customers, each employee has permission to spend up to $2000 a day per guest to fulfill expresses or unexpressed wishes.” “… the company’s most successful customer service policies revolve around hiring and empowering their employees. The Ritz Carlton acted on the belief that if its people did not believe in the brand then the brand could not expect its guests to believe in the brand. 

Publix supermarkets has about 1000 stores, about 800 of which are in Florida. Publix’ culture is one element that makes Publix so successful and such a nice place to shop. And, its culture is based in part on employee ownership. Publix is also a non-unionized organization. According to Barron’s, of its 225,000 employees, 205,000 own Publix stock. Publix is the largest employee-owned company in the United States. Publix is a private company that is owned by employees, Board members and the Jenkins family which founded the business. Publix shares are not traded publicly. Stock is awarded yearly to staff members. Staff members can also purchase stock from the company. Barron’s calls Publix’ culture “strong and durable.”  Publix treats its employees as owners, which they are: the workers are the winners, not the investors, as Barron’s points out. And, Publix has stated that it plows its money into its operations and stores rather than investing in buybacks.

A brand’s service experience is a key factor in making a brand more attractive. How customers are treated makes all the difference in the world. To be successful, brands must take their service to the next level. This includes building and reinforcing employee pride and brand commitment. Pride transfers to the other side of the counter.

Howard Schultz is making a bold move. What is especially important to note, politics aside, is that he is making this move in a business world that has been increasingly focused on the short-term. Mr. Schultz understands that Starbucks grew based not just on product but by offering a comfortable third place staffed with knowledgeable, friendly baristas. These baristas were not just serving the brand’s products; they were serving the brand’s experience. They were aficionados of coffee. The baristas were not just agreeing to Starbucks’ brand experience, they were advocates and adherents of Starbucks’ brand experience. Starbucks’ baristas put the brand experience in the hands of every single customer. The Starbucks brand cannot afford to have unhappy baristas.

Putting monies into its employees is the right thing to do. Not just for the employees, but for all stakeholders. With a committed workforce, Starbucks, and any brand for that matter, has a competitive advantage. Focusing on the long-term health and welfare of employees at the expense of short-term stock gains is not an expense at all. It is an investment for high quality revenue growth.

JC Penney Marketing Branding

JC Penney Aims to Adore its Core

There is nothing like a core customer. Core customers already know what is great about your brand. Core customers are valuable assets. In branding, your priority must be to adore your core. 

But, apparently, core customer retention is just not as exciting or attractive to most marketers. They are always chasing the next, most contemporary, most hip cohort. Replacing regular customers with those who are only visiting your brand occasionally is a formula for failure. Spending resources to attract customers you do not have and who do not like you while losing customers you do have and who love you is a faulty brand-business strategy.  And yet, the allure of the cool, cutting-edge progressive customer appears to be too much to ignore.

So, it is a marketing rarity when a brand, and especially a CEO, decides to focus on core customers. This is precisely what the CEO of JC Penney has committed to do. According to The Wall Street Journal, Marc Rosen will be focusing JC Penney on its traditional, core customer base, those who already patronize JC Penney: budget conscious American families. As Mr. Rosen told The Wall Street Journal when comparing his strategy to previous failed attempts to revitalize the brand, “The difference this time is we are loving those who love us. We need to give them more opportunity to come back and find things they love.” Mr. Rosen is committed to repairing and restoring JC Penney’s core customers’ relationship with the brand. He wishes to reinforce what these customer like and love about the brand. And, he hopes that by taking these actions the core customers will frequent JC Penney more often.

Amen.

If you think focusing on the JC Penney core customer base is out-of-step with our times, think again. There are over three decades of data showing that focusing on the core is more profitable and better for the overall brand-business than chasing a possibly elusive group of customers. Data show that it is easier to encourage a core customer to use the brand a little bit more than to try to attract a new customer who does use the brand at all. Especially in a revitalization situation, as with JC Penney, one of the brand’s critical objectives must be to stop the shrinking of the core customer base while increasing their frequency of use. A small increase in core customer frequency can make a huge difference to brand health.

In a seminal, data-laden article in Harvard Business Review from 1990, Frederick F. Reichheld of Bain Consulting and W. Earl Sasser of Harvard Business School looked at service companies’ attempts to satisfy customers. They found that the successful companies aimed for zero defections among the customer base. In “Zero Defections: Quality Comes to Services,” Reichheld and Sasser discussed the danger of losing core customers (customer defections). They wrote, “Customer defections can have a surprisingly powerful impact on the bottom line. They can have more to do with service companies’ profits than scale, market share, unit costs and many other factors usually associated with competitive advantage.  As a customer’s relationship with the company lengthens, profits rise. And not just a little. Companies can boost profits by almost 100% by retaining just 5% more of their customers.” The research showed that just 5% of core customer retention increased profits from 25% to 125%!

Reichheld and Sasser pointed out that in general there is a tendency to focus on costs and revenues while ignoring the cash flows across a customer’s life-time. Brands tend to ignore the increased profitably of long-term customers. Writing in Harvard Business Review, Reichheld and Sasser said, “Across a wide range of businesses, the pattern is clear: the longer a company keeps a customer, the more money it stands to make.”

Aside from using a brand more frequently, long-term customers account for declines in operating costs. This is because brands have knowledge of the customer allowing the customer to be served in a more efficient and effective manner.  Core customers are willing to pay more for premium products or services. Additionally, long-term customers are good marketers as they recommend the brand to friends and family. Furthermore, customer acquisition is increasingly expensive. Data show that acquisition costs are climbing due to multiple media options, technology and hardware. It costs even more today to acquire a new customer than to satisfy an existing one.

A revealing chart in the Reichheld-Sasser article showed why customers are more profitable over time. Core customers already represent a base profit for the brand while acquisitions drain monies. It costs 4-6 times as much to attract a new customer as it does to keep a loyal customer. The longer a customer stays with the brand, there is an increase in frequency of usage, increasing profit even more. Add to these monies the profits from reduced operating costs, profits from referrals and price premiums and you start to see a core customer’s real worth.

Other data on core customers and profitably are equally compelling. Research has shown that a loyal customer is 8 times as valuable as those who just consider your brand. And, as JC Penney learned over the course of its past decades, losing just a small percentage of core customers accounts for a disproportionate amount of lost income for the brand. Loss of core customers also carves into the brand’s image and reputation.

Of course, a brand needs new customers. But a singular focus on new customers at the expense of losing the customers who love you is death-wish marketing.

The history of JC Penney since 2011 is littered with examples of seeking the new customer at the expense of disrespecting the core customer. In 2011, Board member activist investor Bill Ackman urged for the hiring of Ron Johnson whose success at Apple stores was legendary. The goal was to modernize and rev-up the image of JC Penney while seeking new customers who were less wed to budgets and promotions. Although investors approved of Mr. Johnson’s strategy, it turned out that core customers did not. According to the business press, the execution of Mr. Johnson’s strategy was “one of the most aggressively unsuccessful tenures in retail history” and that Mr. Johnson “had no idea about allocating and conserving resources and core customers.” Insisting that there was no time for testing, Mr. Johnson “… immediately rejected everything existing customers believed about the chain and threw it in their faces.”

After this fiasco, JC Penney thought it could leverage the death-march of Sears by focusing on appliance sales a category that JC Penney had stopped selling in 1983. This approach did not work either. Stores like Lowes and Home Depot had the appliance business covered. JC Penney could not compete. Further, appliances are purchases with long time frames of 12 years or more. Appliances alone are not conducive to generating frequency. JC Penney’s focus on large appliances left the brand at a disadvantage in smaller household wares such as glassware and dinnerware, items core customers wanted.

As The Wall Street Journal pointed out, JC Penney then segued into fitness studios, videogame lounges and style classes further alienating the core customer base. Sears tried this by offering home buying (Coldwell Banker), credit cards (Discovery) and investments (Dean Witter). Sears, too, lost its credibility with core customers.

JC Penney was basically on life support by the time Covid-19 hit. JC Penney filed for bankruptcy in 2020. After seven months, JC Penney emerged from Chapter 11.

Mr. Rosen is correct in his approach to revitalizing JC Penney. Core customers must be protected and cultivated. Core customers are at the heart of the brand.. The core supports the store.

Energies must be devoted to the core customer base. The core customer will profitability finance the revitalization while providing the platform for the future.  Focusing on core customer retention while increasing core customer frequency is the key. Mr. Rosen is committed to focusing on what core customers like and love about JC Penney. This will be the pathway to high quality revenue growth leading to enduring profitable growth. In a birthday ad, JC Penney is 102 years old, the birthday song singer is an ebullient woman who is noted as a “superfan” of the brand.

It is sad that many marketers find core customers boring. Core customers like the brand’s core equities, which so many marketers feel are out-of-date. The thinking is that we already have these customers so let’s find new ones. This is the kind of arrogance that leads to brand decline. The goal must be to modernize the brand’s core equities. Show that core equities are relevant to core customers and today’s newer customers, as well. Focusing on the core is not a chore nor is it a bore. When revitalizing a brand or building your brand into greatness, there is nothing more important than adoring your core.

Kohl’s And Activists Acting Badly

Activist investors are circling Kohl’s, the largest department store chain in the US. 

The activists’ complaints focus on Kohl’s share price not doing as well as they wish. In other words, Kohl’s activist investors are not making as much money as they would like to make. These investors are pushing for an entirely new Board that will in turn push for a sale. With a sale, these activist investors would make a lot of money immediately. After that, they would not have much interest in Kohl’s future. As Barron’s, the financial news magazine stated, it is unclear if a private buyer would be able to develop a strategy that would be any better than the brand’s current strategy. However, “… that wouldn’t be the shareholders’ problem anymore.”

Once again, a brand is being excoriated by value extractors who are only interested in their short-term monetary gain. The protests of these investors center around poor performance. This is just a euphemism for “the stock could be higher and we could be making more money.” The main activist fund pushing for a sale stated that a sale would be “value maximizing.”  A 2014 Harvard Business Review article, titled Profit Without Prosperity pointed out that an obsessive focus on shareholder value alone makes executives and shareholders happy, but it is a system that shortchanges overall, sustainable business prosperity.

Kohl’s is a department store and the department store category is facing challenges. Kohl’s is in a muddled middle space that feels pressure from discount stores at one end like T. J. Maxx and big box stores on the other end like Target and Walmart. (The original Kohl’s department store positioned itself as an affordable, but not discount, emporium with a wide variety of goods.) Many department stores such as JC Penney, Neiman Marcus, Sears along with its Kmart brand and others filed for bankruptcy.

In Kohl’s’ March 2022 investor call, there were many items to satisfy the activists. Kohl’s has increased its dividends. Kohl’s had a good holiday season. Kohl’s’ partnership with Amazon for pick-ups and returns is doing well. Kohl’s partnership with Sephora for stores-within-stores is attractive. Kohl’s made drastic alterations to its clothing lines dropping well-known brands with limited appeal while adding more popular brands. Kohl’s enhanced its loyalty program. 

Kohl’s executives were upbeat about the year’s outlook. Kohl’s reiterated its strategy for long-term growth: to be the store that sells all of the brands needed for leading a more active and casual lifestyle. And, although Kohl’s missed analysts estimates, the report showed topline “promise”. The strategy showed “momentum.” And, according to Barron’s, there were “impressive gains in high growth areas such as athleisure and activewear. (Kohl’s) does expect revenue to come in higher than expected for the year as a whole.” 

These impressive gains will not convince the short-termers, even though Kohl’s bet on athleisure is looking smart. Lululemon, the high end athleisure wear brand, posted strong earnings in fourth quarter 2021. Lululemon’s CEO stated that athletic apparel continues to grow “at a faster rate than” the apparel category in general.

As Barron’s made clear, those interested in a sale of Kohl’s “… have little interest in Kohl’s’ long-term strategic goals. If anything, those (long-term goals) are ongoing impediments….” None of the statements from Kohl’s during the investor call changed activists’ minds. 

When it comes to brands, this kind of “quarterly capitalism” from activists is a killer. Activist investors tend to focus on making that short-term dollar rather than supporting a brand strategy focused on short-term and long-term. The fact is that a for a brand to live it needs a strategy that includes both the short-term and long-term. If there is no short-term than there is no long-term. However, without the long-term, there will not be enduring profitable growth. 

In 2015, in a famous letter, Larry Fink, CEO of Black Rock, Inc., urged public companies to focus on long-term approaches to generating value or lose Black Rock’s support. He said that companies should actively avoid surrendering to the short-term pressures created by the increase in activist shareholders.

Also, in 2015, James Surowieki wrote for The New Yorker’s financial page, “it’s become a commonplace that American companies are too obsessed with the short term. In the heyday of Bell Labs and Xerox PARC, the argument goes, corporations had long time horizons and invested heavily in the future. But now investors care only about quarterly earnings and short-term stock prices….” 

In one of his New York Times Deal Book columns, Adam Ross Sorkin weighed in on short-termism pointing out that there is no excuse for “activist shareholders’ seemingly short-term financial engineering efforts like buy-backs, dividends, spinoffs and sales, which can quickly send shares spiking while potentially leaving the company more vulnerable later, especially when a company uses borrowed money to buy its own shares.” 

And just this past week, activist Bill Ackman announced that he and his hedge fund Pershing Square were ditching short-term activism. The new approach will be more “constructive” and “thoughtful” investing in brand-businesses that will outperform over the longer term. In the annual letter to shareholders, Mr. Ackman wrote: “We expect that these companies will grow revenues and profitability over the long-term, regardless of recent events and the various other challenges that the world will face over the short, intermediate, and long-term.”

Kohl’s as well is taking on the activists. In a shareholder letter, last week, Kohl’s stated that lead activist Macellum, led by Jonathan Duskin, “… is pushing for a hasty sale at any price” adding that this “reveals a short-term approach that is not in the best interest of the company’s shareholders.” The letter continued, “The choice is clear: re-elect the Kohl’s’ Board… or elect Jonathan Duskin and his associates to destroy value.”

For those who believe in brands, this activist behavior is troubling. At its most basic level, activists of this type shun the fact that there can be no shareholder value without customer-perceived value. In fact, in all the press reports describing the activist machinations, the words customer-perceived value never are spoken. 

Peter Drucker, the respected management guru believed that the purpose of business is to create a customer. Losing customer focus is a certain path to trouble. The future will belong to customer-focused businesses that are best at attracting and retaining customers resulting in sustainable, profitable share growth.

The greed squads of activist investors circling Kohl’s appear to have little interest in Kohl’s as a brand. They see a way to make a lot of money quickly. Kohl’s will wind up with a lot of debt. Then, the activists will lose interest in the brand. 

Enriching Kohl’s shareholders through a sale has the potential to destroy the Kohl’s brand, as Kohl’s stated in its letter. Growing shareholder returns through this type of financial finagling while failing to grow customer–perceived brand value leads to a weakened brand-business. 

Even Wisconsin senator Tammy Baldwin is upset with this activist initiative. Kohl’s was founded and is based in Wisconsin. In her public statement she said that a sale of Kohl’s would “… increase the risk of bankruptcy or imperil the jobs and retirement security of thousands of Wisconsin workers.” If you think this is hyperbole, think again: the activists who pushed around Toys R’ Us, putting it in bankruptcy, faced charges of ruining hundreds of workers’ retirement savings.

Activist investors like those pursuing Kohl’s do not unlock value; they exploit value for short-term benefit. Brands pay the price for these pecuniary, greedy actions. These activists focus on the bottom line. But, there cannot be sustainable growth of the bottom line unless there is quality growth of the top line. One thing is clear: you cannot cost manage your way to enduring profitable growth. For the Kohl’s brand to survive and grow, Kohl’s’ leaders must focus on satisfying customer needs rather than catering solely to shareholder riches.

Champion of Breakfast

Let’s talk about breakfast.

Coronavirus changed our work habits. Goodbye to the commute. Hello to Zoom and Google Duo. Goodbye to that brewed Venti. Hello to instant coffee. Breakfast at fast food restaurants took a big hit. However, Wendy’s breakfast – a newcomer to the morning meal – managed to leverage itself into a breakfast powerhouse. Wendy’s is now close to or actually replacing Burger King as the second biggest breakfast fast food brand.

Even with the constraints from Covid-19 lockdowns and its late entry into the breakfast category (right before the lockdowns), Wendy’s restaurants are now champions of breakfast. Wendy’s has McDonald’s in sight.

There are several reasons for Wendy’s breakfast success. 

  1. Breakfast is a routinized meal: Wendy’s leveraged this.
  2. Our bodies crave very specific foods in the morning. Wendy’s menu hit all the right buttons.
  3. McDonald’s breakfast was suffering even prior to coronavirus. Wendy’s kept momentum going.
  4. How people eat really matters. We eat with our eyes first. 

Breakfast is a routinized meal: Wendy’s leveraged this.

Most of us know we should eat breakfast. Yet, most of us treat breakfast as a routine. We tend to have the same meal every day. Unlike lunch and dinner, breakfast is the meal that repeats itself day in and day out. We have habits at breakfast. We do not mind eating the same thing every morning.

There are data showing that breakfast is a routine because we perceive this meal as being utilitarian. We need to start our day; jump start our system; start our day’s feeding cycle; or look for a convenient way to eat before work. Unlike lunch and dinner, breakfast does not have a hedonic goal. On a spectrum from physiological to psychological, breakfast is at the physiological end. Research by food purveyor Bob Evans Farms indicates that we see breakfast as both a priority and a chore.  

One reason for breakfast’s physiological urge is that our morning chemistry is different from our coffee break, lunch, afternoon snack and dinner chemistries. AM meals have different needs from PM meals. Scientists agree that energy needs, energy expenditures and energy utilizations differ by daypart. As one food scientist said, “What one prefers to eat turns out to be inseparable from the time of day one wants to eat it.”

Lockdowns, which halted some routines, also allowed us to create new routines. With a unique breakfast menu backed by heavy marketing and great pricing, Wendy’s was able to generate interest helping us create a new breakfast routine. As one food analyst told CNN, Wendy’s leveraged our lockdown boredom by offering a fun, new breakfast menu during the Covid-19 crisis.

Even though Wendy’s introduced its exciting breakfast just weeks before the lockdowns, CNBC stated that Wendy’s timing of breakfast was a plus rather than a negative. This is because with upended morning routines, people had the “opportunity” to begin new routines.

And, Wendy’s created foods that our bodies crave in the morning.

Our bodies crave very specific foods at breakfast. Wendy’s menu hit all the right buttons.

When we eat meals, we generally do not think about what our bodies crave at that particular part of day. But, what we reach for is based on bodily needs. Chemistry is involved. As one researcher put it, we do not get up in the morning craving ice cream. 

We are in a biorhythmic upswing in the morning. In the morning, we are energy depleted. We have not eaten for 10 or more hours. Our blood sugar is low; our insulin is down; our stores of carbohydrates are almost gone. We crave carbohydrates. Carbohydrates have a calming effect. Since mornings can be stressful, our chemical signals ask for carbs to smooth things out. As marathoners know, carbohydrates quickly convert to glucose. This helps us get going. Paired with some protein, we are ready to face the day.

Wendy’s Breakfast Baconator, seasoned potato wedges, its Frosty-ccino beverage and Honey Butter Chicken Biscuit are unique, delicious, carbo-rich, protein offerings. Wendy’s added a spicier Hot Honey Chicken Biscuit in February 2022.

McDonald’s breakfast was suffering even prior to coronavirus. Wendy’s kept momentum going.

If you are going to take on your competition, it is good to have a weakened rival. Next to Wendy’s non-traditional breakfast menu, McDonald’s menu is rather conservative. McDonald’s is now promising to infuse its breakfast menu with more “modern, trend” items. However, according to CNBC reporting, in McDonald’s recent earnings call, breakfast was barely mentioned. CEO, Chris Kempczinski merely told analysts that breakfast “…was one area of pressure.” This is clearly due to the altered competitive landscape where Wendy’s has performed in a most stellar fashion.

With a strong marketing budget and an enthused franchisee community, Wendy’s entered breakfast with a bang. Wall Street assumed that other fast food rivals would counter Wendy’s. After all, breakfast is worth protecting. This did not happen. Instead, McDonald’s and others cut advertising, cut hours, cut promotions and did everything else possible to save cash. One of the first pandemic changes McDonald’s made was to end its all day breakfast.

Wendy’s also made a strategic move that helped the brand boost its new breakfast at the outset of the lockdowns. Prior to lockdowns, Wendy’s had made its first two and half hours of breakfast drive-thru only. Mobility at breakfast is critical. Also, prior to coronavirus, Wendy’s went on a hiring spree. So, although Wendy’s franchisees faced some staffing uncertainties, Wendy’s was much better prepared than its rivals. And, Wendy’s made sure that the changes needed to provide the new breakfast menu would cost franchisees only $10,000 per store. 

Of course, McDonald’s is still the leader in breakfast.  But, it appears as if its ring-fence around the morning meal is being challenged. True, its breakfast menu is familiar and comfortable, but there has not been much news in McDonald’s breakfast. Compared to Wendy’s, McDonald’s breakfast line-up looks tired. Innovation is a critical driver for Wendy’s. In fact, Wendy’s reports that menu innovation has been essential to the brand’s successful breakfast daypart.

Other morning breakfast brands, such as Burger King, are also looking at their menus, thinking about ways in which to refresh offerings à la Wendy’s.

How people eat really matters. We eat with our eyes first.

Yes, physiology matters. But, perceptions are important. Our eating is governed by our mind as well as our body’s needs. Our eating is actually quite mindful, even though we may be eating the same thing on autopilot

We eat with our eyes first. Then, as scientists relate, the food must pass the nose test, then, the mouth. The stomach’s cravings start with the eyes. There are many receptors that must be satisfied.

Food must look delicious. Then, food must smell delicious. Then, there is the satiation that comes from chewing and texture. All this before you swallow.

Portion size, size perception, bite height, texture and eating time are all signals for satiation. The fact is that when the eyes see a big portion, the brain signals that the food will be filling. If the food is dense, it will take longer to eat, which also makes the food seem more filling. When we see more food on the plate, we automatically expect to be more satisfied. 

Bite height matters. The wider you open your mouth, the more your brain tells your stomach “big food is coming”. The more you chew, again, is a signal of substantial food. The longer it takes to eat, the more our brain tells us “satisfied”. The denser the food, the more satiated we become. A potato is denser and more satiating than a croissant. Carbohydrate-rich and protein-rich foods are more satiating than snacks, confectionary and baked goods.

Wendy’s Breakfast Baconater is a big, dense, “open wide”, carbo-and protein-rich sandwich. The potato wedges are also dense and satiating. 

Prior to our coronavirus lockdowns, marketers would have said that people are not going to change their behaviors, let alone their breakfast behaviors. But, Covid-19 did something extraordinary. It gave people permission to change behaviors. From Pelotons to Amazon Prime deliveries to multiple streaming subscriptions, we made significant behavioral changes, including breakfast.

Yes, we mostly ate breakfast at home. But, many of us still used restaurants’ drive-thru’s for breakfast; we just changed our venue and our time for obtaining that breakfast. Furthermore, we really desired some newness to combat the stay-at-home drudgery. Wendy’s breakfast delivered on all fronts.

Wendy’s managed to make breakfast 8.5% of total sales as of late 2021. In its latest earnings call (March 1, 2022), Wendy’s executives told analysts that US same-store-sales grew 11.6% on a two-year basis driven in part by growth in breakfast. Promotions helped drive “significant trial of breakfast with meaningful increase in buyer penetration, but also increased Wendy’s breakfast awareness.” Additionally, Wendy’s reported that “Looking back on the full-year, the brand made significant progress growing breakfast sales by approximately 25%….” Aside from promotions, menu innovation was a significant driver of breakfast. The menu news drove trial of Wendy’s breakfast while “further ingraining the (Wendy’s breakfast) habit….”

The Wendy’s executive team shared its belief that “…the breakfast business in the US will accelerate in 2022 by approximately 10% to 20%, taking average weekly US breakfast sales to approximately $3000 to $3500 per restaurant by year-end.” Furthermore, Wendy’s breakfast is sending a strong message about the quality of lunch and dinner at Wendy’s. Wendy’s is not just growing breakfast, but growing the rest of the day as well.

Barron’s, the financial news magazine, reported on March 21, 2022, that Wendy’s is an excellent stock. David Palmer, a food restaurant analyst at Evercore ISI, told Barron’s that Wendy’s is “… an accelerating growth story….” Citing another advisor, Barron’s quoted, “They’re (Wendy’s) getting more aggressive on digital, and not just mobile ordering, but incorporating incentives to keep customers coming back” through the loyalty program. “And, compared to other burger-focused competition, they’ve got a good product. Along with consistent, steady growth… those reasons make it a top pick.”

Kudos to Wendy’s. 

The home of the square burger initiated breakfast at an awful time. One would think that Wendy’s would have failed. But, no. Wendy’s turned awful into awesome. Wendy’s offered new, exciting, deliciously satisfying breakfast items fit for our morning needs and our lockdown mentality, along with exciting and affordable promotions. And, because Wendy’s gave us unique breakfast items while leveraging McDonald’s’ weaknesses, we changed our breakfast habits. Wendy’s lucked out. But, so did we.

Rescuing A Brand By Reimagining Its Purpose: Kirin and Innovation

In our fast-changing, volatile world, brands need customer-insight driven innovation. Innovation breathes life into brands. Innovation keeps brands relevant in the eyes of customers. But, not all innovations need be inventions. Some innovations can be reimagining existing processes and technologies for new uses. Innovation is the use of a better, and as a result, new idea or method. Invention is the generation of the idea or method itself. Innovation differs from improvement as innovation means doing something differently; it does not mean doing the same thing better.

Innovation is the challenge that Kirin is taking head-on. Kirin is the Japanese brewery brand with the namesake beer, Kirin Lager and another most popular Japanese brand, Ichiban Shibori. Like many Japanese firms such a Yamaha, Kirin is a huge, multi-national organization. Kirin has holdings not just in brewing but across other categories such as restaurants, agribusiness, food, healthcare, pharmaceuticals and nutrient foods. Kirin is part of the even larger conglomerate, Mitsubishi. 

When it comes to its beer brewing business, Kirin is experiencing the pain of Japan’s demographic decline. The Japanese beer market is in a steep downward dive. The Japanese beer market has declined by one third since 1994. Also, coronavirus has had a negative impact on beer drinking since people did not go out to bars, restaurants, events or clubs. 

Rather than continuing to focus on a declining business, Kirin is going to use its brewery knowledge to “… turn Kirin into a fermentation biotechnology company” according to a report in Financial Times. Fermentation has health benefits and is already part of health foods such as yogurt, kimchi and kombucha. Kirin will innovate to focus on customer wellness needs. Fermentation is one of the oldest, and one of the latest, ways in which foods can become even more nutritional.

Kirin’s CEO told Financial Times, “If the beer segment would grow forever, it would’ve been better for us to focus on it, because making a challenge in a new business is very tough.” 

Tackling this challenge head-on though is an absolute necessity for keeping the Kirin brand alive and well and relevant.

One of the most troubling tendencies of brand management is believing that what worked yesterday will work today. Doing what once worked when the current landscape is different makes no sense. Thinking that yesterday’s successes will continue to propel a brand to tomorrow’s successes is inward looking. The brand misses what is happening now and what can happen down the road. And, rather than be complacent, Kirin is taking action to change its status quo.

Customers change quickly. Behaviors can change overnight if faced with new realities. Just look at the demand for delivery of restaurant meals and grocery items. And, interestingly, behaviors can revert back quickly as well. Brands such as Zoom and Peloton have found out that their pandemic highs have reversed due to reordered, revised and reversed needs.

The poster child for holding on to what worked in the past is Kodak. There was a time when Kodak was ubiquitous. Kodak moments brought tears and joy. But, Kodak lost its footing by clinging to haloid film as the world went digital. Kodak continued to produce what it knew how to produce rather than what produce what customers wanted. Kodak defended the past and was defeated by the present. The brand declared bankruptcy in 2012.

While Kodak was doubling down on the past, its rival, Fuji Film focused on the future. Facing the same landscape of digital over haloid, Fuji saw a bigger picture. Fuji saw itself not in the “film” business per se. Film is essentially molecules and elements. Fuji decided to use its knowledge of the science of film. Fuji scientists understood that the film used in cameras comes from collagen. Collagen is big business for youthful-looking skin. Aside from skin care, Fuji scientists began working on Ebola drugs, anti-aging potions and stem cell research. All of these products benefit from the basic science of film.

Fuji reimagined how to use its knowledge base and scientific expertise to address different customer beauty and health needs. Rather than continue to defensively focus on salvaging haloid film, Fuji took the offense and saw itself as a science company.

Kirin is taking this same approach. Kirin will be using the beer-brewing process, whereby “…sugars are converted by yeast to alcohol…” to generate biotech products. According to Financial Times, Kirin wants to grow LC-Plasma, a proprietary ingredient used in health drinks. Kirin sees the potential for LC-Plasma for beverages and foods produced by third parties.

Additionally, Kirin has a supplement called Citicoline. Citicoline is a memory-improving supplement that is already sold globally. In a world that is growing older, most especially in Japan and Europe, this supplement is a solution to an increasingly critical customer need, remembering.

In a study (Innovation Study: Beyond the buzzword) conducted by Deloitte, the global business services firm, data show that “higher growth companies spend less time looking inward and more time responding to customer needs.” These firms lead innovation with customer needs while relying less on “internal operational needs.”

Innovation is risky. But, innovation can also be incredibly successful. However, innovation is easier said than done. The Wall Street Journal’s Heard on the Street column highlighted tech companies that are pitching major change to investors but not exactly living up to their promises. The article subtlety warns investors not to fall for the “seductive” presentations. As the sub-headline states, “Virtually every technology company will tell you it is changing. Don’t believe it until you see it.” For example, Twitter co-founder and ex-CEO Jack Dorsey said he was stepping down because he wanted Twitter to evolve. The new CEO said things would change but nothing has been implemented.

Innovative ideas are what will keep brands relevant and competitive. There is nothing more powerful than an innovation in action. But, innovative creativity takes courage. 

Failure to innovate is death-wish brand management. In an ever-changing, increasingly competitive world, brands need customer-insight driven innovation to stay relevant. Innovation creates new customer value through solutions that meet new needs, unarticulated needs or old customer needs in new ways.  Continuous improvement is a constant brand-business essential. Innovation keeps brands relevant, differentiated and top-of-mind. Continuous innovation is an imperative for high quality revenue growth leading to enduring profitable growth.

Although innovation on the scale that Kirin is pursuing can be risky, throwing money at methods that worked yesterday is a massive miscalculation. Fortune favors the bold.

Brands and Warnings Labels: Europe’s Nutri-Score and Lessons From The US

Beginning in 2017, Nutri-Score, the European food labeling system, went into effect.  Nutri-Score is a color-coded, front-of-pack labeling system created to alert consumers to the nutritional content of food. Nutri-Score is a red light-green light approach that the EU hopes will help consumers make better food decisions.

According to FoodNavigator.com, Nutri-Score ranks food stuffs from -15 for the healthiest product to +50 for the least healthy. Using an algorithm, Nutri-Score assigns a “grade” with a corresponding color from dark green (A) to dark red (F). 

The algorithm merges data on fat, sugar and salt content per 100g/ml of a given product, comparing against fruit and vegetable content, fiber and protein. So, for example, cheeses, European cultural icons, are 80% of the time “penalized” with a D or an F… the dark red doom designator. According to online NewsTex Blogs, the protected-origin producers of Italian cheeses Parmigiano Reggiano, Grana Padano and Asiago are furious. Parmigiano Reggiano is allowed to use only three ingredients – cow’s milk, sea salt, rennet – and not allowed any additives or preservatives. Yet, these national treasures will be graded as dangerous.

Spain’s meat industry is up in arms, believing that Nutri-Score focuses on “negative ingredients” sorting foods into “good foods” and “bad foods”. Italy believes that Nutri-Score is a cultural tsunami designed to wipe out its cuisine. The Mediterranean Diet is considered one of the healthiest in the world according to UNESCO, as well. However, Nutri-Score rates Italian food stuffs such as cheese, cured ham and olive oil as less healthy. Spain has decided not to use Nutri-Score on its olive oil.

The stated reason for Nutri-Score is Europe’s high level of obesity. One in two Europeans are considered overweight or obese. The European Consumer Organization believes this is a public health crisis exacerbated by COVID-19, since weight is considered one of the pandemic’s biggest risk factors. Reporting on Unilever, Financial Times pointed out that The World Health Organization (WHO) states obesity has tripled globally since 1975. And, although governments are looking to combat obesity, there are “contentious” issues as with confectionary and “treats”. Financial Times quotes a financial advisor who indicated obesity is now considered an ESG issue (environment, social, governance). But, he said, to think that labeling and other initiatives will stop Lindt from selling chocolates or Diageo from selling alcohol will just not fly in Board rooms. Shareholders will not shoot themselves in the foot by eliminating the dividends.

Nutri-Score aims to change consumers’ behaviors. The hope is that consumers will see the colors and the letter grades and make healthier food choices because of the foods’ nutritional composition. With this transparent “health” information on the front of the package, consumers will compare items not just on price but on being a better overall nutritional choice.

Although dished up as a nutritional classification system, Nutri-Score is essentially a warning label. After all, if your brand is marked with a dark red F, the implication is “eat this and you are one bite away from a coronary.” This dark red F is today’s scarlet letter.

As you can imagine, Nutri-Score has engendered a lot of push back. Six global brands – Nestlé, PepsiCo, Coca-Cola, Modelez, Unilever and Mars launched their own system, an initiative that quickly failed. The common agreement among the big global food companies is 1) that there are no bad foods only bad diets; 2) that all foods have nutrients; and 3) a balanced diet has room for a Snickers bar or a soft drink. Just remember to eat in moderation.

Even with all of the push back and national indignity, most of the large food firms have signed on to Nutri-Score. Several supermarkets, such as Carrefour and Lidl have also signed on. 

The European powers that be and the signatories to the labeling are quite vocal that based on research Nutri-Score is the best “labeling scheme” currently available. This caveat should be kept in mind: Nutri-Score is not perfect, but it is the best we could do. Several different warning labels were tested; Nutri-Score was the winner… perhaps the best of the worst?

The CEO of Danone said “… no system is perfect, yet the company sees Nutri-Score as the best label currently available for people to compare products’ nutritional quality at a glance. We support the call to make it mandatory in the EU.”

The CEO of Euroconsumers, an umbrella organization designed to “promote and defend consumer interests” across a wide range of topics such as freedom of choice and right to health issues, agreed. He said research from several European countries “… shows that Nutri-Score is the easiest label to understand and the best-performing scheme in aiding consumers to compare the nutritional value of foods and range of products.” Again, based on the different options tested, Nutri-Score was the easiest to comprehend at a glance: green good/red bad.

In the US, we are familiar with warning labels. 

It is difficult to find a product that does not have a warning label on its package. From baby wipes (the plastic package can cause suffocation, do not flush the wipes) to vehicles (keep the visor closed so the air bag can deploy, SUVs have a high risk rollover) to Whole Foods rice pilaf products (contains wheat ingredients, may contain milk, eggs, shellfish fish and soy).  

When it comes to warning labels, California leads the way. if you want to have your pants scared off, go into any common laundry room in an apartment building. You will see warning signs that washers and dryers are dangerous to your health. This warning comes from California’s Prop 65. California’s Prop 65 states that appliances may contain harmful chemicals that can cause cancer and/or birth defects or other reproductive harm. Prop 65, introduced in 1987, has a list of over 800 potentially dangerous chemicals. For example, if you were thinking of a new couch from Wayfair just remember that California Prop 65 can put a warning label on your desired product. The warning will alert you that the sofa can expose you to levels of a listed chemical or chemicals that pose greater health risks than another piece of furniture with lower levels of listed chemicals. Do I want to binge TV on a bad-for-my-health couch? 

California is an extreme example. However, the issue is, do warning labels work? People still buy and use washers and dryers. People still buy furniture. Do warning labels actually change behaviors? Are warning labels good or bad for brands? 

Clearly, warning labels protect the manufacturer from liability issues and PR nightmares. Peloton had a crisis this past year when a child was killed by its Tread product. Peloton fought a warning label but eventually conceded. Did the warning label stop consumers from purchasing the product? Or was it the cost? Or was it the decision to return to the gym? Or the decision to return to the outdoors?

The warning labels on cigarettes and alcoholic beverages provide some important information on behavior change.

In 1969, the US passed the Public Health Cigarette Smoking Act. This act prohibited cigarette advertising on TV and radio. It also required each cigarette pack, carton and print ad to carry a warning label: SURGEON GENERAL’S WARNING: The Surgeon General Has Determined That Cigarette Smoking is Dangerous to Your Health. The warning label was – and still is – a white rectangular box with black letters. A recent print advertisement for Lucky Strike brand, used this version of the warning: SURGEON GENERAL’S WARNING: Smoking by Pregnant Women May Result in Fetal Injury, Premature birth, And Low Birth Weight.

Kodiak Moist Snuff (chewing tobacco) runs a black box (twice the size of the cigarette warning box) with white letters stating, WARNING:  This product can cause mouth cancer.

Do these warning labels work? Here is what we know. First, seeing a warning label is not the same as reading a warning label. Reading a warning label is not the same as heeding the warning label. Second, people who saw the white box knew it was the warning label. They did not need to read it; they knew it was a warning. Why bother, I know what it will tell me. Third, graphic labels of cancerous mouths, etc., such as some countries use, had negative impact on the image of cigarettes and cigarette brands but did little to affect cessation of smoking.

When the Public Health Cigarette Smoking Act was passed in 1969 cigarettes cost 25 cents a pack. Today, a pack of cigarettes costs, on average, $6.98, or about 35 cents a cigarette. In the state of Florida, smokers pay around $63 dollars for a carton of cigarettes.  In 1970, the highest price for a cartoon of cigarettes might have been $3.50. Many believe that cigarette smokers’ behaviors changed due to the rapid increase in prices rather than the warning labels. There are still, 53 years later, multiple PSA TV ads advising us not to smoke. Even at almost $7 a pack, people are still smoking. 

In 1988, The Alcoholic Beverage Labeling Act was passed. After November 1989, all alcoholic beverages had to alert consumers to the multiple health issues associated with alcohol including reproductive issues and fetal harm. The current alcohol warning states: GOVERNMENT WARNING: 1) ACCORDING TO THE SURGEON GENERAL WOMEN SHOULD NOT DRINK ALCOHOLIC BEVERAGES DURING PREGNANCY BECAUSE OF THE RISK OF BIRTH DEFECTS. 2) CONSUMPTION OF ALCOHOLIC BEVERAGES IMPAIRS YOUR ABILITY TO DRIVE A CAR OR OPERATE MACHINERY, AND MAY CAUSE HEALTH PROBLEMS. (Yes, the alcohol warning label is in capital letters.)

In one alcohol study, data showed that 64.3% of purchasers saw the warning label; 38.8% of purchasers read the warning label; 25.5% of purchasers said they heeded the warning.

In the US, after decades of food labeling, the results of behavior change are still unclear. A recent study by The American Journal of Preventive Medicine showed labeling “… reduced the intake of calories by 6.6 percent, total fat by 10.6 percent, and other generally unhealthy choices by 13 percent. They also increased vegetable intake by 13.5 percent.” However, these data are not reflective of other data showing that after all the decades of food pyramids and nutritional labeling, there is little agreement and little evidence that food labels affect consumers’ intakes of total carbohydrates, protein, saturated fat or sodium. Nor did labels affect consumption of fruits, whole grains, or other healthy options.

Nutri-Score may be experiencing the same lack of clarity as to effectiveness.

A recent November 2021 Belgian journal article’s data sets showed that Nutri-Score consumer purchases were mixed. There were some positive effects. However, the study concluded that “shelf labeling on its own is unlikely to significantly influence consumer behaviors.”

Other European data indicate that the degree of influence Nutri-Score has on consumer decisions is unclear. An August 2021 study showed consumers were still not clear about the color-coded Nutri-Score. A 2019 Nielsen study showed that only 14% of French consumers “noted the guidance of the Nutri-Score label.” Not surprising when you consider that beloved Brie or Camembert cheeses as well as butter are on the wrong side of the system’s health spectrum. This goes against centuries of French gastronomy.

One of the issues plaguing the Nutri-Score system is credibility. Since its algorithm factors in sugar content, Nutri-Score rated orange juice as unhealthy but rated Coca-Cola Zero healthy. In a Nestlé-generated survey, sixty-percent of consumers thought the Nestlé cereal brands would score well below a C on Nutri-Score. But, Nestlé publicly touted Nutri-Score ratings that its sugared cereals actually earn a C or above on the Nutri-Score spectrum. This is because the system has a positive bias for fiber. 

Hopefully, the Nutri-Score system will evolve its algorithm to better reflect the fact that there is a benefit to the idea of balanced diets and moderation. Nutri-Score should fix the blanket rejection of products such as meat. Putting ecological concerns aside, meat does contain iron, vitamin B12, protein and minerals. Nutri-Score does not currently assess the impact of trans fatty acids, something else that meat does not contain. And, Nutri-Score should take into account that not all obesity can be affected by diet. Further, the risk to national cuisines is real and needs to be calibrated. The algorithm also must include portion sizes, a real problem in the US. 

Also, algorithms do not recognize the fact we first eat with our eyes. Foods have hedonic feelings associated with taste and emotions that no algorithm can take into account … as of yet. People eat for both physical and physiological reasons. There are differences between eating when one is hungry versus eating for indulgence. Taking delight out of diets is dreary.

Warning labels are all around us, stuck on brands across all categories. We have learned over time that the effect of such labels do some good but less than expected. In many cases, the warnings are ignored, or accepted, or accepted and then ignored. Certainly, it is important to point out that some items are dangerous. For example, the plastic bag draped over your dry cleaning can cause suffocation. 

Behavior change is tough. In fact, in most instances, facts, data, experts, or science make people dig in their heels. Social science research on behavior change indicates that asserting science, facts or data to change minds generates a “backfire effect”. When confronted with information that is contrary to set beliefs, some people become even more set in their ways. 

This is not to say that behaviors can never be changed. Wanting consumers to change their behavior is not a losing battle: it just requires a different strategic approach. The best way to change behavior is to provide an alternative, desirable solution to their concerns. This is something that Nutri-Score does not provide.

If history is a factor than the Nutri-Score warning label will have an unclear, if limited, effect on behavior change. 

Apple Brand

Brand Pioneering In Today’s High Tech World: Advantageous?

Technology brand-businesses are today’s most valuable, leading entities. According to the financial firm, Charles Schwab, Tesla, Apple, Amazon, Microsoft and Alphabet rule the roost. Were these brands the pioneers in their categories? Or, were these brands early leaders or followers? What does the success of our current brand-business behemoths tell us about making it for the long run? Just what does it take to go from an idea to powerful, valuable, great, enduring profitable brand-businesses?

There is a place for answers to these questions. 

In 1993, two professors, Peter Golder and Gerald Tellis, wrote an article titled, “Pioneer Advantage: Marketing Logic or Marketing Legend?” The article raised one of marketing’s most interesting questions: do pioneers in a category always grow and become great, enduring profitable brands? Or, are pioneer brands inventive but impermanent, replaced by an “early leader” or “follower” brand?

Following up on their seminal thesis, Golder and Tellis wrote, “First to Market, First to Fail? Real Causes of Enduring Market Leadership” (1996). This second article’s abstract stated that Golder and Tellis discovered “… many category pioneers fail while current brand leaders are not pioneers.” 

Reading the articles is like being in a brand-based way-back machine. The cited pioneering brands that created categories and were shining stars for their eras, all crashed, burned and faded away. But, early leaders and followers introduced other brand-businesses that became, and in many cases, still are the category winners.

For example, disposable diapers. Today, we have two brands that own the disposable diaper category: Pampers and Huggies. But, neither of these brands were the original disposable diaper. Before there were Pampers and Huggies, there was Chux. Chux arrived in 1935. Yes, 1935. Chux were expensive but “great for traveling.” In 1962, Consumer Reports magazine stated that Chux were “the best” disposable diaper. Chux was a brand from Chicopee Mills, owned by Johnson & Johnson. Several years later, both Pampers and Chux were evaluated as best buys. The rest is history. 

Golder and Tellis did not just look at packaged goods. They also focused on personal computers and video recording.

Let’s face it: we all believe that Apple opened the door to personal computing. And, what about HP? But, no. MITS (Micro Instrumentation and Telemetry Systems) was first. As stated in their article, Golder and Tellis recounted that in 1976, Business Week “referred to MITS as the IBM of home computers.” Additionally, Business Week stated that MITS was the “de facto standard” for the category as well as the industry. Okay, but today MITS is never thought about or, worse, unknown. 

As for video recording, something we really no longer need to do what with streaming, Ampex was the hands-down leader. Ampex created the video recorder. That was in 1956! An Ampex video recorder cost $50,000.

At the time, RCA and Toshiba were behind Ampex. The category was intriguing for Sony, JVC and Matsushita, however.  And again, Ampex went away while Sony, with its customer focus and $500 price tag, for example, endured and thrived.

Golder and Tellis discuss other pioneer brands that created a category and lost to later entrants. You may think that Miller Lite was the first light beer, but no. For those who live in the brand history repository, there is Gablinger’s.  Gablinger’s was a brand from Rhinegold (another long-gone brand-business). Rheingold was a favorite New York State beer brand: that once had 35% of New York’s beer market. Rheingold died in 1975. As for its light beer pioneering brand, Gablinger’s was never able to match the marketing heft of Miller Lite powered by Philip Morris. Philip Morris funded a marketing effort that few could match. Remember that Philip Morris had a lot of cash: the firm owned the Marlboro brand. 

And, there was the brand described in 1960 as “The world’s biggest chain of highway restaurants; the pioneer in restaurant franchising; a most strongly entrenched factor and highest quality investment; and, the most fabulous success story in restaurant chains.” No, not McDonald’s: Howard Johnson’s.

The annals of brand-business are littered with the detritus of dead brands, brands that were once the innovators. Golder and Tellis found that pioneer brand-businesses had a failure rate of 47%. Pioneering brand-businesses had a mean market share of 10% and “were current leaders in only 11% of categories. Early leaders, defined as “firms that enter after pioneers but assume market leadership during the early growth phase of the product life cycle,” had a minimal failure rate with a market share “three times” that of the pioneer. Early leaders were, at the time, brand-businesses that entered the category 13 years after pioneers.

The result of Golder’s and Tellis’ research found that early market leaders, have five critical factors that drive performance: 

  1. Vision of the mass market, 
  2. Managerial persistence, 
  3. Financial commitment, 
  4. Relentless innovation, and 
  5. Asset leverage.

Vision of the Mass market propelled Ford Motor Company. But, it was also a factor in the success of Kodak film, Pampers and Sony. George Eastman (Kodak) saw that if film developing were made easy, more people would take pictures. Procter & Gamble used its knowledge of mass market consumer products to make disposable diapers affordable. Masaru Ibuka of Sony saw the possibility of video recorders in homes around the world. 

Managerial persistence is a mindset that focuses the enterprise on long-term commitment to a product or service. This may take years. But, as successful brand-businesses know, brand building is an ongoing, never-ending process towards a North Star. P&G was notorious for its lengthy R&D behind products as were Sony and JVC. RCA spent a decade pioneering color TVs.

Having the funds to hang in there, innovate and market matters. Financial commitment allows brand-businesses the luxury of long timeframes. And, as the Golder-Tellis research showed, it is not just having the money: it is the willingness to spend it on the vision.

Relentless innovation is critical for long-term successful performance. Pioneers have an invention. But, as we have learned with technology, there is always something new, better, smaller, faster or more creative. Firms that do not have the drive to constantly and consistently innovate, fall behind. Gillette was torpedoed by the introduction of stainless steel shaving blades from Wilkinson Sword. But, determined to maintain its market share, Gillette innovated with its Trac II, followed by the highly innovative Sensor. Wilkinson Sword had the innovations but it could not match Gillette’s financial commitment.

And, finally, the professors point out that late entrants can often become leaders in a category if they already have a dominance in a related category, assets which they can leverage. For example, in the early 1960s, Royal Crown (RC) owned the diet soda marketplace. But, both Coke (Tab) and Pepsi (Diet Pepsi) were able to leverage their dominance not only in carbonated beverages but in distribution. Wisk liquid laundry detergent (the “ring around the collar” eliminator), was such a strong brand that it was able to fend off P&G for over a decade or more until P&G agreed to make Liquid Tide in the late 1980’s.

According to Golder and Tellis, these five factors were more important in determining successful long-term leadership than having the pioneering invention. And, even though these principles were observed 36 years ago, they still hold true in our high tech digital world.

Let’s look at those brand-business stocks identified by Charles Schwab: Tesla, Apple, Amazon, Microsoft and Alphabet.

Tesla is a great example. Elon Musk did not invent the electric vehicle. The first electric car in the United States was developed in 1890–91 by William Morrison of Des MoinesIowa. According to history, this six-passenger wagon could reach 14 miles per hour. But, vision, commitment, money and innovation has propelled Tesla into a leading position.  Lucid and Rivian have stumbled recently due to supply chain and inflation issues. Ford just announced that it will separate its electric vehicle group from its gas-powered vehicles to generate the focus needed to perform long-term. The Wall Street Journal stated that Ford wanted to channel its “inner Tesla.”

Apple did not invent the personal computer. But, it became a long-term performance-leader through relentless innovation and the driving vision, creativity and persistence of Steve Jobs, generating the financial wherewithal to continually design and innovate. Furthermore, Apple has been able to leverage its assets in personal computing into iPods, iPads and telephones.

Let’s not forget that being the store selling to everything to everyone was Sears. Amazon came in and made a digital version. Decades of commitment, vision, persistence and financial resources as well as leveraging its assets in data collection and management have led to its leadership. Financial commitment behind a vision allowed Amazon to buy Whole Foods. Amazon is now leveraging its digital adeptness into changing the grocery experience.

Microsoft did not invent software. But co-founder Bill Gates had a vision for mass software usage. He wanted to see a world where there was a computer on every desk. Microsoft did not make computers or desks. But the firm recognized the massive mass power of the software that ran these computers. Persistence, vision, innovation, and eventually, asset leverage, allowed Microsoft to grow and become ubiquitous.

Alphabet’s Google did not create the Internet not did it create the search engine. Its founders created a better way to search on the Internet. Again, the vision was for anyone who wanted to search the Internet, the information would be easily accessed. Persistence and continuing innovation propelled the enterprise to where it is today. Alphabet currently leverages its data, digital expertise and innovation across a broad spectrum of companies

Although none of these companies were pioneers, they are now five of the most valuable brand-businesses on this planet. Start-ups should pay attention. As Golder and Tellis conclude, “… being first to market by itself is neither necessary nor sufficient for enduring market leadership.” Seeing the mass potential, having managerial persistence, the availability of funds to power the idea, being relentless in innovation and being able to leverage established assets are what make or, if not there, break a brand-business.