From: Schmid-Preissler Strategy Consultants

Crisis, Recession or What?

Readers of BriefLetter or recipients of our Synesis have known our assessment for a long time already. What we mean is that what we are experiencing today is neither a crisis nor a recession. We characterize this situation as a break. A break with the past. We wrote about it in the essay “The last 50 years have passed”. 

It is not about pondering how to cope with the crisis, about how to get out of a recession. It is now time to define in every business, in society and politics, the future primary values and along with them to necessarily develop new strategies for the future. 

It is essential to take stock in all areas, to filter out the substantially valuable and to put it together to a new performance indicator. Less has to be more in the future. The “every year increasing turnover” can no longer be in the center of strategic thoughts. The goal has to be to achieve a substantial profit. Only with such a profit can new goals be reached. 

It is imperative to procure certainty in regard to availableness of knowledge and expertise of employees, because with too few or even no employees with enough knowledge and lots of experience a future cannot be shaped. 

It is essential to rigorously verify products and services in regard to their superiority as compared to the offer of the competition. In the best sense, distance has to be created and expanded. 

It is it is necessary to be prepared for consumers keeping a close watch on the price/performance ratio during purchases for products meeting needs. For purchases taking place in the big field of satisfaction of wants, more attention is going to be paid that the intrinsic value of immaterial values emanating from Premium and Luxury brands is going to be expressed and as such dreams and wishes of the buyer are going to be fulfilled. The latter is very important, especially in times where money is spent cautiously and prudently. Surely, it is going to be easier for people to extricate themselves from bad times, if they can strike a balance between reality and beautiful experiences. Wise and sensitive marketing are in demand here. 

We suggest to look less to the left or right, but to be self-concentrated and to concentrate on the relationship to the customer. The livelihood of a business and its success actually depend on ones performance ability and on ones attitude towards the customer.

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Re: WSJ: Milan Woos the New Frugal Luxury Shopper

Re: Today's Wall Street Journal. 

Touting runway designer clothing as an "investment" is a bad idea. If branding teaches us anything, it is that your brand is your promise to your consumer, it's your contract, your bond. So, why make a promise that you know you will disavow a year or two from now? Does anyone really envision next year's ad pitch to be " you don't have to buy much this year because you bought well last year? Is this what we'll be saying next year? I don't think so.

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Starbucks: Grinding The Numbers, Losing its Soul

Re: Cold Coffee, NY Times, August 2, 2008

Bravo, The New York Times.

But Starbucks, What have you been drinking. lately?

When you're a 5000 store chain, boasting outlets all over the world,  and a national newspaper begs you to keep open one, 1000 square foot location, one would think this might get the attention of the cost cutters. 

Has everyone in charge of the Starbucks brand been fired, already? 

"Maybe cutting these particular costs might be more expensive than we calculated" they might ask. 

"Are there some "off-financial-statement costs here that we haven't accounted for?" 

"Maybe our customers thought we stood for something more than just the opportunity to buy an expensive latte?" 

"We used to talk about building our reputation, did that ever matter?"

"Has anyone checked what we told the community planning board when we were lobbying to open the store and the neighborhood was concerned that the shop, previously there for 25 years, might be forced to close?" 

"Do you they will remember this closing when times turn and we are again wanting to expand into their neighborhood?"

 "I know it's a longshot, but do you think any of the locals travel out of the neighborhood and might actually tell people what we're doing?"

Just some non-financial-analyst metrics that Starbucks might add to sharpen its grinder.

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Cutting Its Costs, Starbucks Brand Begins to Bleed

Re: To Starbucks, a Closing; To Newark, a Trauma, NYTimes, July 23, 2008

Starbucks explains the planned closing of its Broad Street, Newark store very candidly: ““We used several criteria to determine stores for closure, including identifying locations that were not profitable at a store level and not believed to provide acceptable returns in the foreseeable future.” Where's the assessment of the impact of a store closing on the company's reputation, on the Starbucks brand? 

Clearly, financial criteria are important to the consideration. Surprisingly, for a business that is so brand driven and profits so much from its investment in its brand,   there is no indication that a brand strategy is playing any role in planning the Starbucks retrenchment. To be sure, Mr. Schulz, clothed his comeback in the language of “brand values” and “return to the brand’s roots”.  But, where's the meat? In fact, no brand planning has surfaced as of today. Instead, Starbucks is cannibalizing its brand and sacrificing it on the altar of satisfying the financial goals imposed by Wall Street.

Some very smart person once said, “it’s not whether you fail but how you deal with your failure that reveals who you are.” And that’s true of brands as well. These times will reveal much about Starbucks and will set the foundation for its future success or failure.

Starbucks sold itself as a “different” type of coffee company. It was the American adaptation of the European coffee house, the neighborhood coffee house. People friendly, the café’s were stocked with newspapers and periodicals and invited customers to linger while enjoying their quality coffee time. It was also a company that was good to its people: good salaries, advancement possibilities, good ingredients in its foods, good coffee purchased from the right parts of the world. Starbucks was a trend-setter which “proved” during its rise that you can be a good corporate citizen as well as a highly successfully company. These were some of its hard earned brand equities.

People felt good when they sipped their Starbucks; they were part of a good thing. Who can measure how much of the premium they knowingly paid for their Starbucks was for the better roast, or coffee bean and how much for the privilege of participating in this "good", "positive" feeling.

It’s now clear that in its giddy days, the Company embraced some ridiculous expansion policies. It played to its financial analyst audience and has paid the price in hits to its profits caused by foolishly chosen, duplicative locations and other wasteful expenditures.

But while claiming to be focused squarely on the protection of its base, its core, its brand, its current tactics reveal a serious misunderstanding of what the Starbucks brand is all about. Ignore the people on Newark’s Broad Street, if you like; what are the rest of Starbucks followers going to think when their “different” kind of company turns its back on the community development it once prided itself as being part of? What is the next local zoning board going to think when Starbucks needs a variance to successfully replace the old, local coffee shop with a brand new Starbucks café? How much of a premium will coffee drinkers pay for a cup of coffee from a regular corporate coffee shop?

How much is a company’s credibility worth? Well if you leave it exclusively to the numbers crunchers tasked with reducing costs by a target percentage within a specified time frame, “not much”. There may not be a line item in the company’s financial statement for “brand equity” but intelligent, forward looking leaders of brand driven companies surely understand its value.

How about you, Mr. Schulz?

 

 

 

 

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The High Price of Opacity

Re: Why No Outrage? Wall Street Journal, July 19, 2008

Great question, but that’s where it stops. James Grant’s answer: blame the victims, bad answer. 

In this illuminating chronicle of financial misdeeds, Grant presents a long list of reasons why the American public should be outraged at the state of the economy, at the condition of the vast majority of Americans, and at the seemingly near unanimous willingness of those in power to do nothing to correct the situation. He asks, given that this is an election year and these problems are well publicized why don’t we see any signs of public outrage. He answers: Americans don’t care.

This article is only one of a growing number of inquiries into why, at a time when we Americans are awash in information, various groups within our society consistently behave against their self-interests. In your spare time, read What's the Matter with Kansas by Thomas Frank.

“Things have become too complicated.” “It’s harder to connect the dots.” “The US and global economies have become so inter connected that it’s difficult to discern cause and effect relationships.” We are regularly showered with lists of reasons why not to understand a situation.  Add to this our penchant for the sound-bite and 100 word news analysis and it’s clear why many will tell you that any concept which can’t be explained within these parameters is probably not a concept worth understanding.

But there’s more. This is not an entirely benign situation. It didn’t just happen.

We have developed an unsettling pattern in our national culture: We provide government assistance to the poor and middle sectors of society through direct assistance programs and we provide government assistance to the affluent and corporate sectors indirectly through opaque systems of credits, tax incentives and indirect benefits. There may be nothing sinister here, it may just have developed this way for historical reasons, but the costs of this opacity have become enormous.

By way of illustration, we have school lunch programs through which the federal and local governments provide direct assistance to schools to provide healthful lunches to our students. If someone were interested, one could compute the amount of money that the government provides through this program. If one day, it were discovered that some local officials were misappropriating the food intended for the students and instead selling it, in addition to the deserved outrage, we could take remedial action. We understand the flow of the money through the program, how much money is involved, who should handle it etc. We could fix this problem.

Now take the example of how hedge fund managers are compensated. Generally, they receive most of their compensation through a construct called a carried interest. The reason for this is that their tax advisors have advised that a carried interest qualifies them for capital gains treatment for the money they are paid for their work and it is therefore subject to a maximum tax rate of 15%.  One day, someone writes an article in the Wall Street Journal noting that while hedge fund managers typically make in the tens of millions of dollars per year, unlike the rest of the American public, they are taxed at a maximum rate of only 15%.  There is the expected outrage and the public says: “fix this”. But the fix is no longer direct, it’s no longer easy. Why, because the fix involves changing the tax provisions which in this case were used to incentivize people to take investment risks. The argument from their lobbyists: if you tax these poor hedge fund managers on the same basis as we do the rest of us, they will not take the risks (what risks) and they might even move to the Cayman Islands where they have set up their funds.  The argument essentially is: we can’t afford to lose these guys.

Imagine if we had paid some ordinary person $50,000,000 and his contribution was to burden our business with billions of dollars of worthless debt that we now have to reckon with. Would anyone be screaming, “don’t cancel his bonus, he might leave?”

T. Boone Pickens is now publicizing his alternative energy plan to end the US dependency on foreign oil. The plan will entail tens of billions of dollars of government assistance.  Mr. Pickens is lobbying for government assistance. It might very well be a good plan; he might deserve the government assistance.  But if I were going to help, I would want to know how much I’m giving, how it’s being spent and what can I expect in return.

But under our current system, the assistance will come through very indirect and hard to measure programs like energy credits, research and development tax credits, the use of government eminent domain powers and numerous other incentives. In the end noone will know how much public money was spent. Noone will know how much was given to Mr. Pickens.  No one will be able to calculate what we, the public, have gotten in return. 

There is no accountability for public money given to the affluent and to corporate America. Many don’t even acknowledge the subsidies exist; many don’t assume any responsibility for providing the public with a return on its investment.

There is no appreciable public debate on the subject because the welfare and other assistance programs for the affluent have been kept out of the public’s view. The price for keeping them out of public view is that they are not measurable, it is difficult to tell if they are accomplishing the goals for which they were created, and there is no accountability. Our leaders preach the benefits of free market capitalism, of transparency and of accountability. It's time that we insist that these principles be applied to all of the members of our society.  

 

 

 

 

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Brand Repair: Fresh Views Breathe New Life Into Inbred Brands

Re: Nelson Peltz, Activist Marketer, Fortune Magazine, July 10,2008

Brand strategy is shrouded in secrecy by most brand driven companies. And the more successful the brand is, the more likely it is that the group responsible for its creation remains around for a long time, each successful year growing more confident, and frequently less open to opinions from outsiders. We see this phenomenon in our politics and we see it in our businesses. Insularity and smugness kill brands.

When businesses falter, how frequently do they go back to the business's founder or early leaders seeking to be rescued by those who had the "original formula" down right? Sometimes, I think the reason why this strategy works at times is because the founder has been disassociated with the business long enough to have seen it from the outside, not because he possess the deep, hidden secrets on which he built his original success.   Steve Jobs is certainly credited with turning Apple around and Howard Schultz was brought back to Starbucks with great fanfare. The jury is still out to determine what Schultz learned while away from his creation.

So, this little article about activist investor, Nelson Pelz, has an important message. But it's not that Mr. Pelz is or is not a wonderful marketer. The message is how valuable it can be to bring some fresh air into the insular brand strategy and marketing thinking of established brand driven companies . In Pelz's case, he has bought his own ticket to the party by owning more than 5% of the company's with whom he shares his advice. Management could hardly afford to ignore his views. 

But one would hope that enlightened brand managers would seek the views of those who are sometimes outside of their inner circle. Someone has to tell us when the emperor is wearing no clothes!

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Buying For Less May Be Trading Up

Re: The Wall Street Journal, July 11, 2008, “US Consumers Trade Down As Economic Angst Grows”

Focus on consumers buying less expensive things is missing the point. Price alone is not the issue. The questions for the brand marketer are: 1. Is the consumer redefining the “value proposition” he desires, 2. How can we deliver that “value”; and, 3. Is the consumer willing to trade up to acquire that “value”.

In our desire to identify indicators to predict consumer behavior in the economic downturn, we instinctively revert to pulling out the tired lists of full priced retailers, discounters, club (warehouse) discounters and comparing sales figures over like periods. But what these gross figures don’t reveal is why the consumer is making the choices reflected in the comparisons.

From the point of view of the product manager or the marketing strategist, it is very different whether the consumer is merely seeking the refuge of “lowest price” or whether traditional notions of value factor into the buying equation. Is the consumer asking “will this item last longer?,  “will it cost less to maintain” “is the style likely to survive the shifts in fads or trends and be wearable longer?” Clearly if the consumer is taking value propositions, other than pure price, into account, this is information that is highly useful to the brand driven business, particularly in times of economic duress.

When utilizing this information, though, the company should be very careful not to treat this entirely, or even principally, as a marketing challenge. Value starts with the product and the value proposition being offered to the consumer must be product or service driven if it is to be real. Inventing a great story, launching a great marketing message for inferior products, or products that don’t meet the consumers’ expectations, are flawed strategies and will not work.

This a moment for brand driven companies to reassess their product lines, to edit those items that may have crept in during the sloppy, frothy, high rolling times, and to ask themselves, "What do we stand for? and "What do we want to stand for?" To the extent there is a difference, a realignment is in order.

 

 

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American Universities: Let Me Count the Ways in Which You Overcharge Us

 Anytime I write about education policy, I get myself into trouble. But when I finished reading today’s Wall Street Journal article on “custom” textbooks and thought, “this is unbelievable”, I knew it was only a matter of minutes before I reached for my computer to write this post.

It seems that a “custom textbook” is one of the more recently developed techniques through which our institutions of higher learning are short-changing our students. A custom textbook is apparently a widely produced text book, which is "customized" for a university by including freely available information, perhaps a different, customized binding, and often stamped, “This book may not be bought or sold used”. In other respects, many of these text books are identical to the ones that are distributed as non-customized. No matter that the prohibition on resale is acknowledged to be legally unenforceable, our schools think this is sufficient to deter most of the students from re-selling their custom books. So, from the point of view of selling more books, this is mission accomplished.

Adding insult to this injury, the books are priced higher than the non-customized versions (which have the same substantive text) and the educational institutions for which the books have been customized have contracted to share in the proceeds from the sale of these books! That’s right, our colleges have conspired with privately owned, for profit, publishers to charge their students an artificially high price for textbooks, which the schools require their students to buy, and then block the students ability to sell his or her book, once used, or to buy a used copy.

To be sure, many universities who originally found this fund raising gimmick attractive, have rethought their original position, and decided that cheating their students was not the right thing to do. I hope the rest of our educational establishment will quickly follow suit.

 

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Starbucks: Why Was it the Real Estate, Stupid?

“Lax Real Estate Decisions Hurt Starbucks” reports today’s The New York Times. Not hard to figure out four days after the company announced the closing of 600 stores!  But the store closings are the symptom, not the cause, of Starbucks’ problems.

In my previous post, I alluded to some of the company’s research, which supported its aggressive and patently foolish march to place a Starbucks on every available inch of available real estate. It’s worth repeating: 1. long lines at existing stores led to the conclusion that to ease the wait, the company should add another location within a stone’s throw of the successful store; and 2. research that showed that customers would not cross the street to buy Starbucks’ premium coffee, the same coffee for which they would pay $4 per cup and for which they would forgo the fee cup of coffee often awaiting them in their work place or home.

Isn’t it amazing that no-one looked at these conclusions and screamed, “the emperor has no clothes” ?

Well maybe not, if we give some serious thought to what drives endless (and too often, mindless) corporate expansion. It’s probably no coincidence that the pace of store openings increased dramatically in the weeks and months before the close of each fiscal period.

Why might this happen? Is it possible that the corporate expansion strategy is targeted as much to satisfying the expectations of the financial analysts as it is to keeping the company competitive and healthy?  You know, it’s funny, if you place the typical successful CEO in a room with a bunch of average people who offer suggestions as to how to run his/her company, he might politely listen but few would expect him to return to his corporate suite and implement each suggestion. But when Wall street analysts lay out expansion targets, articulate strategies for global expansion, to offerings on the new menu or the music that might be played as a backdrop to the sipping of Starbucks black gold, somehow management took copious notes and couldn’t move fast enough to implement these untested (and unsolicited) suggestions.

I was hoping that a fellow like Schultz, who has much more than a financial stake in seeing his company flourish again might have the backbone to tell the financial community that maybe there are limits to the number of Starbucks stores that the world will support, that Starbucks might attract more business by looking deep into the company’s core to find additional offerings. I was hoping that Schultz would do more than the tired Wall Street two –step of cutting employees and shuttering stores. The company has a stellar reputation for how it treats its people and its customers. Now, it's time to live up to its own values, not those imposed by others.

I am still hopeful, Mr. Schultz. At one time you built a truly world class brand. Let’s see what you can do if you put your mind to it!

 

 

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eBay and Trademarked Goods: A Better Solution

From our archives: Originally published in November of 2007

On November 14, 2007, the Wall Street Journal ran an article describing the beginning of a long-anticipated trial, being litigated in the Southern District Federal court, in which Tiffany & Co. is claiming very substantial damages from eBay. Tiffany alleges that eBay bears responsibility to regulate the sale of counterfeit Tiffany branded products on its site. Other prominent trademark holders have filed similar actions against eBay. It seems that while these two goliaths wage their war, the public interest in maintaining a fair and informed market place on the Internet might be neglected.

A much simpler solution than the broken system now in place between eBay and trademark holders would be to simply require those who wish to sell trademarked goods on eBay to register with eBay, as sellers of trademarked goods, and to provide a verifiable identity and (terrestrial) address. While it's virtually impossible to authenticate goods in a virtual marketplace, it is feasible to identify and regulate those who gain access to that market.

Generally, our legal system works when there is in place a system of meaningful checks and balances. To maintain this equilibrium, the trademark holder is given a legal monopoly over the use of its rights and the person who might be affected by the assertion of those rights has the right to protect himself from abusive enforcement behavior. He has the rights to review any assertion of illegality, is provided with the opportunity to answer claims and is given the right to seek compensation if the rights holder acts abusively. When the legal system grants a legal monopoly, like a trademark, to a party, it does so cautiously, and generally imposes responsibilities on the monopoly holder designed to safeguard the public interest. In the area of trademarks, these responsibilities include a duty to protect one’s trademark, to maintain its distinctiveness and to enforce the trademark against those who infringe it. But there is no right given to the trademark holder to interfere with the lawful sale or resale of products bearing its mark.

In the terrestrial world, trademark holders police the use of their marks. When confronted with suspicious activity, the trademark holder traditionally begins enforcement by sending a notice to the infringer, a demand that the activity be stopped. He may sue for infringement and damages, and in certain circumstance he may resort to extraordinary measures like injunctive relief, to prevent a sale, or to the seizure of the counterfeit or gray market goods. When the law provides for extraordinary measures, it attempts to level the playing field by requiring that a bond be posted. This is designed to protect the targeted party and to induce the trademark holder to act responsibly.  In all instances, the trademark holder acts at his peril; if he mistakenly seizes legitimate goods, or erroneously closes a selling establishment, he bears responsibility for the financial consequences of his actions.

On the Internet, this equilibrium is threatened by the broken system now in place with online auction sites like eBay and the trademark holders. EBay’s existing policy is to remove specific listings when it is notified by a trademark holder that the listing violates trademark law. There is no requirement that the holder establish that his claim is valid or even that it is likely to be upheld by a court.

Tiffany and other trademark holders, engaged in similar lawsuits, are seeking to deputize Ebay to become their trademark rights enforcer. They would like eBay to act even more aggressively to independently remove trademarked items that are offered for sale, whether or not the trademark holder calls these listings to eBay’s attention. In effect, the trademark holders would like to eliminate all of the usual checks and balances, which protect the public, and assume the position of judge and enforcer by deputizing eBay to do their enforcement work.

Where is the public interest in this scheme? Is it reasonable to assume that an individual eBay seller will pursue his remedies against abusive trademark enforcement through the legal system? Given the global nature of the Internet, an eBay seller in New York might be faced with challenging the actions of a trademark holder in Europe or Asia in order to re-list his items or sell similar items on eBay in the future. This is not very likely to occur. And, the trademark holder may unwittingly alienate its loyal customers, some of whom may have purchased the trademarked goods, relying on the owners promises that they are worth more, eventually become collectibles, and ultimately hold or increase their value. EBay  looses potential revenues by reducing the volume of legitimate sales. So, no one really benefits from this regime.

It would be simpler and more in keeping with existing trademark law and practices if eBay would institute a registration procedure through which a seller who desires to offer trademarked goods for sale on the site, would be required to register with eBay. The seller would provide a verifiable address and identification. With this simple procedure, the trademark holder would be left to police potential sales over the Internet in the same manner it now does in the terrestrial world: it would be charged with implementing a monitoring and enforcement program to detect suspicious activity and to enforce its rights against those violating the law.

If the suspicious activity occurred on the Internet, the rights holder could either obtain the identity from eBay or eBay could contact the seller on behalf of the rights holder and make the normal demands. All parties would be left with their traditional legal remedies in tact. And, equally important, the public, in this case the eBay seller, would have the opportunity to meaningfully defend itself against inaccurate claims by the rights holder. Each party, eBay, the trademark holder and the public seller would have protections and remedies that are consistent with the economic consequences of their activity and therefor likely to be pursued.

 

 

 

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Ebay, Poor Advocate For Public Interest, Loses Our Case

Just some initial thoughts; more to come.

Today’s Wall Street Journal story reads: “EBay Fined Over Selling Counterfeits”; and stories in yesterday’s editions of The New York Times and Women’s Wear Daily were headlined,  “EBay Ordered to Pay $61 Million in Sale of Counterfeit Goods” and  “Battle of the Titans: LVMH Awarded $61.3M In EBay Counterfeit Case” respectively. EBay has been prominently associated with “counterfeits”.

Can you think of anything that could be more damaging to the reputation of an Internet marketplace? EBay should have gone to extraordinary lengths to explain to the public that its interest in this dispute is the public’s interest as well.

There should be no question that foisting counterfeit trademarked goods on the public is a bad thing and should be punished. The trademark laws generally impose upon the trademark owner the responsibility to police the market and bring infractions to the attention of the governing authority. These laws generally recognize that governments usually have very limited capacity to recognize a fake, to regulate it and to determine who is selling it. That’s one reason why the owner, who is awarded the premium on the sale of its branded goods, is expected to underwrite the cost of enforcement as a cost of doing business.

But these cases involved far more than the sale of fake goods and it is in these areas, in particular, that the impact of this French decision, if extended to other courts and jurisdictions, would be devastating to the Internet market place.

EBay might have educated the public to know that the so-called “counterfeit goods” that were the subject of this lawsuit include genuine branded goods (like the LVMH fragrances) which are being sold by vendors outside the authorized LVMH distribution system. There is nothing fake or counterfeit about these goods. The consumer is not being defrauded in these sales. The trademark on the goods is a proper indication that the goods originate from a source common with goods purchased in the LVMH distribution.

EBay might have educated the public to know that often times these goods are being sold on eBay by independent sellers, people like you and me, who may be selling a legitimate branded item which we have bought or have been given and which we cannot return, and who believe we can do better selling these items through an auction rather than by giving them away.

EBay might have educated the public to know that many of the sales are sales of used branded items, which are also now prohibited by this ruling.

Most importantly, eBay should have educated the public that the virtual world of the Internet, the world in which eBay operates, is in many respects different from the terrestrial world in which most luxury goods have grown and perfected their marketing. Consequently, before imposing trademark, distribution and competition rules for this new world, we have a responsibility to examine their likely impact.

Trademark laws generally impose upon the owner of the mark, the brand owner, the responsibility to police the proper use of its mark. The legal rational is that the monopoly, which the law grants to the trademark owner is justified by the benefit to which the consumer gains from knowing and relying on the fact that all products bearing the same mark emanate from a common source. Unlike copyright laws, which are about property, intellectual property, trademark laws are about business, consumer protection and orderly marketplaces.

One of eBay’s raison d’etres is that it empowers ordinary people to become buyers and sellers in a reliable market place. Turning this marketplace over to the interests of the large and financially powerful brand owners runs in many ways counter to the justification for establishing market places like eBay in the first place.

While I am often not an ardent fan of eBay, in this instance they walk on the side of the angels. Its interests in these lawsuits are very much aligned with the public interest, with the interests of ordinary, honest buyers and sellers who patronize eBay.  But those people handling eBay’s public relations, those who are entrusted with its brand, permitted the brand owners to publicly marry eBay to the devil. And this association may ultimately prove more damaging to eBay than the setback of the underlying lawsuits.

 

 

 

 

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Disappointing Starbucks Redux: Fix the Brand? No, Just Sell the Real Estate

This morning’s Wall Street Journal article reporting the closure of 500 additional Starbucks stores got me thinking about how naïve I was when I actually believed what I read in the original Starbucks story.

When the news about Starbucks’ financial problems began to surface last year, accompanied by the leaking of the now infamous memo from its founder, Howard Schultz, detailing how the brand had lost its way and needed to return to its core, I actually believed that he had identified some of the causes of the company’s reversal of fortune.  In fact, I copied and distributed to my class on branding, copies of the initial articles and of his memo.

While Mr. Schultz’s admonitions to respect the company’s roots and return to the principles, which supported its success, provided great jumping off points for academic discussion, they apparently did not identify what really ailed the company. While his statements supported his purist and maverick public status, made for good press, and might have even eased his return to the helm of his weakened enterprise, they now appear to have been little more than window dressing for a fairly standard cost cutting Wall Street approach to fixing a business. 

Even at the time, I was puzzled by his assertion that rapid growth was the company’s biggest enemy. Why, I asked, was having a large number of locations an impediment to delivering an authentic European coffee house experience at each location? It may be that growth was unhealthy but it was not the growth, I thought, that caused the company to lose its focus on its special coffee house experience.

But now, as we witness the company’s actions, not their public relations inspired pronouncements, we begin to glimpse what really went wrong with the Starbucks experiment.  Now, it makes more sense that its real estate expansion is a principal culprit.

According to the Wall Street Journal article two real estate principles supported its march to ever increasing numbers of locations: long lines at existing stores and research that showed that customers, presumably thirsting for the taste of Starbucks premium priced coffee and eager to pay twice or three times the cost for one cup, somehow would not cross the street to find their treasure. Crossing the street, the research concluded, was enough of a deterrent to send the customer sipping an inferior alternative. Both these principles supported the strategy that Starbucks needed more stores, sometimes down the block, sometimes across the street from its existing locations.

While the absurdity of these strategic conclusions should raise serious questions about the competence of the experts who came up with this stuff, and those who executed the strategies which were developed to respond to these perceived threats, it seems an unfortunate, but safe bet that Starbucks will not be one of those businesses which re-examines its core brand values and returns to health by understanding the sources of its strength.

 

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Consumers of Branded Goods Beware: Goods May Not Be Resalable!

Women’s Wear Daily and The New York Times just reported that LVMH, the parent of Louis Vuitton, Christian Dior, Parfums Christian Dior, Parfums Kenzo, Guerlain and Parfums Givenchy, and other French luxury brands has just won a significant case against eBay in the French courts. According to the article, the French court has held eBay liable for the sale of counterfeit LVMH items and the sale of legitimate LVMH items by non-authorized sellers.

It is the barring of sales by the so-called non-authorized sellers that is troublesome to me because these non-authorized sellers could easily be folks like you and me.

Many owners of high-end trademarks and branded goods companies have policies, which define a “seller” as anyone who offers three or more branded items for sale. Once one is included within the definition of “seller”, it only requires a check on the trademark owners’ “Sellers” list to determine whether or not one is “authorized”.

Casual sellers and independent dealers who buy these goods and resell them as used, don’t appear on these lists. Ebay, on the other hand, lacks the capacity to check whether the goods being offered are legitimate or not and consequently merely takes off its site any goods reported to it by the trademark owners and being sold by “unauthorized sellers”.

The result: all this high end stuff that is trumpeted as holding its value or even increasing in value over time, is unsalable on eBay.

Obviously, these policies were established for legitimate reasons to maintain an orderly distribution system for the manufacturer and owner of the marks. But on the Internet, where everyone can be a seller, and where people often go to buy and sell trademarked goods not wanted by the original owner, this is a problem.

In fact, the Internet exacerbates this problem because it is the market in which branded goods experience much more success than unbranded goods and at the same time the Internet was a market touted to be friendly to the independent, often smaller and less powerful, merchant.

To the extent that this decision, already being heralded by many of the major brand owners as a significant victory, signals that the Internet is now on track to become the domain of the powerful, large brand owners, this is a setback for independent and smaller merchants and ultimately for all consumers who will inevitably pay more for branded goods. The next time you are told that a high priced luxury branded product is intended to be passed from generation to generation, take it seriously: You may never be able to re-sell it.

 

 

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High Energy Costs & The Consumer: From SchmidPreissler International Strategy Consultants


Energy Costs Naturally Change Consumer Behavior. Globally.

The majority of people, no matter in which part of the world they are living, are not going to earn more than the rising energy costs. This does not inevitably have to lead to a decrease in consumption. In our opinion, consumers are going to change their behavior. 

The process of purchasing decisions is subject to changed criteria. We are assuming that impulse buying in regard to satisfaction of needs is going to decrease for most people in the broadest sense and every purchase is going to be pondered with greater thoroughness and the actual necessity of the purchase. 


The satisfaction of wants is going to increase considerably. The small and big wants are going to increase, especially in tougher times. The majority of people are going to ask the question of value more often and more intensively when it comes to the satisfaction of wants. Material values are playing the decisive role here. Premium and Luxury products have their high times especially in times when the disposable money is worth more, because there is less of it. Purchases are made purposeful and selective. True Premium and Luxury products are bought, maybe even more than ever, but only if they are “true” Premium and Luxury products.



Growing awareness during purchasing and consumer behavior is surely one of the consequences that arise from the development of energy costs. What does this mean for industry and retail? Advertising, sales conversation and service agreements for customers have to be of a better quality. Naïve advertising, half truths, deceiving appearances all of this is not going to be enough for promotion. The sales conversation has to have a content directly related to the product and its qualities. A profound knowledge of the product would be such content. For the longest time the maintenance of such sales conversations has been grossly neglected. Self service in retail, order charges and online ordering systems in wholesale and in B2B business have disregarded the vocation of sales personnel. It is imperative to do a lot of persuading here.



Quality is above quantity. This principle applies especially to those products meant for satisfaction of wants. Less is going to be more in the future. Bulk goods are going to be hard to sell even at reduced prices. People are going to live more consciously. A lot of things that might have been viewed as old-fashioned are going to be held in esteem again. What’s natural is going to be rediscovered again. Life is going to become more humane again and as such get back a new “old” quality. In a certain way the development of the energy costs is helping us to get a new relation to consumption, as paradox as this may sound.

 The fear that high energy costs endanger the consumer’s wealth or keep the people in the Second and Third World in poverty is only one of many positions one could take and one we do not really believe in. When it comes to the people of the Second and Third World one could see one ray of hope in this development that consists of the ability to achieve higher prices for the natural resources, oil, gas, food, and other materials that they produce and thus have one immediate advantage to the higher energy costs. Let’s think of Africa. We have pointed out the future of Africa years ago and have touched exactly on what we experience today. A new Africa that is slowly finding its feet on solid ground again thanks to its natural resources. 



High energy costs slow down uninhibited globalization. In turn, this is going to ease the fear of the future in many people. 



Restrained and conscious consumption, quality above quantity are decision criteria that allow for a positive outlook into the future. And there is one other thing we should consider, it is energy in the form we know it today that has enriched our lives. Often we have not even noticed it anymore, at least in the First World, because energy was relatively cheap until recently.



For the development of new strategies it is important that the above mentioned other side of energy cost development attracts interest, because it contains a great deal of possibilities which have been overlooked in the recent past.

 

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Change and Rupture, Published by SchmidPreissler Strategy Consultants

 

Life is change. That is not new. From the beginning of creation, the world has changed with every passing day, every hour. In the past, the change of which we speak occurred at a more or less moderate pace. Within limitations, it was calculable.

Globalisation, new information technologies, the New Economy, increasingly sharply differentiated ideologies, suggestions of economic recession, catastrophes, and other events have increased the tempo of traditional, familiar change to such an extent that it has spun out of control. A fracture has resulted that is so deep and permeates all aspects of life to such an extent that the question becomes ever more urgent: how is this to continue? For many, the future seems to be in danger.

Until now, at least in the First World, people lived by and large at peace and under circumstances of ever increasing prosperity. In Europe, the population discovered that peace means much more than just the absence of war and the dangers lurking in the darkness were soon forgotten. The 11th September 2001 represented the outbreak of a new dimension and type of war. The supposed secure world of the strongest power on earth was deeply wounded.

The events are driving people to their utmost, above all the knowledge that their abilities have become inabilities and that instead of being the ones in control they are being controlled and hustled. Money and work are becoming scarce. Virtual possessions are dissolving into nothing. Hunger and poverty are spreading even more quickly. The neo-socialists and neo-communists are rehearsing a comeback.

Due to bewilderment, weakness and fear in the upper echelons of politics, business and society, but less frequently among the “common man”, change, as we experience it today, is commonly reinterpreted as an apocalypse scenario.

At the moment, more and more top managers, unprepared for the challenges that confront them, are leaving the business world, some by choice, some under duress. Even quite serious, solid and well-known economists are falling victim to mental traps. Graspers are doing foul work. Ethics and moral are being thrown by the wayside all too quickly if advantage can be gained somewhere. One might almost think that with the loss of a hold on the values of yesterday we are all being catapulted into uncontrollable chaos.

Today, just managing is no longer sufficient to deal with the situation. This is true of both the economy and politics. An orientation that will lead to a new order is necessary if we are to feel the ground steady under our feet again and regain trust in ourselves and in others.

We need more entrepreneurs.

Entrepreneurship is essential. This is very likely the reason that family companies are experiencing an unexpected renaissance.

What we are experiencing is not a game.

What we are experiencing in the economy is not easy to solve with home-made drastic cures. Above all caution is advisable when using quick solutions. Successes achieved quickly are often bogus successes and of short duration.

Personnel reduction, cost reduction plans, Lean management structures, new management-by... programmes, benchmarking, restructuring programmes off the peg - none of these, not even the 100 US management concepts recently offered in book form by one consulting firm, convey as a rule solid solutions.

We have to be capable of more.

Our time, characterised by change which generates rupture, also has its chances and it is necessary to accept and use these without any ifs and buts. Ultimately, it is the chances that can lead us out of the valley of worries and problems.

In order to do so, we must again pay close attention to the rules of Creation.

We must serve truthfulness, that is, we must stand up for and guarantee what we say and do. And we must undertake nothing that we cannot affirm.

We must again practice discipline, be open, fair and determined.

We must be responsible.

One’s word must again be worth something.

And we must recognise and respect the limits of freedom.

Unrealistic? Illusory? By no means!

We know many entrepreneurs and companies that either never relinquished their stability, or regained it, and are in terrific shape. And, therefore, they brilliantly survive the storms unleashed by change.

Our own clientele is proof that traditional and conservative values combine in an excellent symbiosis with an elite, polyglot, modern context.

This symbiosis has a future: it is the path to tomorrow’s success. And the current change signalises a new beginning for it. It has always been the basis of our strategic consulting.

We understand the current chaos as a process of clarification and renewal. The four seasons are a beautiful example provided by Creation for natural events, though they recur with regularity, are also always new.

What are the essential aspects in terms of the structuring of a corporate future?

·  Uniqueness: this is among the most important goals for any company. Only a company that strives for and achieves uniqueness can enjoy a leadership role.

·  Leadership role: no company should follow trends; rather, it should formulate them. The most important prerequisite for that is independence.

·  Independence: the degree of independence in all its manifestations decides the value of a company. Its value is then expressed in its culture and style.

·  Culture and style: a company must be able to afford culture and style in order to ach¬ieve profitability.

These essentials constitute the armour that allows a company to thrive.

Knowledge is power.

The First World has largely completed the change from an information society to a knowledge society.

 With his knowledge, each individual, each achiever represents an unknown challenge for each company, but likewise offers great and multifarious opportunities.

The current change is creating new perspectives for companies of every size, it creates for those who understand it, who perceive the rupture, chances for a “place in the sun”.

The storm that is sweeping over us speeds up a long overdue process of elimination, separating the wheat from the chaff. The survivor of this process then faces equally stiff competition. In the long run, this results in better achievements for everyone, a better economy and better economic management.

New horizons emerge through this process, particularly in the context of consumption.

In the First World, the importance of immaterial goods increases as that of material goods declines. They have lost their significance.

In the Second and Third Worlds, private consumption is just becoming a factor in the political economy.

One further aspect of this change is of great importance to us. It will make possible the future transition from a knowledge society to a culture society. Knowledge allows us to prevent the destruction of our world through the misuse of power. And, knowledge can also enable us to find ways to set strict boundaries for stupidity.

After what we’re going through now, nothing will be the same as it once was. Let’s understand change and rupture as a chance for a new beginning.

 

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Action/Abstraction: Pollock, de Kooning and American Art, 1940-1976

I just attended a preview of the exhibition at the Jewish Museum, NYC, Action/Abstraction: Pollock, de Kooning and American Art, 1940-1976.  My advice: Drop whatever you're doing and go see it! 

Not only is the selection of works from the American Abstract movement beautiful and well presented, but more impressive to  me, is the organization and mounting of the show. The art works are punctuated with intelligent and highly informative curatorial narrative as well as with a good amount of original, period documentation. All of the paintings are exhibited in the context of continuous references to the historically significant critical writings of  the period's two pre-eminent art critics: Clement Greenberg and Harold Rosenberg. This exhibition is as much about the important role which art criticism and artistic dialogue play in the creation of an art movement and the shaping of the art that defines it, as it is about the specific American Abstract artists included in the show.

Even though I frequent museum exhibitions and have always been attracted to the art of this period, I was relatively unaware of the role which these two individuals played in shaping and defining their contemporary art scene. My fascination with their writings was made even more intense when I realized that there is no comparable critical dialogue evident in our contemporary art community. Today, we are asked to judge artists and their works, by the continuous loops of spiraling auction prices and gallery price increases. 

When covering contemporary trends, the art press generally seeks out the opinions of auctioneers, art dealers and affluent collectors. Hardly any attention is paid to the more academic and critical segments of the art community. And with good reason: they have disappeared from the scene.

While we can't instantly create knowledgeable art critics or writers or reporters who can invest the time to learn about something before they report on it, it is a step in the right direction to realize that our dialogue is incomplete, that an important element is missing. From the perspective of a collector, or from that of a contemporary art curator, this realization should, at a minimum, encourage us to go slow when acquiring contemporary art at contemporary prices.

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Use Caution in Regards to Growth of Consumer Goods Turnover in 2008

From Brief Letter, published by Schmid-Preissler Strategy Consultants, Germany

Cost of energy, development at foreign exchange markets, exploding costs for health care, pension provisions, research and education, costs for fighting poverty, epidemics as well as terrorism, war and the consequences of war, rising costs for public service, securing and expanding infrastructures, fighting ecological destruction, development of new energies, protecting what is still whole in nature, fighting and lowering national debt – all of these problems are prevailing equally in countries of the First, Second and Third World and thus burden financial powers. People have to dedicate considerable financial resources to these problems and this is going to significantly affect consumption in the next year. Everywhere in the world even if there is a positive development of the global economy taking place. It’s not that consumption is going to collapse under these general burdens, but it is still going to change and we assume that it is going to change more and more sustained than many think during this time of a positive general mood.

Wants and needs are going to get even more distinct outlines than has been the case in the past. Everything that can’t be clearly assigned is going to continue to disappear.

Meaning, people are going to purchase more prudently. They are going to use their considerable knowledge during selection and purchase of products and services.

Surely, there are needs that can be met, in regards to quality, with simple and modest products and services, especially through automated facilities. Price can be adequately low there. The consumer has long gotten used to buying packaged products from a carton or simple shelves. When it comes to satisfying needs, the advantageous price is an important sales tool. This is why discounters are going to be of even more significance in the near future.

However, when this is about fulfilling wants, satisfying wishes, then people are always willing to spend more money. In economically tough times this may be even more so than in good times. But even for products and services which do not serve fulfillment of demand it is imperative that the relation of the value of the product to the price has to be evident. Far more critical than in the past, people are going to watch out for a comprehensible immaterial value of Premium and Luxury goods and services when fulfilling wants and satisfying wishes. Most of all this means brands dominating the premium and luxury business have to offer value.

It is going to be problematic for those suppliers of products and services which are still present in the traditional and disused “center” of the market and without adequate substance and yet are offered as premium and luxury goods and brands.

The consumer goods markets are going to shrink. But not the exterior outlines on the upper and lower edges of the individual markets or industries, but from the center.

If your planning includes growth for 2008 and the coming years you should rely less on the past but rather align your plans for growth with the possibilities, your products and services offer in regards to a clear profile.

Money available for consumption is becoming more valuable globally and the offer has to be designed correspondingly. If you are aware of this and look around accordingly, you are going to realize quickly that considerably more has to be done then just economizing and lowering costs. In order to keep the offer valuable and if necessary create a more valuable offer one has to be willing to invest into the market.

 

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Has the Fed Become a Sub-Prime Lender?

With the Fed's extension of $39 billion of credit, collateralized by the same assets that caused private banks to refuse to lend to Bear Stearns, hasn't the Fed become the largest sub prime lender in the world? And by facilitating the J.P. Morgan Chase buyout of Bear Stearns, the Fed has signaled it has the appetite to purchase additional piles of sub prime debt. 

The difference between the Fed's strategy and that of the banks and other financial institutions who hold large portfolios of sub standard assets is that the private financial institutions got into this mess unknowingly; the Fed knows exactly what its lending against and that's the tragedy.

Given the huge amount of sub prime debt still in the banking system and the Fed's declared policy of being a ready buyer of any asset unwanted by the private banking system, isn't it time to ask "What is the net worth of the Fed?" "How good are its guaranties?" and "What is the result of the Fed's insolvency?"

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From Bloomberg.com: Volcker Says Fed's Bear Loan Stretches Legal Power by John Brinsley & Anthony Massucci

April 8 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker questioned the central bank's decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at ``the very edge'' of its legal authority.

``The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,'' Volcker said in a speech to the Economic Club of New York.

Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent ``severe'' damage to financial markets.

Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed ``excesses of subprime mortgages'' to spread into ``the mother of all crises.'' The Fed's Bear Stearns loan was unusual, he said.

``What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,'' he said.

Wall Street Subsidy

Lawmakers, while praising the Fed and Treasury for averting a financial collapse, have also questioned the plan to subsidize Wall Street while the Bush administration resists using government funds to assist homeowners cope with the worst housing crisis in 25 years.

Volcker said the Fed's loan may send investors the wrong message.

``The extension of lending directly to non-banking financial institutions -- while under the authority of nominally `temporary' emergency powers -- will surely be interpreted as an implied promise of similar action in times of future turmoil,'' he said.

Volcker said the modern financial system has ``failed the test'' of the marketplace. When asked whether he predicts a ``dollar crisis,'' he said, ``you don't have to predict it, you're in it.''

The dollar has dropped 15 percent against the euro and 14 percent versus the yen in the past year.

$945 Billion in Losses

``What Chairman Volcker said in his remarks is that we need to make sure we are taking a look at the implications of the Fed decision,'' Glenn Hubbard, former chairman of President George W. Bush's Council of Economic Advisers, said in an interview. ``The question is: How do we then redesign regulation around a decision that bold?''

Volcker's critique comes as policy markers struggle to prevent the world's largest economy from contracting, a prospect Bernanke himself raised last week. The International Monetary Fund today said the global losses from securities tied to commercial real estate and loans to consumers and companies may reach $945 billion.

``The bright new financial system, with all its talented participants, with all its rich rewards, has failed the test of the marketplace,'' Volcker said.

As credit markets seized up, the Fed gave the 20 primary dealers in U.S. government bonds the same access to discount- window loans that had previously been reserved for banks. The central bank now auctions as much as $100 billion to lenders a month, and has cut the cost on direct loans to just a quarter- point above the overnight rate on loans between banks.

``The implications of these decisions, and the lessons from the unfolding crisis itself, surely deserve full debate and legislative review in the period ahead,'' Volcker said.

Fed's Response

The Fed has also lowered its benchmark rate six times since September to 2.25 percent from 5.25 percent, and traders anticipate it will cut by at least another quarter point this month to cushion the economy's downturn.

Volcker, 80, said the problems stemmed in part from trading of increasing complicated securities including derivatives that ``have taking on a trading life of their own,'' and said the turmoil ``adds up to a clarion call for an effective response.''

`There was no pressure for change, not in Washington which was spending money and keeping taxes low, not on Wall Street which was wallowing in money, not on Main Street with individuals enjoying easy credit and rising house prices,'' Volcker said.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net

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