Wednesday, June 20, 2018

Why Lyft Is Trying To Become The Next Subscription Business

IN MANY US cities, ride-sharing is a commodity. Both drivers and riders pull up Uber and Lyft interchangeably on their phones, weighing which to use based on price and wait time.
That’s a problem for ride-sharing companies. In an industry where new apps like Via, Juno, and Gett are coming online regularly, riders have myriad choices. Uber and Lyft can’t keep undercutting each other and everyone else to win riders forever; eventually, they’ll have to charge enough to retain drivers and also turn a profit, competing on the strength of their products and their brands. Both companies wish to be the one app we open every time we need to go anywhere. Lyft and Uber are attempting to compete for this alpha slot by improving their technology, boosting the quality of the service, and providing the most competitive prices.
But to become the one platform that people trust with their transportation needs, these companies will need to lock their riders in. That’s why Lyft’s new subscription service is so interesting.
Lyft has been testing versions of the plan since December, and last month it began rolling out the tests more broadly. “You’ll subscribe to a Lyft plan like you would subscribe to Netflix or a Spotify Premium plan,” president and cofounder John Zimmer explained when I visited the company’s San Francisco headquarters recently. He didn’t say how many people were enrolled in the program but pointed out that it was now being tested in every market.
The subscription program is still in the early stages, but it’s easy to see how Lyft would benefit. Indeed, many startups have adopted the subscription model to form a durable bond with sporadic users. “Spotify, Amazon, and others have employed ‘land grab’ strategies like this to change behavior and build new habits, as a means of forging loyalty in a moment of disruptive change,” says Robbie Kellman Baxter, consultant and author of The Membership Economy, a book that addresses subscription businesses. 
Subscription business models are very popular among investors, and that could be important as Lyft prepares for an initial public offering. “Wall Street loves them,” says Daniel Ives, the head of technology research for GBH Insights. He calls this approach a “golden business model” because it locks in repeat customers over time. “This is something that, as the company goes from private to public, would be looked on very favorably,” he says.
In recent years, digital startups have launched subscriptions in nearly every industry. You can get monthly razor deliveries and weekly dinner supplies. For $10 a month, cinephiles can watch a movie every day with MoviePass. You can listen to music with Spotify, get free delivery (and just about everything else) with Amazon Prime, and take fitness classes with ClassPass.
But ride-sharing subscription businesses have challenges that other industries, like software, do not. “Up until recently, most of the subscription-oriented businesses were for digital offerings—where variable costs were negligible,” Kellman Baxter says. “But with rides, there is a real cost for each ride.” Drivers must be paid enough to make it worth their while, regardless of the cost to riders. “The biggest concern is going to be coming up with pricing that doesn’t bankrupt them but is still compelling,” she says.
Since 2016, Lyft and Uber have experimented with membership passes—testing similar, simple programs. A rider pays an up-front fee and then gets reduced-cost rides for a month. (Prices and services vary according to the individual market.) But two years in, these passes remain experimental and hard to search out. Riders discover they are eligible through the app, and they can only try it for one month.
While Uber has no immediate plans to move the program out of its testing phase, Lyft’s subscription program takes the concept much farther. Right now, riders have two options. They can subscribe to the “All-Access Plan” for $299 per month and get 30 rides of up to $15. If a ride costs more than $15, a rider will be charged the difference. Or, they can subscribe to the "Commute Plan" and pay $3.99 month in exchange for 45 Lyft rides between work and home, set at one personalized price.
One early tester, a Chicago rider named Rachel Morrison who is a competitive intelligence analyst for the company Arity, blogged about her experience. “The deal was no joke,” she wrote. She payed a $135 monthly subscription fee for 30 ride using Lyft Line, the carpooling service, that cost up to $10 each.
In Morrison’s case, at least, the subscription had the intended loyalty-generating side effects. Morrison blogged that after signing up, she buried her Uber app in a folder on her iPhone’s last screen and moved her Lyft app to a prominent place on the opening screen so she’d remember to check it first every time. She also reported that she’d begun to use the service more, and had opted for taking a Lyft Line over public transportation to commute to work more often.
A subscription business also sets Lyft up for a future where its riders use more forms of transportation, like renting bikes and scooters, and turn to the Lyft app to figure out when to use a car and when to take the bus. Zimmer plans to expand this even further in a bid to be a full replacement for car ownership. “If we have a rental car program now that has tens of thousands of vehicles for drivers, we could potentially offer that to passengers,” Zimmer told me. 
Ride-share loyalty could help these other revenue streams thrive: If riders are opening the app nearly every day to call the Lyft Line, for example, they’re more likely to discover and experiment with these new services. But changing behavior is hard. When it comes to ride-sharing, most people are looking for the best price, and it will take a lot to train them to stop searching for something better.
I checked in with Morrison, the woman who’d blogged about her experience with Lyft’s membership, to see if she was still using the service. She loved it the first month, she told me. But rather like a gym membership, she didn’t use it as much the second month, and so she let her subscription lapse.

Tuesday, June 19, 2018

Fall of the American Empire: Paul Krugman

The U.S. government is, as a matter of policy, literally ripping children from the arms of their parents and putting them in fenced enclosures (which officials insist aren’t cages, oh no). The U.S. president is demanding that law enforcement stop investigating his associates and go after his political enemies instead. He has been insulting democratic allies while praising murderous dictators. And a global trade war seems increasingly likely.
What do these stories have in common? Obviously they’re all tied to the character of the man occupying the White House, surely the worst human being ever to hold his position. But there’s also a larger context, and it’s not just about Donald Trump. What we’re witnessing is a systematic rejection of longstanding American values — the values that actually made America great.
America has long been a powerful nation. In particular, we emerged from World War II with a level of both economic and military dominance not seen since the heyday of ancient Rome. But our role in the world was always about more than money and guns. It was also about ideals: America stood for something larger than itself — for freedom, human rights and the rule of law as universal principles.
Of course, we often fell short of those ideals. But the ideals were real, and mattered. any nations have pursued racist policies; but when the Swedish economist Gunnar Myrdal wrote his 1944 book about our “Negro problem,” he called it “An American Dilemma,” because he viewed us as a nation whose civilization had a “flavor of enlightenment” and whose citizens were aware at some level that our treatment of blacks was at odds with our principles. A
And his belief that there was a core of decency — maybe even goodness — to America was eventually vindicated by the rise and success, incomplete as it was, of the civil rights movement.

But what does American goodness — all too often honored in the breach, but still real — have to do with American power, let alone world trade? The answer is that for 70 years, American goodness and American greatness went hand in hand. Our ideals, and the fact that other countries knew we held those ideals, made us a different kind of great power, one that inspired trust.

Think about it. By the end of World War II, we and our British allies had in effect conquered a large part of the world. We could have become permanent occupiers, and/or installed subservient puppet governments, the way the Soviet Union did in Eastern Europe. And yes, we did do that in some developing countries; our history with, say, Iran is not at all pretty.
But what we mainly did instead was help defeated enemies get back on their feet, establishing democratic regimes that shared our core values and became allies in protecting those values. 
The Pax Americana was a sort of empire; certainly America was for a long time very much first among equals. But it was by historical standards a remarkably benign empire, held together by soft power and respect rather than force. (There are actually some parallels with the ancient Pax Romana, but that’s another story.)
And while you might be tempted to view international trade deals, which Trump says have turned us into a “piggy bank that everyone else is robbing,” as a completely separate story, they are anything but. Trade agreements were meant to (and did) make America richer, but they were also, from the beginning, about more than dollars and cents.
In fact, the modern world trading system was largely the brainchild not of economists or business interests, but of Cordell Hull, F.D.R.’s long-serving secretary of state, who believed that “prosperous trade among nations” was an essential element in building an “enduring peace.” So you want to think of the postwar creation of the General Agreement on Tariffs and Trade as part of the same strategy that more or less simultaneously gave rise to the Marshall Plan and the creation of NATO.
So all the things happening now are of a piece. Committing atrocities at the border, attacking the domestic rule of law, insulting democratic leaders while praising thugs, and breaking up trade agreements are all about ending American exceptionalism, turning our back on the ideals that made us different from other powerful nations.
And rejecting our ideals won’t make us stronger; it will make us weaker. We were the leader of the free world, a moral as well as financial and military force. But we’re throwing all that away.
What’s more, it won’t even serve our self-interest. America isn’t nearly as dominant a power as it was 70 years ago; Trump is delusional if he thinks that other countries will back down in the face of his threats. And if we are heading for a full-blown trade war, which seems increasingly likely, both he and those who voted for him will be shocked at how it goes: Some industries will gain, but millions of workers will be displaced.
So Trump isn’t making America great again; he’s trashing the things that made us great, turning us into just another bully — one whose bullying will be far less effective than he imagines. 

Monday, June 18, 2018

Millennials seeking authenticity put ‘fear of god’ into big business

When Ben Branson asked a waitress for a “mocktail” one sober Monday night, “she came back with this pink blend of juice,” says the 35-year-old, wincing. “I felt like an idiot. I thought — I can’t be the only person not drinking alcohol on a Monday who isn’t satisfied with a blend of fruit juices.” Spurred by the pink juice experience, he came up with the idea for Seedlip, a non-alcoholic drink for grown-ups, inspired by a 17th-century herbal medicine book, The Art of Distillation. Mr Branson’s father was a brand designer and his mother’s family have farmed for 300 years. Peas from their farm, along with hay, rosemary and thyme are the main ingredients in Seedlip, which despite the lack of alcohol, costs as much as an upmarket gin at roughly £27 a bottle. It is too bitter to drink neat, and even mixed with tonic is best sipped rather than gulped. Despite the price, Seedlip sold out within two days of its 2015 launch at Selfridges, the upmarket London department store. Three years later, it is still one of the store’s best-selling drinks. “I think that’s pretty remarkable,” says Mr Branson, gazing into his mint-green Seedlip cocktail in a Spitalfields bar in London’s now hip East End. Seedlip, a non-alcoholic drink for grown-ups, sold out within 2 days of its 2015 launch at Selfridges in London. Meat processor Tyson Foods invested in Beyond Meat, a plant-based start-up that makes meatless burgers Even more remarkable is the fact that Diageo, the world’s biggest drinks company, decided in 2016 to invest in Mr Branson’s non-alcoholic venture. Seedlip is served in Michelin-starred restaurants and now sold in 17 countries. Why millennials are seeking ‘authenticity’ A wind of change is ripping through the consumer industries. For decades, big meant better, consumers trusted brands they knew and convenience food was a novelty. No longer. Emmanuel Faber, chief executive of Danone, France’s biggest food group, summed it up at the CAGNY industry conference in February this year. “Consumers are looking to ‘pierce the corporate veil’ in our industry and to look at what’s behind the brand,” he declared. “The guys responsible for this are the millennials.” Millennials have a completely new set of values, he said. “They want committed brands with authentic products. Natural, simpler, more local and if possible small, as small as you can.” Emmanuel Faber, Danone chief, said millennials 'want committed brands with authentic products. Natural, simpler, more local and if possible small, as small as you can' © AFP Millennial consumers — those aged 22 to 37-years-old, according to Pew Research — are in general more health-conscious than their parents were at the same age. They are drinking less alcohol, at least in developed markets. They want to know what is in the products they buy and where they come from, demanding curbs on plastic and waste. They are more environmentally aware — 61 per cent feel they can make a difference to the world through their choices, according to Euromonitor — and their trust in politicians and institutions is low. For big brands it all means increasing pressure, as this generation of consumers seeks “authenticity”. Andrew Geoghegan, Diageo’s global consumer planning director, is very aware of the shift. “Authenticity is a huge trend,” he says. “We saw it coming through in the last 15 years in areas like craft beer.” Whatever the millennials do, you can count on their preferences getting picked up by other generations and getting emulated Mark Schneider, Nestlé chief Michael Ward, Diageo head of innovation, adds that: “Consumers are increasingly aware of what they’re putting in their bodies, and making very decided choices about ingredients.” Diageo is uncomfortable about making sweeping statements about the world’s 2bn millennials. “So-called millennials are really different across the world,” says Mr Geoghegan. He prefers to break down the way people drink into “occasions” rather than segment them by age. Seedlip fits nicely into the occasion for having “a really interesting drink but without any of the alcohol and calories”. Mark Schneider, chief executive of Nestlé (the world’s biggest food group) agrees “it’s not only about millennials”, but regards their impact as hugely significant. “They’re important because this is a group that’s fast approaching their peak earning years. And youth rarely goes out of fashion. So whatever the millennials do, you can count on their preferences getting picked up by other generations and getting emulated. Catering to their needs is very important for any fast-moving consumer goods company,” he told investors recently. Big brands are losing out to smaller companies One of those preferences, certainly for millennials who can afford it, is food that is healthy, fresher and has natural ingredients. Sales of food claiming to be organic grew 10 per cent last year in the US, according to Nielsen, the market research group. Even in the weight loss industry, “everybody is talking about health and wellness. Nobody wants to use the word diet,” Mindy Grossman, chief executive of Weight Watchers, told analysts. In this climate, big brands are losing out to smaller companies. Over the past decade, as big companies were still adding sugar and artificial colours to their processed foods, small start-ups sprung up offering healthier or more exciting alternatives, often with an interesting back story about their entrepreneurial owners. Supermarkets are now devoting more space to small brands, which can also bypass stores altogether by selling direct to the consumer. Between 2011 to 2016, large brands in the US lost 3 percentage points of market share to smaller companies, according to Boston Consulting Group, equating to $22bn of sales. “This is the first time we’ve seen this in 50 years,” said Jim Brennan, partner at BCG, in an interview last month with Bernstein Research. “It fundamentally challenges what maintains the consumer packaged goods industry, at least certainly in the western world, since the postwar period.” Halo-Top ice cream, Graze snacks, Kind snack bars, Dollar Shave Club and Harry’s in razors, Tito’s in vodka, Fevertree tonics, The Ordinary and Glossier in skincare/cosmetics are all challenger brands that have grown rapidly, helped by authenticity credentials. How social media is eroding barriers Driving the change, even more than the buying habits of millennial consumers, is the rise of digital technology. In the past, a company needed a huge marketing budget to advertise on television and had to be big enough to persuade large grocery stores to stock its products. Those barriers have been eroded by social media, itself dominated by millennials, and online selling. As Mr Schneider says: “Because of digital change, once you have the product then making it to market has become cheaper and much faster. Initially, I think all large companies ignored that trend.” The upshot is that big companies’ revenues are no longer growing as fast as they once did. Paul Polman, Unilever chief, said his biggest fear for the company 'is that we lose the connection with millennials' . In 2011, the 50 biggest consumer groups — including Procter & Gamble, Unilever, PepsiCo and General Mills — were growing at an average of 7 per cent, according to the consultancy OC&C. But that rate has dropped every year since, and in 2016 average sales actually fell. Jorge Paulo Lemann, the Brazilian investor behind both AB InBev and 3G Capital, which part-owns Kraft Heinz foods, told the Milken Institute conference in April that he felt like “a dinosaur”. “I’ve been living in this cosy world of old brands, big volumes, nothing changing very much,” he said. “You can just focus on being efficient and you’ll do OK. And, all of a sudden, we’re being disrupted in all ways.” Everybody is talking about health and wellness. Nobody wants to use the word diet Mindy Grossman, Weight Watchers chief The industry is now at a turning point. Big brands still dominate. But with small being the new big, can they appeal to fussy consumers in fragmenting markets, while operating in an unfamiliar world in which Facebook “likes” can count for more than million-dollar marketing budgets? “My biggest fear for this company, of which I have very few, is that we lose the connection with millennials,” Paul Polman, Unilever chief executive told the FT in November: “Very selfishly, because then obviously we don’t have future consumers any more.” The new strategies happening now Big consumer groups are still trying to work it out with a range of strategies, from buying up small on-trend start-ups, to cutting costs and increasing the rate of new products. “They can’t make up their minds on how to respond,” says Nick Fereday, analyst at Rabobank, “whether the days of global iconic brands are over, or whether iconic brands are infinitely malleable and can be adapted to today’s trends.” Faced with these challenges, the initial reaction has been to cut costs. This has also been driven by the enormous influence of 3G Capital, which has boosted profitability in its companies Burger King and Kraft Heinz through cost-cutting and big M&A. P&G, the biggest consumer goods group in the US, has been shrinking its business by reducing its brands from 170 to 65 since 2015. The producer of Pampers nappies and Crest toothpaste saved $750m by slashing its advertising and marketing agencies from 6,000 to 2,500, and aims to halve that number again. Who are the millennials? – in 5 charts Many large companies, including US food producers Kellogg and Campbell Soup, have set up venture capital arms to jump on promising start-ups. General Mills, producer of Cheerios cereal, used its 301 Inc subsidiary to invest in Rhythm Superfoods which makes broccoli snacks and kale crisps. Unilever has spent more than €9bn on about 20 acquisitions since 2015, mostly small companies, including Dollar Shave Club, Pukka organic teas, and Seventh Generation eco-friendly laundry products. These “speedboats”, as Mr Polman calls them, are one way to capture fast-moving trends and learn from those entrepreneur founders who agree to stay on board. General Mills used a subsidiary to invest in Rhythm Superfoods, which makes broccoli snacks and kale crisps. Unilever has spent more than €9bn on about 20 acquisitions since 2015, including Pukka organic teas With vegetarianism on the rise, Tyson Foods, the US meat processor is hedging its bets about future diets: it has invested in Beyond Meat, a plant-based start-up that makes meatless burgers. And companies are trying to appeal to a younger generation with new products. Unilever had not launched a new product for two decades until last year when it came out with half a dozen, including Love, Beauty and Planet shampoos and shower gels. Big brand dilemma: will anything really help? The question is whether these strategies will work. Mr Lemann said at the Milken conference that changes in developed markets such as the US are not happening so quickly elsewhere. He was optimistic that once similar trends emerged in other countries, consumer companies would be ready. AB InBev had been taken by surprise by the rise of craft beer, he admitted. “We reacted, we bought 20 craft companies. In international markets, if craft appears in Argentina or Brazil, we’ll buy it right away.” The 78-year-old is certainly not going to give up. “I’m not going to lie down and go away,” he said. Nestlé’s Mr Schneider does not believe that big companies need to downsize. “Can we really compete with three guys in a garage? No, we cannot and, honestly, we shouldn’t try. Sometimes it’s good to have entrepreneurs test out trends first, then being a fast follower is good enough.” One industry veteran thinks, however, that big brands have probably lost a certain type of millennial consumer. Elio Leoni-Sceti held senior roles at Reckitt Benckiser, the Dettol disinfectant to Mucinex cold remedies group, and was head of frozen foods group Iglo. He co-founded The Craftory, an investment group launched last month to help challenger companies grow. When a brand tries to dress up differently, consumers disassociate and don’t engage Elio Leoni-Sceti, The Craftory co-founder He believes that consumers looking for good-value “average quality” would continue to buy big brand names. But, “there is a growing and significant percentage of consumers, call it around one-third in the developed world, which is not looking for this kind of brand. A lot of these [big] brands are trying to reinvent themselves for this kind of demanding consumer but many of them fail. When a brand tries to dress up differently, consumers disassociate and don’t engage.” Others argue that big brands should be able to regain their poise: “We’ve heard the cry that ‘brands are dead’ every year without fail for the past 15 years,” says Richard Taylor, analyst at Morgan Stanley. “The 200-year history of global fast-moving goods companies strongly suggests that brands will endure.” Martin Deboo, analyst at Jefferies, agrees. “Millennials have certainly been putting the fear of god into the staid US food industry,” he says, but “fragmentation fears are overdone” and the best players will be able to adapt.  . As for Mr Branson, with his “scary, crazy dream of wanting to change the way the world drinks”, he has no complaints about Diageo. He is grateful for their support while being left to get on with the business. But he knows he does not want to run Seedlip forever. “I’m good at starting things but I’m not really a commercial mastermind that’s going to take something from 100,000 to 200m. I’m not good at making things big — I’m not excited about that at all.”

Wisdom of Charlier Munger

-Deserved trust is the most important thing. 
"The highest form that civilization can reach is a seamless web of deserved trust — not much procedure, just totally reliable people correctly trusting one another. ... In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has fortyseven pages, I suggest you not enter.” 
• Those who keep learning, will keep rising in life. 
"I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.” 
• Life has terrible and unfair blows. 
Utilize them in a constructive fashion. "Another thing, of course, is that life will have terrible blows in it, horrible blows, unfair blows. It doesn't matter. And some people recover and others don’t. And there I think the attitude of Epictetus (Greek philosopher) is the best. He thought that every missed chance in life was an opportunity to behave well, every missed chance in life was an opportunity to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea.” 
• Wisdom acquisition is a moral duty. 
"Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. Wisdom acquisition is a moral duty. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here.” 
• Real knowledge is knowing that you don't know. 
 "Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing…. The survivors know. ... Knowing what you don’t know is more useful than being brilliant.” • Spend each day trying to be a little wiser than you were when you woke up. 
• “We both (Charlie Munger and Warren Bufett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.” 
• You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time. • It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, ‘It’s the strong swimmers who drown.’ 
• How do you learn to be a great investor? First of all, you have to understand your own nature. Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable and some losses are inevitable – you might be wise to utilize a very conservative pattern of investment and savings all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one size fits all investment strategy that I can give you. 

Tips for accountants ☺ 
• Optimistic accounting leads to 99% of problems. 
"Ninety-nine percent of the troubles that threaten our civilization come from too optimistic accounting. And yet these damn accountants with their desire for mathematical purity want to devote exactly as much attention to accounting that is too pessimistic as they do to accounting that is too optimistic — which is crazy. Ninety-nine percent of the problems come from being too optimistic. Therefore, we should have a system where the accounting is way more conservative. "Source – University of Michigan discussion. 
• Assets require more scrutiny than the liabilities.” 
The liabilities are always 100 percent good. It’s the assets you have to worry about” 
• Three rules for a career: 1) Don’t sell anything you wouldn’t buy yourself; 2) Don’t work for anyone you don’t respect and admire; and 3) Work only with people you enjoy. 
• Never underestimate the power of incentives and the power of compounding.

Retail Reimagining: Why Being Great Is no Longer Good Enough

The retail industry is undergoing a major repositioning as legacy stores and brands that were once customer favorites fall victim to shifting consumer demands. Nine West, Toys R Us, Claire’s, Macy’s, Aerosoles, BCBG, Payless and countless others have either filed for bankruptcy, closed hundreds of stores or simply pulled the plug on the whole operation. In her new book, The Shopping Revolution: How Successful Retailers Win Customers in an Era of Endless Disruption, Wharton marketing professor Barbara Kahn explains how retailers can weather these radical changes. Kahn joined Knowledge@Wharton to explain why in today’s retail environment, it takes more than a great sale to keep customers coming back for more.
An edited transcript of the conversation follows.
Knowledge@Wharton: This book could easily be titled The Amazon Revolution. What is it that Amazon knows about consumers that other retailers don’t?
Barbara Kahn: The interesting thing about Amazon is that they have, as they call it, a maniacal focus on the consumer. If you look at retailers in the past, the customer was not part of the proposition. Amazon understood that the customer experience really matters.
Knowledge@Wharton: Walmart is also a huge player here. In what ways does Walmart need to copy Amazon, and in what ways should it follow its own path?
Kahn: Walmart disrupted the retail industry in the mid-1990s. I wrote a book about it then. It was called Grocery Revolution. What Walmart did was an operationally excellent strategy at the time: They evened out demand, got rid of high-low pricing and went to everyday low pricing. They understood that customers want low prices, and they really attacked it from an operational point of view. But what Amazon showed was that it’s not just about price, although price clearly matters to a certain segment of consumers. But it’s also about convenience. Frictionless. Make it easy. Walmart hadn’t done that before. In response to the competition, or the competitive expectations that Amazon has imposed on the industry, Walmart has to make their world more frictionless. And they have to embrace online shopping and e-commerce in a way that they hadn’t previously.
Knowledge@Wharton: In the book, you share a framework for helping to make sense of all these changes in retail. What are some of the key elements of the framework?
Kahn: I did a lot of research, and I’ve been studying the industry for a while. [In the book,] there is a description of some of the different research, but it’s important to lay it on a framework and to think about the strategic implications. That’s what I think the value of the book is. So, it’s a very simple framework. It’s deceptively simple, but it has really strong implications. 
I start with two basic principles. The first is the principle of customer value. In the retail world, it means that customers want to buy something they value from someone they trust. That forms the columns of my matrix — product experience and customer experience. The second principle is the principle of differential advantage. They want to buy from retailers who do it better than anybody else. How can a retailer do it better? They can either give more pleasure or take away pain. That provides the rows of the matrix.
Therefore, in my matrix, I have a two by two. On the top row, which is benefits or pleasure, the product quadrant would be things like brand or luxury or design or technology or something that’s really super-cool about a product that you’re willing to pay a premium price or even a luxury price. It’s the importance of in-store touch and feel. That quadrant would be retailers like Sephora or Eataly, which provide incredible, state-of-the-art customer experiences in the store.
Kahn Figure 1.1
Copyright Barbara E. Kahn. Published by Permission of Wharton Digital Press.
On the second row, it’s take away pain. And on one, it’s the pain of the product’s price. Walmart is an example of take away pain and offer low price. Walmart, Costco, TJ Maxx would be in that quadrant. Take away the pain from the customer experience is what Amazon did really differently, and they made it convenient. They made it frictionless. In Amazon’s case, their differential advantage is collecting a lot of customer data so that they can constantly simplify and personalize and customize the experience to make it easier and easier for the customer. That’s the matrix. That’s how I can define things. But the strategic implications of the matrix are something else.
Knowledge@Wharton: You noted in the book that it used to be good enough to just be good at one of those things. But now, you need to be good at more than one of those things. Is that one of the implications?
Kahn: Yeah. That’s something that I discovered when I was trying to map these different strategies on the matrix. In a lot of marketing strategy frameworks, it’s, “Be the best at something and good enough at everything else.” That’s a rubric that we’ve used strategically. But when I was looking at what was happening in retail, it’s an industry that is being disrupted. It’s very, very hyper-competitive now. If you can’t make it, you’re really going to go out of business.
When I looked at the winning strategies, each one of the winning retailers were the best at something. But they leveraged that leadership advantage to be the best at something else, too. I call that the two-quadrant strategy. So, you have to be the best at two things and good enough at everything else. But if you’re in a competitive industry, if everybody’s trying to be the best at something, what that does is ratchet up customer expectations. Even when you’re trying to be just good enough at something, those expectations are constantly going up.
You can see it in what Amazon’s done to the industry. Say you’re competing on price, but Amazon is making two-hour deliveries or these kinds of things that raise customers’ expectations. Just being good enough in that quadrant of frictionless or convenience is getting harder and harder to do, let alone being the best the way Amazon is.
Knowledge@Wharton: Are customer expectations driving a lot of these changes?
Kahn: Five years ago, you would walk to your grocery store and get groceries. You didn’t think that much of it. Now, you demand that it’s delivered to you, and it’s got to be delivered to you at this time. The reason why those customer expectations are higher is because retailers are delivering to these new values, and customers get used to it and want everybody to do it.
Knowledge@Wharton: If you could pick one trend that retailers need to focus on now, what would it be?
Kahn: I do think understanding the importance of customer experience is really important — understand that customers now have been catered to. They expect things to be convenient. They expect the retailer to have an online presence. There are some retailers who still don’t have an online presence, and I wonder what will happen to them. Trader Joe’s is a retailer that people just love. It’s a real niche retailer, but they don’t have much of an online presence. I wonder what will happen going forward if they don’t rectify that situation. 
Knowledge@Wharton: A lot of legacy retailers are suffering because they have stores and systems that are outdated. If a retailer is way behind now, how can they catch up?
Kahn: I don’t know. A lot of retailers that have fallen behind just really haven’t caught up. A couple of things are driving that. One, Amazon alone has just raised people’s expectations on e-commerce. But you also see a difference in consumers. A lot has been written about millennials, but now people are focusing on Generation Z. These are what people are calling digitally native consumers. They grew up with the phone in their hand and shop through their phone. They expect online. If you don’t have a seamless shopping experience that goes across physical stores, mobile and online, these people are just going to go somewhere else. It doesn’t make sense for them.
A lot of the legacy retailers understand it. I’m not saying they’re naive and don’t get the importance of e-commerce. But they have legacy systems that are hard to integrate. The online and offline have been so separate that, for some of these retailers, it’s very hard to get up to speed. That gives an advantage to the digitally native retailers who came in after expectations. They came in with an online presence, and then they started opening stores. It was much easier for them to integrate the shopping experience than the other way around.
Knowledge@Wharton: All eyes tend to be on Amazon and Walmart because they are the big examples. But what are some other retailers flying under the radar that are doing things well?
Kahn: A lot of attention is being payed to what are called digitally native vertical brands. [One] is [eyewear company] Warby Parker. Warby Parker is one of the big ones that started and really got the equation right. What digitally native vertical brands have in common is an amazing brand that really caters to a customer segment and really cares about what the customers want. So, they offer something of value. The other thing that characterizes these digitally native vertical brands is that they are vertical, which means that they go direct to the end-user. They can do that because they start out online and don’t need to go through physical retailers, necessarily. That eliminates layers and offers a good price. So Warby Parker, as well as Bonobos, Casper, or some of the other digital native vertical brands, offer really cool customer experience brands, but they offer it at a lower price. They compete very effectively because they have that two-quadrant leadership strategy.
Knowledge@Wharton: H&M is a retailer that became successful riding this wave of fast fashion, but now it’s sitting on billions in unsold inventory. What do you think went wrong? What lessons are there for other retailers?
Kahn: Zara is also a fast-fashion retailer, which I also think of as a vertical brand. It eliminated the layers, too, and offers a good brand at a low price. H&M and Zara both did that. Zara is a little higher price point than H&M but still much cheaper than luxury. What Zara did, which I don’t think H&M did as well, was it had a better prediction of inventory, of fashion taste. They were right on top of fashion and managed their inventory well. H&M had a lot of excess inventory. Once you start doing that, you’re not really on top of what customers want. Then you get a lot of costs that have to be managed. 
Knowledge@Wharton: A lot of luxury retailers are retooling to compete in an even more fickle fashion world. What does luxury mean now? Does it mean something different than it did 10 years ago?
Kahn: Yeah. Going back to this epiphany that I had about two-quadrant strategy, luxury used to be good enough to be just fantastic brands. They didn’t have to compete on price, and they weren’t convenient. Part of the luxury paradox is that it shouldn’t be easy to get, so that makes it more valuable. That’s crazy, but that is what happens.
But now, with people’s expectation of online convenience, even luxury brands, which went kicking and screaming into this notion of e-commerce, recognize that e-commerce is starting to be a factor in whether consumers will buy from you or not. You’re seeing new platforms starting up, like Net-a-Porter or Farfetch, which are e-commerce platforms trying to cater to the luxury market. Outside of the U.S., Alibaba is doing that.
Most of the luxury companies or brands do not want to sell on Amazon because they don’t think that Amazon will give them enough power over their own brand. Amazon is a very ruthless retailer. But some of the other platforms are ways for these luxury brands to reach their consumers, protect their brand mystique and still offer some convenience of e-commerce.
Knowledge@Wharton: This new era of retail also has implications for commercial real estate. How will developers have to change their strategy to accommodate this new world?
Kahn: You’re seeing a lot of interesting changes in physical stores. A lot of the B and C malls, the less attractive malls, have been closing down. Even when you see the A malls open up, they are not the same A malls as in the past. A good example is Century City, one of the new malls that opened up in Los Angeles. It’s a gorgeous mall. I loved it. One of the anchors is Eataly, which is a food place. They have tons of restaurants. They have gyms. They have a department store. Nordstrom is there. But the statistics that I’ve seen is that a lot more of the purchases used to be made in the department stores, and that’s going way down. It’s much more experiential. People like to hang out at the malls. They eat, they go to the movies, they go to gym. There’s still some retail there, but it’s a different mix of retail.
Knowledge@Wharton: Given these trends, what do you think the retail experience will be like for the consumer 10 years from now?
Kahn: That’s hard to call, for sure. There are other trends. Demographically, a lot of people are moving into the city, so you’re seeing smaller-footprint stores there. I think a lot of the retail physical stores are making themselves smaller because they’re not carrying as much inventory. Some of the retail stores are becoming showrooms. You can go there to touch and feel the product, and then you order it online and it’s delivered within two hours. That suggests the store itself doesn’t have to have the inventory.
I think the importance of this touch-and-feel and really valuable customer experience is going to matter. It’s not just about food. A lot of people think customer experience is to offer a cup of coffee. It’s obviously more than that. But it has to be a way where you really understand what the customers want to do in the store.
The other thing that a lot of the retailers are fooling around with, and it’s very interesting to think about, is health care. That’s also very high touch. You’re moving into CVS and Walgreens doing a lot more primary care in their stores, which is an experiential thing. You do have to see somebody to have them touch you, figure out what’s wrong with you or give you a shot. Anything that’s experiential might be in these retail stores, not just pure shopping. I think you’ll see these smaller stores, more experiential, defined very broadly. If the industry continues to be this competitive, then I think you’ll see customer expectations constantly being ratcheted up, and retailers will really have to keep improving and innovating.
Knowledge@Wharton: What about the fate of big-box stores?
Kahn: A lot of the closings are big-box retailers: Circuit City, Borders, Toys R Us. Those used to be called category killers. What they offered was huge assortment at low price, but online can totally defeat that. That’s just not a winning proposition anymore. The question is, can department stores exist? They’re trying. Macy’s has a lot of strategies on the table. They really understand the threat, and they’re trying to catch up. Time will tell if they can make it.
Knowledge@Wharton: What are the core tenets of retail that will never change?
Kahn: The irony when I developed this matrix is that, duh, this is Marketing 101: Give customers what they want and do it better than the competition. What that means is customer expectations change. It might mean something different. But really, being customer-focused I think will always be in style.

Sunday, June 17, 2018

Utilities are in need of a new model

Over the past 10 years, energy utilities across the world have delivered average cumulative shareholder returns of just 1 per cent. The figure comes from an interesting new paper from McKinsey, which looked at 50 publicly listed utilities. By comparison, the performance of a global index of overall corporate performance showed a gain of 55 per cent.  Investors have had a miserable time. Many of the companies in the survey have lost value, some considerably. Centrica of the UK has seen its share price fall 50 per cent over the past four years. France’s EDF has lost 65 per cent of its value since the 2005 initial public offering. Despite some recent recovery, the German utility RWE is worth little more than a fifth of its peak value 10 years ago. What has caused this chronic underperformance?  There seem to be two answers. The first, highlighted by McKinsey, is the failure of individual companies to adapt to a rapidly changing market structure. The growth of renewables, backed in many cases by subsidies and given protected shares of the market, has not only changed the energy mix but also encouraged distributed production. The old model of large-scale, centralised power stations pumping out electricity to passive consumers is out of date. But the preference for renewables that produce power when the wind blows or the sun shines leaves many utilities with older assets such as gas-fired power plants, which are needed to maintain continuous supply but are running at far less than capacity and quickly become uneconomic.  The utilities have begun to accept, often reluctantly, that they have to identify new ways of working. Some have given up producing power themselves, and simply trade what others produce. Others have switched to managing distributed supplies, while yet more have become suppliers of energy management services. Some, like Centrica, no longer describe themselves as utilities. The sector is in flux and only those most capable of adapting will survive. It is not hard to imagine investors giving up on traditional utilities or to envisage new players that will apply technology, especially around data management, to create entirely different business models.  Just as supermarkets took to selling petrol to draw people into their stores, so could gas or electricity provision attract customers for a wider package of goods and services. The other challenge is the targeting of utilities by governments looking for someone to blame for policy failures — as in the UK. Egged on by politicians, the British tabloids have targeted energy suppliers as examples of corporate greed that milk consumers from a position of quasi monopoly. Never mind that the last major review by the competition authorities focused on tariff structures and the need to make switching between suppliers easier rather than any suggestion of price fixing. Or that utilities have to fund the maintenance of the network and invest in new capacity. Or that governments have added to consumers’ bills the charges from the shift to low carbon energy, which should be covered through general taxation. Beating up the utilities may be a short-term win for politicians but it carries real risks. It is not sustainable for private companies to deliver a return of only 1 per cent over 10 years. Investors expect, and can get, better returns. Why should our pension funds put money into a sector that produces only profit warnings? Private capital will be withdrawn — the fall in valuations of many companies shows that is happening already. Since the job utilities do is essential to the running of a modern economy, without private capital the state will have to take ownership and control of their basic functions. That might satisfy some people on political grounds but it is hard to see how it would improve performance. EDF, for example, is state controlled and is hardly a success story.  The provision of basic services will always be subject to extensive regulation and public policy decisions. Continuity of energy supply is a strategic necessity. If the lights go out, politicians tend to go out too. In many parts of the sector, utilities are natural monopolies and need to be controlled as such. On a whole range of issues, from safety to environmental policy objectives to the protection of poorer customers, they will always be constrained. But there is a world of difference between firm regulation and nationalisation. The challenge is to find a better solution. If we want a rational market in energy supply, there needs to be a new social contract in the sector based on transparency, strong competition and the recognition of the need for a fair rate of return for investors. Destroying trust in utilities may be good politics in an age of populism, but it is not good public policy.