Carlos Slim's Track Phones: Marketing In Action

Last week's post on ATT's proposal to buy T-Mobile focused mostly on the market concentration among the top three wireless firms.

In subsequent discussion of the proposed deal, Michelle Caruso-Cabrera, a co-anchor and reporter on CNBC, made a very interesting point. Rather than focus on the two major wireless firms, ATT and Verizon, she noted that Mexican billionaire Carlos Slim's Track Phone pre-paid wireless business had the highest growth of any wireless firm.

I can't vouch for exactness, but I believe the data she cited showed Slim's firm adding more subscribers in some recent multi-year period than all three competitors who weren't ATT or Verizon. I believe MetroPCS was one of the firms, and T-Mobile may have been another.

In any case, it got me thinking about segmentation and consumer behavior, always favored topics due to my academic roots in marketing theory and practice.

I'm aware of how differently P&G and Colgate-Palmolive market in third-world countries, as opposed to higher per capita income European and US markets. Specifically, much of their volume moves through neighborhood bodegas with little product display capacity, selling to consumers with little disposable income. Thus, package quantities tend to be much smaller. Detergent might be sold by the envelope, rather than, as in the US, in a money-saving giant bottle.

That said, it makes sense to me that someone with business and cultural roots in a country like Mexico would naturally see the value of pre-paid wireless phones. Rather than take the American vendor route of replacing large monthly landline phone bills with similar-sized, or larger ones for much more feature-rich, multi-functional smart cell phones, Slim chose to offer smaller-sized bites of valuable wireless service to poorer consumers.

The result? Faster subscriber growth in a simpler market. You can bet that Slim's customers probably aren't constantly watching videos or netsurfing on their phones. They're probably happy to have such a powerful, yet inexpensive communications tool on their limited budgets.

When asked, an ATT official made some mention of possible interest in the pre-paid market. And, of course, it's no shock to observers that, for purposes of the proposed acquisition, ATT seeks to define the wireless market to include pre-paid, thus lowering the effective market share of the combined firms.

However, to me, Caruso-Cabrera's comment was eye-opening. Recalling the unsatisfying, mediocre total equity price performances of ATT and Verizon, relative to the S&P500, which appeared in last week's linked post, I can only imagine how Track Phone would look if it were public and standalone.

Just because a product aims at a lower-priced segment doesn't always mean it's lower-quality. That characteristic is, ideally, in the mind of the consumer. And Carlos Slim's people have apparently hit a very good sweet spot, offering affordable doses of a very desirable, powerful service, wireless, to lower-income consumers.

A great marketing story. I love it.

Starbuck's Reconsiders The Details

In yet another chapter in Starbuck's continuing struggles to recapture its former luster, the chain is now planning a significant change in what would seem to be a trivial activity. After what has apparently been intensive study of how and when coffees are brewed in the roaster's many stores, management has decided to focus on having fresher pots of coffee always available.


The Wall Street Journal reported, in a recent article,


"Instead of grinding coffee only in the morning, baristas will grind beans each time a new pot is brewed. Timers will buzz to signal when it's time to make a new batch, according to internal Starbucks documents reviewed by The Wall Street Journal.

The changes are part of the Seattle-based company's effort to reinvigorate the "Starbucks experience" in the face of competition from less-expensive rivals such as McDonald's Corp. and 7-Eleven Inc. With Starbucks' changes, customers will be able to hear the whir of grinders and smell the aroma of fresh coffee all day.


Two years ago, Howard Schultz, then chairman of the company, wrote a memo to executives blaming the chain's excessive focus on growth and efficiency for cheapening the coffee-shop experience he long had championed. Mr. Schultz wrote that an earlier switch to preground coffee had taken the "romance and theatre" out of a trip to Starbucks.

"We achieved fresh-roasted bagged coffee, but at what cost? The loss of aroma -- perhaps the most powerful nonverbal signal we had in our stores," he wrote.


Currently, baristas decide when to brew fresh batches "based on multiple signals ranging from demand (quantity), to expiration and timing," the new documents say, explaining that the revamped process "reduces this complexity by eliminating many of these signals."


The documents say that currently, "by using dedicated [containers] to brew coffee, our customers may experience a coffee outage 14 minutes out of every hour, or 23% of the time! This coffee outage occurs for seven minutes during every batch, making brewed coffee unavailable to our customers." As a result, customers can be forced to wait, choose another type of coffee or leave the store empty handed. "To solve the brewed-coffee outage problem, we must change the way we brew coffee," the documents say.


Some baristas said the extra grinding and brewing might slow service and turn off customers with added noise.

But demonstrating to customers that coffee is ground and brewed on the spot could help Starbucks maintain its premium position, especially as rivals tout less-expensive alternatives."


What struck me about Schultz' approach and concerns is that it probably won't attract coffee drinkers the chain hasn't already won over long ago. I'm not a big Starbuck's fan, personally, but I visit their stores with/for my daughters on occasion. The same people are generally in the one we most often frequent.

I honestly don't think more freshly-ground or -brewed coffee aroma will bring (back) Dunkin' Donuts' and McDonalds' coffee drinkers. It's a segmentation issue, and Starbucks long ago sewed up the segment that celebrates expensive coffee and the coffee houses in which one may linger to drink it.

Finally, in these times of government intervention into financial services, auto production and healthcare, I find it instructive how detailed and minute are Schultz' and Starbucks' managers' focus on their business.

Look again at how deeply and precisely the firm's management had studied a specific part of their operation with an eye to customer motivations and need satisfactions.

No governmental civil servant is going to do that. Yet, that's what it takes to succeed in business. Focus on customer wants and needs. Diligent, constant, detailed review of your own business' offerings, strategies, and operations.

Is Schultz right in changing the Starbucks' stores' coffee brewing? I don't know, but I doubt it. Still, he and his managers feel it's an important change to make in order to revive growth, profitability and equity value for the firm.

I just don't see that sort of combination of analytical rigor and imagination from any government hacks trying to oversee, restructure or operate significant portions of the US economy.

My First Trip To Whole Foods

I recently had the occasion to visit a Whole Foods store for the very first time. Separately, Monday's Wall Street Journal contained an article discussing the company's recent troubles extending its growth in the current economic environment.

My first impression of the store was how different is its layout is from most other chains. It reminded me of Trader Joe's, whose aisles are also laid out in odd patterns, and similarly narrow.

These aisle patterns and widths seem to discourage fast, volume-oriented shopping. Supporting this, shopping carts are smaller, too.

In line with the Journal's piece, I noticed some fairly high prices on many items. Not uniformly so, but sufficient to make it clear that spending most of one's grocery dollar at Whole Foods would quickly make a major dent in your budget. Following up on my daughter's questions about some cuts of beef, I noticed that Whole Foods' offerings were literally triple the price of the same items at Costco, from which we had just come.

The mix of customers were more like those I saw in Trader Joe's, too, and less like other, larger local grocery chain stores. For example, there seemed to be fewer parents with young children. Perhaps the largest difference I noted was that lack of pace of other shoppers. Some were obviously married, empty-nesters, taking a lot of time strolling through the store.

On a Sunday afternoon, the store did not seem especially crowded. Then again, maybe it never is. As I noted, this was my first visit.

Turning to the article about Whole Foods in Monday's Wall Street Journal, it seems that perhaps what I observed on Sunday echoes what the chain is experiencing nationwide.

Nearby are the 2- and 5-year price charts for the company's stock and the S&P500 Index.

For the past 24 months, Whole Foods' equity price has fallen by some 80%. It's decline really accelerated in the past 12 months.

Looking back further, the 5-year chart shows the company's rising fortunes in 2004 and 2005. Beginning in 2006, however, the peak of the company's equity price had been realized.

Thus, there may be a lot of truth in a quote appearing in the Journal piece by Bob Summers of Pali Research,

"It's kind of the wrong time, wrong concept."

For what it's worth, the local, lower-priced Stop & Shop chain has organized its own product portfolio into a private-label organic brand. Further, it has grouped those items into one section of the store. So the organic-based differentiation of Whole Foods has already been competitively addressed by other chain stores in the area, including BJ's and Costco.

That makes the overall tone of the Journal's article quite believable. It notes the lack of cash on Whole Food's balance sheet, and its Starbucks-like wrangling with landlords in various shopping centers as it attempts to back out of prior lease commitments.

It's not hard to see the company continuing to appeal to a segment of high-income, small-family or empty-nest couples and singles who wish to consume only organic food and can pay the higher prices for it. That's a reasonable strategy, but for a niche player, not a nationwide chain of large grocery stores.

The next 12-18 months should be interesting ones in which to observe Whole Foods adapt to economic changes in the US.

Starbuck's Latest Turnaround Strategy

This weekend's Wall Street Journal's "Heard On The Street" column discussed Starbuck's turnaround strategy.

For the second time in a few days, I read an article about Starbucks in which the word "segmentation" is used in quotes?

What's with that?

The context is that, according to this piece,

"Mr. Schultz is looking at "segmentation." strategies that would provide an entry point for new customers amid a weak economy."

Now, it was news to me that the Seattle's Best Coffee brand is owned by Starbucks. I think that's fantastic, because I like that brand much better than their flagship one. And as I've written here, about Les Wexner's Limited Brands, it's can be a very smart way to market different product lines.

However, only a few months ago, I wrote this post, which noted, from another Wall Street Journal article of that timeframe,

" 'Much of that may not be Starbucks's fault. Pressures on consumer spending haven't made it any easier for Starbucks to increase sales, particularly because Starbucks's customer base has gradually broadened to include Americans with lower average incomes, a group more likely to cut back. This summer, a spike in dairy costs caused the company to implement its second price increase in less than a year.'

To me, the most telling sentences are those in the fourth paragraph which I have quoted from the article. The company, in order to sustain growth over the past few years, headed down market. Now, those less-wealthy customers are being more affected by recent economic events, including prices of gasoline and food, while even Starbucks' ingredients' price rises are driving them to increase prices, too."

So Starbucks is, in fact, looking to reposition itself with its lower-income, newer customers. Apparently through the provision of inexpensive, simple brewed coffee. The Journal piece suggests,

"...and adding a lower-priced tier inside its own stores would be tricky for a brand that built its reputation on upscale cachet."

No kidding. Mr. Schultz, have you taken a look at Wal-Mart's failed 'upmarket' retail strategy of a few years past? It flopped. In their case, new, upscale customers wouldn't rub elbows with lower ones, and Wal-Mart's merchandising was not credible.

In the Starbucks case, you can imagine hordes of teenagers fleeing Starbucks as lower-priced, un-chiche, lower-priced coffees are shoehorned into the stores.

Schultz is also ditching the breakfast sandwich menu. Surprisingly, according to the article, this accounts for about $35,000 of revenue per location per year. That equates to something like $100/day. Isn't that only about 20 breakfasts/day?

Perhaps what's surprising is that they even kept this offering for so long. And that, with McDonalds revving up their coffee offerings, along with the constant pressure from Dunkin' Donuts, anyone wanting food won't visit Starbucks at all now, when they can just buy the same thing, for less money, at either of the other two purveyors.

Schultz holds out hope for Starbucks' line of summer drinks to help it out in the second half of the year. But isn't that a seasonal effect? Don't they already have a summer drink menu?

As the article suggests,

"Starbucks was one of the first major consumer brands to be built using word of mouth- and there are few precedents for how to resurrect a tarnished brand that was built that way."

As the nearby, Yahoo-sourced price chart of Starbucks and the S&P, for the last three months, demonstrates, the coffee roaster's stock is essentially in free-fall.

Schultz has one heck of a job to try to rescue this firm. Personally, I think he's fighting the force of Schumpeterian dynamics. Competition and consumer tastes have altered the competitive and market landscapes since the firm's heyday of some years ago. It's unlikely that Schultz can regain its long term, consistently outperforming total return record anytime soon, if ever.

Vindication: The Wall Street Journal Officially Buries "Wal-Mart Era"

Yesterday's Wall Street Journal featured a prominent, front page piece entitled, "Wal-Mart Era Wanes Amid Big Shifts in Retail."

As such, I'm going to declare yet another of my predictions vindicated. I wrote pieces on this blog, here, and here, as long ago as September of 2005, when I began writing this blog.

Among the quotes from my earlier posts are these from April of this year,

"Friday's Wall Street Journal ran a piece in their Money & Investing section on what ails Wal-Mart, and how to fix it. Trouble is, they mostly asked a group of money managers. Why they think those guys would have a lock on such knowledge is beyond me.

In my opinion, most of them are barking up the wrong tree. Wal-Mart isn't 'coming back' as they knew it. It's big, sluggish, and hard to manage with its saturated markets.

Rather, Wal-Mart is likely at a crossroads. If it desires to regain consistently superior total return performance via growth, then it needs to do a better job identifying those markets which will sustain its traditional, logistics-dependent strategy for dominating the low end of retail merchandising. Whether this means staying or leaving Japan, I don't know. But Wal-Mart's management should.

My own view is that it's unlikely that Wal-Mart will regain its former consistently superior outperformance record. Its size, need to be in multiple countries and exposed to radically varying cultures and logistics environments probably presents the firm's management with too many challenges to overcome simultaneously.

But, since I'm neither a broker, nor a current investor in Wal-Mart, I don't have a stake in convincing others to either buy, or sell the firm's stock based upon expectations. I'm just writing what I have observed, from both my proprietary research, track record of portfolio selections, and the recent media coverage of Wal-Mart's performance."

And these sentiments, from September, 2005,

"Back when I was earning my degrees in Marketing, there was a theory which was taught that went by the name of “the wheel of retailing.” It essentially observed that every so often, a new, low-cost retailer will arise that rips through the existing sector structure like a hot knife through butter, growing at the expense of outmoded, expensive older giants.

That said, the Wal-Mart saga since the 1980s is both remarkable, yet not surprising. What the company did is not all that new. It upended several existing chains of general merchandisers who had grown inefficient, insensitive to consumer needs and wants, and basically moribund. How it did it was with the latest version of what the lowest entrants on the wheel of retailing always use- low-cost supply of large volumes of goods. It looks glitzier now, with integrated IT functions shared among vendors. But if you go back to the architect of Sears’ great transformation, you will find that Robert Wood, the creator of that transformation, learned his supply skills as quartermaster on the Panama Canal, one of the more challenging logistical projects of that era.

What is puzzling me is why there is all this attention paid to the mid-late life growth pangs of a retail success. Retailers who began life at the bottom always try to extend growth, once they saturate the market with stores, by moving up-market. And they nearly always fail in doing so.So will Wal-Mart. The company appeared briefly as a selection in the large-cap equity portfolio I manage. That was back in the 90s. But it hasn’t performed in a consistently superior fashion in over a decade."

I'm quite proud of the fact that I called the demise of the "Wal-Mart era" two years ago. It's sort of sad that as fine a business newspaper as the Wall Street Journal both missed the boat for this long and, even now, in their comprehensive article yesterday, can't come up with a reporter who is familiar with the 'wheel of retailing' concept. Or Schumpeterian dyanmics. Because both figure in this story.

The 'wheel of retailing' is an old, but still valid, marketing concept which observes that, over time, low-end retailers eventually attempt to move upmarket, making way for new entrants, while tending to stall in their new product/markets. This is Wal-Mart, to a "T." Schumpeterian dynamics explains, additionally, why, over time, Wal-Mart sowed the seeds of its own competition, as well as became a target for regulatory and social activist forces, sapping its energy and tarnishing its reputation.

As it is, the article thoroughly documents Wal-Mart's troubles amidst shifting consumer values which place style and convenience above price. Further, having dominated their product/market spaces for so long, they became the target at which to shoot. Consequentially, the article mentions that many competitors, such as the drugstore chains, Walgreens and CVS, simply redefine their offerings to avoid head-to-head competition with the retailing giant. Krogers does the same in food, offering semi- and fully-cooked meals to differentiate itself from Wal-Mart's grocery stores. Tesco, the British food retailer, is about to enter the Western US market with a portfolio of store types, taking on Wal-Mart in this large product/market.

The Yahoo-sourced price chart in this post demonstrates, compares Wal-Mart's performance since the early 1970s with the S&P500. It's clear that, except for a brief 2-3 year period in the late 1990s, Wal-Mart's market performance has been stalled since 1992, i.e., for 15 years!

That's an awfully long time to be waiting for a turnaround, isn't it? That's why I called the company dead as a consistently superior total return performer. The Wall Street Journal article echoes my own research findings and observations about the retailer- it's simply grown too large and stable to respond with alacrity anymore to changes in consumer tastes. Further, with such a large, inertial sales volume, significant growth is no longer easy. Wal-Mart's ventures abroad have disappointed, suggesting their management style is not transferring well or easily to China, Europe, et. al.

As the chart above shows, if you had bought Wal-Mart stock over 30 years ago, and simply held, you'd still have outperformed the S&P for the period by a stunning margin. But you'd have to have sat and watched it tread water for this entire decade. Simply put, Wal-Mart's best days are behind it in terms of consistently superior shareholder return performance.

And you read it here first. Two years ago.

Parker Hannifin's CEO Discover's Customer Needs

Tuesday's Wall Street Journal featured a wonderful article on the radical new pricing policies initiated by the new CEO of Parker Hannifin.

It's sort of a good news/bad news story.

The bad news is, PH had actually hard-coded a fixed markup percentage into their pricing management software. Talk about inflexible, stupid, and being insensitive to the uses to which your products are put. I can see using a fixed minimum markup percentage, but not a fixed universal markup.

The good news is that the new CEO, Don Washkewicz, has brought an end to this practice, and instituted a 'willingness to pay' style, application-sensitive approach to markups. The customer's applications of PH's seals is now a paramount input into pricing. Thus, the company's marketing and product people focus more, not less, on customers, and their applications of PH's products. PH added $200MM of revenue and income to its P&L in four years, bringing it up to its current $673MM.

Two interesting things were mentioned in this story. First, how inept external consultants advocated PH develop a greater customer service focus, but neglect to accompany that with segmentation, product differentiation, and pricing strategies to pay for it. Second, PH had a total insensitivity to how its products were used by its customers. They knew next to nothing about the real customer problems, applications, and options for which PH's seals were alternative solutions.

In short, a lack of fundamental marketing skills existed at Parker Hannifin prior to Washkewicz's elevation to CEO. Now, PH has such a focus, and I hope it makes an appearance in my equity portfolios soon.

Wal-Mart and the Wheel of Retailing

Did you read the piece about Wal-Mart in the Wall Street Journal’s first weekend issue on Saturday? Am I the only person who doesn’t understand why Wal-Mart thinks it can trade-up from being the nation’s largest purveyor of cheap, bulk provisions to the masses to being a destination for those seeking fashion, style and upscale wares?

Back when I was earning my degrees in Marketing, there was a theory which was taught that went by the name of “the wheel of retailing.” It essentially observed that every so often, a new, low-cost retailer will arise that rips through the existing sector structure like a hot knife through butter, growing at the expense of outmoded, expensive older giants.

In the 1920s in hard goods, it was Sears. In the 1930s, in groceries, it was The Atlantic & Pacific Tea Company, a/k/a A&P. In fact, so virulent was A&P’s impact on the world of small, neighborhood grocers that the Robinson-Patman Act of 1934 was informally known as “the anti-A&P Act.”

That said, the Wal-Mart saga since the 1980s is both remarkable, yet not surprising. What the company did is not all that new. It upended several existing chains of general merchandisers who had grown inefficient, insensitive to consumer needs and wants, and basically moribund. How it did it was with the latest version of what the lowest entrants on the wheel of retailing always use- low-cost supply of large volumes of goods. It looks glitzier now, with integrated IT functions shared among vendors. But if you go back to the architect of Sears’ great transformation, you will find that Robert Wood, the creator of that transformation, learned his supply skills as quartermaster on the Panama Canal, one of the more challenging logistical projects of that era.

What is puzzling me is why there is all this attention paid to the mid-late life growth pangs of a retail success. Retailers who began life at the bottom always try to extend growth, once they saturate the market with stores, by moving up-market. And they nearly always fail in doing so.

So will Wal-Mart. The company appeared briefly as a selection in the large-cap equity portfolio I manage. That was back in the 90s. But it hasn’t performed in a consistently superior fashion in over a decade.

If Wal-Mart really wants to move up-market, they should do what Les Wexner did with The Limited. He employed a strategy of buying different brands to move out of the original retail niche in which The Limited succeeded. Wal-Mart could probably employ its size and legendary logistics acumen to vault some existing fashion brands into the big leagues, and at the same time, bring better financial management to them. And attract the more upscale consumers it now seeks, albeit through doors with other brand names on them.

Whether they do or not, at least they would have a fighting chance with both customer segments- the current Wal-Mart shopper, and the fashion-conscious shoppers who now move up to Target and Kohls. It’s not like Wal-Mart is aiming at uncharted, nor vacant, product/market territory.