Thinking Outside the Taco

The core problem facing many retailers is channel obsolescence. It’s driven by the proliferation of consumer choice and rapid market segmentation.  For many the infusion of value selling ecommerce competition has resulted in the commoditization of several categories, compressing margin and shrinking contribution required to support a physical distribution model created in the days before ecommerce.  These businesses become locked into excessive overheads, unable to “right size” their fixed costs as quickly as consumers shift channels. Closing unprofitable locations is a good first step, but it only delays the inevitable unless management invents a new customer experience and a profitable financial model to support it.

I’m a person that believes in fundamentals over façade.  Success isn’t a byproduct of sophistication, it occurs over time as a result of properly executed fundamentals. When management explores transformational strategy it’s critical to strip away all the façade to understand the model’s mechanic at the most fundamental level. Only then can you identify the similarities to other successful models—gaining essential insight. Each retailer is constrained by unique circumstance, separated only by the distance of the transformation required.  It doesn’t matter if you’re selling fashion or fast food; you face many of the same financial challenges to your model.

A fast food company, Taco Bell, taught one of the great lessons in transformation decades ago.  As they stripped away the façade from their business they confirmed a nearly identical model to McDonalds, Burger King and emerging fast food competitors selling Mexican cuisine.   All businesses required a similar physical footprint, which meant they were all constrained by the same real-estate investment.  The same investment created the same financial drag on the model.  Each business dedicated a small percentage of the footprint to customer seating with the majority allocated to kitchen space.  As they searched for a competitive advantage to ignite growth they also were challenged to solve another problem.  Their model required staffers to prepare large quantities of messy ground beef in the morning that soiled their uniforms by the time lunch rolled around.  Consumers were turned off by the disheveled look of the employees. 

And then the insight occurred.  They realized their model was also similar to a catered office cafeteria.  It was a moment of epic transformation.  By outsourcing the food preparation they eliminated the need for a kitchen and dramatically reduced the physical footprint and corresponding investment.   Food prepared at a remote location would be delivered in warming trays and Staff would now become cleanly clothed assemblers of menu items.  Suddenly they had reinvented a model that not only slashed cost and reduced investment, but opened the door to thousands of locations not accessible by their competitors constrained by large footprints.  Taco Bell went from a small and struggling fast food business to exploding with seismic growth.  How will you transform your retail business?  For more ways to think outside the taco, visit my website at shawstrategy.com

When Maytag Lost the Match

Early in my business career I became obsessed with tennis, joined a club and hired a teaching professional.  As my physical skills developed my pro wisely decided it was time to work on the mental game by discussing match strategy. 

“There are only two positions to play from on the court, at the net and the baseline,” he said.

I quickly challenged his thinking because it occurred to me that from the service line (the middle of my half of the court); I would be in a better position to reach all shots.  “Not true, it’s really no man’s land because you’re not in a position to defend anything well.  He can lob, pass you or drop it at the net,” he replied. My pro helped me accurately evaluate my game.  I was a quick player with great reflexes burdened by a weak first serve.  My topspin forehand was good, but I played a cut backhand.  For me the best chance of winning was to play at the net as often as possible. 

As I look back on my career I’ve equated that experience to business strategy.  I’ve always preferred high-margin small-volume models that scale.  I like to think of it as playing at the net—fewer shots and quicker points. The opposite model is low-margin high-volume and requires the player to pound it out from the baseline.  Both can be successful, but each come with an entirely different risk profile and require a unique set of competencies.  Starbucks is an example of a high-margin low-volume model that scales to enormous size.  They play at the net and they are really good.   Amazon is the classic example of a large low-margin high-volume model pounding out millions of low margin transactions from the baseline.

When management explores channel strategy it’s important to accurately value its business skill set long before the first serve. If ego gets in the way or you fail to correctly evaluate your ability it’s easy to play the wrong game and lose.

A classic example is illustrated by the Maytag Company’s strategic failure, which ultimately led to its downfall.

For nearly 100 years, Maytag built a reputation for superior quality, long product life and exceptional service. Maytag owned the high-end laundry market and had developed a unique and powerful channel reaching the consumer through dedicated distributors with small retail locations throughout America.  They played at the net and owned it.  One day they awoke and realized they were sitting on too much cash.  To avoid being acquired in a leveraged buy-out, they decided to put the money to work by purchasing other business units.  This was their defining moment and the beginning of the end.   Seduced by their dominating success at the net, they looked at the big box stores and became envious of the distribution game played by Whirlpool, GE and others.  They longed to hit from the baseline and began acquiring businesses that played there, expanding into mid-level ranges, refrigerators and dishwashers.  They elected to discontinue the hugely successful distributor network strategy and join the acquisitions at the big box baseline.

My Father was one of the people elected to travel the United States and inform his distributors that Maytag was changing channels and would no longer need their services.  It was hard for my Dad because many of the business relationships were friendships that spanned generations.   At the time he told me it was a big mistake.  Maytag quickly learned competitors were much better at making less expensive appliances and connecting to the people that would buy them. They found themselves in no man’s land, stranded between the net and the baseline—compressed between rising manufacturing costs and smaller price points driven by their competitor’s efficiencies.  It was a game they weren’t familiar with and there was no going back. 

Maytag should have listened to Bear Bryant who said, “Dance with the one that brung ya.”  Translated from Deep South vernacular this phrase means you should remain loyal to the process that brought you success, especially if it’s not broken.  Maytag’s management failed to understand their competitive advantage was about the channel they created, the ability to produce superior quality products and market to consumers willing to pay higher prices.  Needing growth, they should have stayed at the net and acquired other high-end and high-margin low-volume appliance brands appropriate for the established channel and skill set.  Instead, Maytag threw the healthy channel baby out with the bath water.  Congratulations Whirlpool, you won.

Today, many iconic high-margin brands are being seduced into playing the low margin ecommerce game.  Like Maytag before them, they find themselves in no man’s land with a business model lacking the efficiency to compete at the baseline—trampled by the ecommerce elephant in the space.  They struggle to find a match strategy to defeat this new opponent when the solution has always been to stay at the ecommerce net.  Simply said, “go where the elephant isn’t.”  For more ideas on transformational channel strategy that keeps you in the game, visit my website at shawstrategy.com 

The Myth of Developed Markets

In Depth: The Direct Selling Channel Part Four

One of the biggest mistakes management can make is to believe in the myth of developed markets.

I’m talking about the false underlying premise that developed markets actually exist.  They don’t.  To refer to a market as developed is to assume the evolutionary process is complete, or at best, static.  All markets are emerging and like the “Big Bang” theory—markets that are further along in the process aren’t moving slower—they are evolving faster.  This enormous disconnect between the reality of continuous market evolution and the perception that markets are either emerging or developed is at the root cause of so many direct selling channel failures and the death spiral of once behemoth household brands.  Conversely, the recognition of market evolution and the implementation of transformational channel strategy has been the hallmark of a small group of companies that continue to thrive.  To become empowered by this concept lets start by abandoning the idea that there are two buckets of markets, emerging or developed.  Instead let’s envision a spectrum of development where each market is located at some point in its evolution by predetermined criteria like the percentage of access to consumer credit and logistical infrastructure. 

In the same way there are wavelengths of light at each end of the spectrum that aren’t visible to the human eye, there are markets too primitive and too advanced to be seen as viable by the business eye.  As primitive markets build infrastructure they emerge at the beginning of the visible business spectrum.  What most consider developed are simply emerging markets further along in the evolutionary process of infrastructure adaptation. 

Let me give you an example of a geographic market that might fall in between what many consider emerging and developed.  I’m thinking of a Country with significant GNP but where consumers don’t have access to credit cards.  While they don’t yet have home delivery they have decent highway infrastructure, a good trucking industry and business-to-business service with UPS.  What Country is it?  Peru?   Mexico?  Spain?  It’s the United States of America in 1975.  In 1975 many would have considered the U.S. “the developed market.”  But there was another more developed market beyond the visible business spectrum because it existed in the future—a market where companies compete to bring merchandise to your door.  Where you don’t have to leave your home to shop and you can pay without writing a check or using cash.  The question isn’t where—it’s when.

Let me explain why this is important.  To consider a market as developed is to approach the channel strategy as if the market has completed its evolutionary journey—it hasn’t.  At the opposite end of the business spectrum, past what most considered developed markets, you’ll find new markets invisible to the human eye.  That’s because these markets exist in the future. To paraphrase William Manchester, companies with vision see beyond the horizon to a future invisible to others—they envision new channel strategies for markets that their competitors fail to recognize.

In 1975 Home Interiors and Gifts was a growing powerhouse of a home décor business.  The owners did so well they founded the Dallas Mavericks NBA franchise.  Sales representatives were only allowed to call in orders one day a week.  Semi trailer trucks full of boxes pulled into the driveways of their Directors each week to unload dozens and dozens of home party sales into their garage.  Local company reps would arrive to pick up and later personally deliver the merchandise to the homes of their hostesses who would in turn deliver to homes of her friends and neighbors.  They had built one of the most successful party plan companies in history by developing a business model that was perfectly appropriate for the U.S. market in the 60’s before FedEx even considered home delivery.  A similar company in Orlando, Tupperware was nearly a mirror image of the Home Interior business model.  Together they were enjoying much more than $2B of annual revenue in today’s dollars.  

But that was all about to change. By the early 80’s I was the youngest division head at a sister company of Tupperware and participating on the Strategic Planning Group for Dart Industries. I noticed two companies gaining amazing traction in the space at a time when domestic sales at Tupperware were collapsing—Pampered Chef and The Longaberger Company.  Both new businesses combined would go on to sell more than $2B each year in today’s dollar.  Their annual growth in dollars equaled almost exactly the annual decline experienced by Tupperware and Home Interiors—essentially transferring reps and dollars from the old to the new.  This didn’t occur simply because Home Interiors failed to include baskets in their line or Tupperware couldn’t find a vendor to make ice cream scoops—it occurred because both the Tupperware and Home Interior channel strategy and subsequent business model had become obsolete.  Instead of the huge effort required to deliver product to the consumer by the sales organization, these new models utilized an emerging home delivery service.  Both start-ups dramatically changed their compensation model embracing multiple levels of compensation to reward leaders for growing teams instead of compensating a director for her warehouse and distribution effort.  Two billion in annual sales were lost and two billion in annual sales were won because two companies failed to realize their developed market was evolving and failed to adapt while two start-up ventures did what seemed appropriate.  The industry had reached a strategic inflection point and both established management groups failed to react.  By the time they did react they were in a death spiral and couldn’t recover.  Tupperware’s U.S. sales remain insignificant, but because current management embraced evolving channel strategy they are a thriving and diverse corporate entity.

Fast forward to today.  People seem confused when they see the numbers at Pampered Chef and Avon collapse.  They search for answers when scores of direct selling party plan companies go out of business.  How can this happen?  What’s going on?  It’s exactly the same scenario from 35 years ago.  These failing companies are utilizing the same business model with the same compensation plan and same back office infrastructure that was appropriate in the last century.  And like Home Interiors décor enterprise before them, the market continued to evolve and left them behind. Many if not most of today’s direct selling models have become as obsolete and inefficient as the companies they displaced a generation ago.  

For some it’s too late, they’ve gone to the graveyard where companies die from lack of vision and execution.  For others there is still time but the clock is ticking.  There is a new model for this time, a new group of products that are perfectly appropriate, a new technology infrastructure, a new group of potential participants and a new way to compensate them.  But you won’t find it in the direct selling space you’ve come to know.  It lives in the not too distant future at the intersection of an evolving ecommerce and re-imagined direct selling opportunity.  I’ve looked around the corner and seen it with my own eyes.  For more ideas on transformational strategy, visit my website shawstrategy.com

Sailing With Warren Buffett

In Depth: The Direct Selling Channel Part Three

Last week I had a conversation with a highly respected colleague about a business that was taking on water.  Swamped in a gale would probably be a better metaphor. It’s always easier to think clearly when you’re not the one in the storm trying desperately to save an unresponsive vessel. The CEO had done many things right—lowering the sails by cutting costs and jettisoning the drag of underperforming cargo.  But with each successive quarter the vessel rode deeper and deeper in the water.  

We imagined ourselves at the helm and the decisions we would make from the pilothouse.  We recalled the words of one of America’s most respected strategists, Warren Buffet.  He said, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” Buffett’s clear, no nonsense advice is exactly what so many CEOs understand intellectually but find so difficult to execute. 

If you find yourself in a leaking business it is essential to determine if you can repair it—what’s broken and why? This needs to be done calmly, but with a sense of urgency.  If your team believes they’ve identified the actions required to return the business to sustainable growth, then implement the actions and measure the progress against a near-term deadline.  If the actions fail to produce the desired results you need to make the hard call to change vessels as soon as possible. Forget all the emotional baggage that goes along with brand and history. Remember, you’re in the business of making money and building equity for your investors and that’s it, period. Products come and go and channels are constantly in need of rethinking.  The one constant in the equation is management’s responsibility to make money for the shareholders.

Think of yourself sailing through a shallow water passage in a deep draft ship.  You need to reach the open water on the other side but you know your ship will certainly run aground before you find safe harbor.  The old boat that has served you well for so many years just isn’t capable of making the journey. Once you’ve decided to find another boat, release that decision to a very small circle on a need to know basis to avoid panic.  Don’t abandon ship; view the current business as a collection of valuable resources to be harvested allowing you to construct or acquire a new business structure.  You drop anchor and begin stripping the vessel of its parts—building a new catamaran capable of navigating shallow water. Of course all of this depends on your ability to find an architect to build you an appropriate boat and a plan for transformation.  For more thoughts on navigation visit my website at shawstrategy.com.  There’s no reason to go down with the ship.

Is the Party Over?

In Depth: The Direct Selling Channel Part Two

This morning I read that a third party-plan company is shuttering in January—another fallen soldier on the battlefield of obsolescence. Obsolescence affects all direct selling companies in different ways and to varying degrees. Some find themselves in safe harbor, oblivious to the storm that’s raging around them. Others are blown away in the gale of commoditization as margins collapse and customer acquisition cost rises. This article is for those struggling in the gale. And it begins with a short story.

A few years ago newlyweds Tom and Mary were looking forward to hosting the extended family for their first Easter dinner. On Sunday morning Tom noticed Mary cutting about two inches off the end of the ham before placing it in the roaster. He asked, “Mary, why do you cut off the end of the ham before putting it in the roaster?”

“Because that’s the way my Mother always did it,” she replied. When Mary’s mother arrived Tom asked her the same question and receive the same answer—because that’s the way we’ve always done it.

A few minutes later Mary’s Grandmother arrived and Tom again asked, “Grandma, why do we cut the end off the ham before we bake it?”

She laughed and replied, “Do you mean to tell me you still do that? When Mary’s Mother was a little girl, I never had a pan big enough for the ham to fit so I always cut the end off it.” For two generations they continued to cut the end off the ham for no reason.

Today party-plan business models have continued to operate with compensation plans that are horribly inefficient because that’s the way they’ve always done it. Even start-up party-plan companies implement obsolete compensation models without first asking, “why?” Commissions, overrides, incentives, host programs, award’s, prizes, sales meetings and conventions are all promotional expenses related to customer acquisition. And they are all behavior modification tools.

When the party-plan model was created decades ago it offered a huge leap forward in productivity for the sales person. Instead of taking all week to make twelve individual sales calls, they could utilize a host who would arrange for eleven prospective customers to be present in her home at the same time. A representative could now earn as much in one night as she was earning in an entire week. But there was a catch, she had to cut the host in on the deal to entice her to clean her home, mail out 50 invitations, follow up with phone calls, get the husband to leave for the evening with the kids and find time to prepare snacks and beverages for the sales party. All behaviors she wouldn’t do for free. We quickly learned that sharing 15% to 20% of the party sales in product credit was enough to produce the behaviors required for success. If a company enjoys a 4X mark to retail and gives away 20% in a host program, that’s a promotional COG expense equivalent to 5% of the parties retail sales before free shipping and handling—expensive, but worth every penny.

Let’s fast forward to 2015. If you read my article, “Obsolescence and the Avon Lady,” then you understand today more than 70% of party-plan sales don’t occur at a physical party, they happen over the web as a result of email solicitation and social media promotions. Without a physical party you don’t require a host to put forth all that effort or said another way, exhibit all those difficult behaviors you’re paying for. For some reason nearly 100% of sales are attributed to a host and burdened by host expenses. How does that happen? Your sales reps are either acting as the both the rep and host, or they are allowing someone to earn the host credits without hosting a physical party. A big reason to compensate a host is to facilitate a physical recruiting experience. Without a physical party you have no platform to recruit and you begin to fall off the cliff. Today’s party-plan companies are paying big money for an important set of behaviors critical to their success and receiving an entirely different group of behaviors.

Let’s examine one more expensive behavior management is paying for and not receiving, field leadership. A big piece of your compensation plan is your total override payout. The money you are paying to the upline to grow the business or said another way, to acquire more customers by acquiring more representatives. This number usually ranges from 10% of sales to as high as 20%. Historically, as a leader grew her team it required more of her time as a coach and teacher. To drive the behaviors of her team she had to get in front of them each month by conducting a local meeting in her home or the home of a rep. As she promoted out reps they in turn were required to conduct monthly home meetings that she attended. When the team grew even bigger she had the added expense of holding meetings in hotels for her region. The added work, the awards, meeting and travel expenses were all costs she was expected to provide. These were the behaviors of leadership required by management in exchange for significant compensation. Today, that same significant percentage of revenue is paid to uplines without requiring the leader to leave her home. Congratulating people via email and providing recognition on social media doesn’t cost the upline much time or money and it doesn’t produce the results management intended. The reason a business fails isn’t the market—it’s the model. The majority of today’s party-plan companies, those that feel the pain of commoditization, are doomed to fail because they are grossly inefficient. They are paying as much as 25% of their revenue for behaviors that don’t exist. They continue to cut the end off the ham years after acquiring a new roaster.

If you’re in business selling a commoditized category you can’t continue to realize the same robust mark-up or you will price yourself out of business. When commoditization happens margins are compressed between locked in variable customer acquisition costs (the compensation plan) and lower realistic retail price points mandated by a proliferation of ecommerce competition. If you attempt to sell at realistic prices with a smaller mark-up you can’t support high customer acquisition costs, especially if you’re not getting the behavior you’re paying for. Checkmate.

With my new channel strategy I’ve identified a new set of behaviors that are drivers of growth and the cost required to achieve the behavior. This led to new business rules and a completely new compensation model that is extraordinarily efficient. It’s not about paying less; it’s about paying the right people the right amount for the right behavior. That drives efficiency, which in turn drives productivity. It’s time to quit cutting the end off the ham.

Obsolescence and The Avon Lady

In Depth: The Direct Selling Channel Part One

The direct selling channel in the United States is experiencing a strategic inflection point. The balance of forces acting on it has shifted dramatically as a result of advances in technology and socio-economic change.  The same can be said of the traditional retail channel as many iconic brands struggle to find a way forward in a new digital world with a non-digital model.  It should be apparent that the old structure, the old ways of doing business and the old ways of competing must evolve.  

A core problem facing direct sellers in more developed markets is channel obsolescence driven by the proliferation of consumer choice. This causes rapid market segmentation, fueled by the infusion of ecommerce competition resulting in the commoditization of high margin categories. Unlike emerging markets in South America where an expanding mobile platform acts as a catalyst for direct sales growth, developed markets are inundated with e-channel competitors better suited to serve smaller consumer segments. 

As traditional direct selling companies placed shopping carts on line, more customers chose electronic ordering instead of attending in home presentations.  Customers compared this experience unfavorably to what they discovered with e-retailing competitors.  Prices were too high, selection was too small, shipping was slow and expensive, and returns too difficult.  Key performance metrics deteriorated, rep counts declined and customer acquisition cost rose.  Many businesses became locked into excessive overheads, unable to “right size” their fixed costs as quickly as consumers shifted channels. Here's the ugly truth--simply adding a shopping cart to your business doesn't equate to creating a competitive digital model.

Party-plan business models are further challenged in the U.S. because of a dramatic shift in the composition of their historic target market, stay-at-home mothers.   According to Belinda Luscombe in her 5/14 Time article, “Stay at home moms not who you think they are,” current versions of business models were created to serve the “opt-out-stay-at-home mom” with a car pool and a husband with a nine to five job.  While start up party-plan companies continue to pursue an educated, married white home owner with a household income greater than $75,000, research indicates they make up a very small percentage of just 1% of all stay-at-home mothers—a huge disconnect. The vast majority of moms taking care of the kids can’t find well-paid work and they can’t find childcare that would make less than well-paid work worthwhile.  One third of stay-at-home moms were not born in America.  Half of them are not white and nearly half have only a high school diploma or less.  Twenty percent are single mothers and more than one third live in poverty, nearly double the percentage compared to 1980. 

As 2015 begins, two well known direct selling companies will shutter—Jockey’s Person to Person and Lia Sophia Jewelry.  These are just the latest in a long list of direct selling party plan companies to close their doors in the last 48 months. Avon’s stock is trading near a 52 week low as the collapse of their U.S. channel continues.  Not all direct selling companies are affected in the same way and to the same degree, but those that find themselves struggling in developed markets must create a new approach to the customer or continue to experience a downward cycle of revenue. 

Creating a new approach to the customer isn’t a new idea.  This channel has successfully reinvented itself in the past and will again in the future.  But reinventing requires management to reconceptualize the channel.  The narrow definition created by the Direct Selling Association defines the channel as “the marketing of products or services directly to consumers in a face to face manner, generally in their homes or the homes of others, at their workplace and other places away from permanent retail locations.”  This definition may have served the industry well in the past, but it's far too narrow for today.  Perhaps more than 70% of domestic dollars flowing into U.S. direct selling companies aren’t sold in a face-to-face manner.  They are marketed through email campaigns initiated by representatives to their contact base and promotions spread across social media.  Orders that occur as a result of electronic solicitation are placed online without the representative being in the same room, same State or even the same Country.  The channel is evolving but its participants are constrained by an obsolete business model.   There is a huge pent-up demand for a contemporary approach to the customer, especially with young women that are universally rejecting the current outdated model. 

I've reconceptualized the channel allowing me to look around the corner to see what so many haven't seen, a new direct selling space with enormous potential.  I've articulate new concepts that form a new channel structure and a new way of doing business.  I've identified appropriate categories and underserved target markets with exceptional potential.  This led to a new set of business rules and a new technology architecture.  Most will view it as the next logical step in ecommerce, some will see it as a 21st century version of direct selling.  Both will be correct.  One thing is certain; those that choose to enter or remain in the channel must create a business model that is more like the future or risk building on a platform of obsolescence.  

Note: Belinda Luscombe , “Stay at home moms not who you think they are” Time Inc. 5/9/14