Focus On: Stephen J. Hoch

Consumer Confidence Hits Five-year High: Time to Celebrate?

Posted on May 29, 2013

072110consumerconfidenceTuesday’s report from the Conference Board indicating a spike in consumer confidence — now at its highest level in five years — should boost optimism about growth in the second half of this year. Add to this a big rise in home sales and a stock market surging to record highs, and the outlook for the U.S. economy is bright. After all, numbers like these typically mean that consumers will spend more, companies will hire more, and stock prices and housing prices will keep increasing.

Yet the latest data also raise some questions. For example: Do the numbers suggest that we are, in fact, on economically firm footing? What segment of the economy is benefitting most from these increases? (Consumer confidence slipped among people earning between $25,000 and $35,000.) In terms of housing prices, are the numbers increasing too fast? Could we be entering another bubble fueled by speculators and house flippers?

Kent Smetters, Wharton professor of business economics and public policy, keys in on the housing market. “The high loan-to-value type of mortgage lending prominent before the 2008 housing bubble burst appears to be back,” he says. “Looser lending standards combined with the artificially low long-term interest rates do seem to be a recipe for another bubble. Of course, investors will be smarter on the securitization side, doing more due diligence on the loan quality of the underlying pools. Still, the high LTVs [loan-to-value] and low interest rates give a reason for some pause.”

Smetters also points to a “big pre-college education crisis in the United States…. If the dropout rates and poor performance common in the inner city community occurred in the suburban areas, the nation would recognize pre-college education as a major crisis. Helping the poor gain confidence is ultimately about [figuring out] how to help them gain skills and better education.” He cites the University of Pennsylvania’s involvement with the KIPP program — a national network of free, open-enrollment schools designed to help students in underserved communities prepare for college –as one good way to approach this issue.

As for strong showings by both the Dow Jones industrial average and the Standard & Poor’s 500 index, “I think that the market has its head in the sand regarding the public policy side of things,” Smetters says. “We are still on the path of exploding deficits, and it will require major spending and tax reforms to address them.”

Wharton marketing professor Stephen J. Hoch looks at the news from the consumer perspective by, for example, dividing the population into the haves and the have-nots. “The have-nots are sitting in the same sink hole as they have been forever, but now they have to watch the haves start behaving like they did during the heady days of 2006 and early 2007,” he says. “It could turn into a case of dreamy consumer amnesia: Housing is back; time for splurging to make up for all that ‘sacrifice.’ The very rich have been in this place for at least a couple of years.”

Every time there is “a dip and recovery, I am amazed at how fast things come back once some momentum is gained, despite the severity of the previous recession,” he adds. “The haves are right now suffering from a conflict between fear and greed because they remember not only how much they lost the last time, but they see how much they have gained in the meantime.”

He predicts that most consumers will maintain “a discount mentality, but extra splurges are now getting added into their mix of purchases. My view is that the consumer — the haves — will continue to increase spending and help keep the modest recovery going.”

 

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J.C. Penney’s New Old CEO

Posted on April 10, 2013

JCP_Header_logoWith the company’s stock price tanking (12% yesterday), sales falling (25% for the year) and store traffic dropping off, J.C. Penney’s board decided on Monday to replace CEO Ron Johnson with former CEO Myron Ullman. Johnson, a retailing whiz at Apple before he moved to Penney, failed to get mileage out of a new strategy that eliminated coupons, cut out hundreds of brands and introduced a new boutique-type store-within-a store concept.

Was the board’s move a surprise? Long overdue? And what lies ahead for Penney given the retail sector’s ongoing challenge to persuade consumers to keep buying?

“It was clear that there were problems. The issue was how long the board’s patience would last,” says Wharton marketing professor Barbara Kahn, director of the school’s Jay H. Baker Retailing Center. “Ron Johnson asked for a full two years to test his ideas; [the board] didn’t grant him that…. He burned through money, no question. So from a business point of view, the ouster might be considered long overdue.”

If Johnson had been given more time, could he have made his new strategy work?

“That’s the big question,” says Kahn, who wrote a blog post about Penney before Johnson’s ouster. “Johnson says ‘yes’. Most in the industry say ‘no’. They say he didn’t test his strategies; he didn’t understand the customers; he didn’t understand his employee base. The margins are quite different in this business than at Apple — significantly lower at JCP – and he didn’t seem to appreciate that.”

His biggest mistake, she adds, is that he “didn’t test any of his ideas to see customers’ response and understanding. There is no question that his pricing strategy was flawed. Originally, the new pricing strategy was too confusing. The initial advertising was negative, and telling customers that they were stupid to adhere to the old price promotions is not effective or smart advertising. A few more pricing mishaps later, and finally JCP was back to coupons – which the customers demanded. And why did they demand the coupons? Because they provided a reason for the customer to come into the store. Because having a discount price provides a reference price, and we know customers base value on relative pricing strategies.”

Furthermore, in bad economic times, Kahn notes, “JCP customers needed even more incentive to go shopping. The coupons provided all of that. But by the time Johnson understood this, it was too late, and even the coupons were not effective.”

Kahn, however, also offers praise for parts of Johnson’s merchandising strategy: “It is creative and has potential. Whether there are the resources and time to implement it now is questionable.” She points to his proposal for “stores-within-stores on a ‘street’ around a ‘town center.’ The street would encourage people to linger in the store, surf the net, drink coffee. The town center would feature events. Both would increase the in-store retail experience and the initial response was good…. But there were too many stores-within-stores planned, and it was too difficult to get them implemented quickly enough. And the trouble with Martha Stewart … didn’t help at all.” Macy’s sued Penney last year after Johnson partnered with Martha Stewart Living Omnimedia to sell Stewart’s housewares in Penney stores, despite the fact that Macy’s has an exclusive contract with Stewart for certain housewares categories.

As for Ullman, “he came back out of loyalty for the store and the brand. He’s in a very tough position,” Kahn says. “There is a possibility that the store will have to go through bankruptcy to get out of the mess.” In addition, “it should be noted that some of these problems were exacerbated by a customer base that was likely hit hard by the recession. Many stores suffered during this time, although none as badly as Penney.”

Wharton marketing professor Stephen Hoch wonders why Johnson took the job in the first place. “It was a career move from hell, and I’m not sure why he wanted to leave Apple. More importantly, I never could understand his enthusiasm for ‘reinventing’ the moderate-[priced] department store,” which Hoch considers a flawed concept.

Ullman, he says, “is a seasoned retailer so he will do okay. But he was responsible for where they were when Johnson took over, and that [situation] obviously needed fixing.” Johnson’s pricing approach, Hoch adds, “was obviously not going to work, and he should have known that from his pre-Apple days.” The company has “suffered a tremendous body blow in terms of lost sales and a huge cash drain. It will not be easy for them to get back into the thick of things and succeed. The brand name is not that strong and never has been.”

Wharton management professor John R. Kimberly says Johnson’s ouster “came sooner than I expected. It was clear that his magic hadn’t transferred from Apple, but boards typically are slower to move.” And while the huge drop in sales no doubt played a role in the board’s decision, “it’s more about what was behind the drop that shook the board’s confidence, particularly the waffling on the ‘no sales’ policy and the Martha Stewart mess.”

Kimberly doesn’t think giving Johnson more time to execute his strategy would have worked. “Penney’s customers were not Apple’s customers, and it’s hard to imagine that you could really turn a JCP store into an Apple store. The whole ‘customer experience’ in the two rests on fundamentally different bases.” One of Johnson’s mistakes, he adds, is that “he may not have understood the roots of his success at Apple; he may have drawn the wrong lessons from his experience there. Certainly it wouldn’t be the first time that’s happened when a senior executive transitions from one industry to another.”

As for Penney’s chances of surviving in this increasingly difficult market, Kimberly acknowledges it will be tough. “They have some formidable competition, and they were already losing market share, which is why they [hired] Johnson in the first place. They are now even further behind. I can’t imagine investors are going to be thrilled, and it’s a stretch to imagine how they will win back customers. It will take a turnaround executive with a cast iron stomach and Teflon outerwear to rescue this one.”

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Lenders’ New Largesse

Posted on January 15, 2013

 creditcardThe new Discover It credit card, offered this month, has a few new incentives for consumers. Its web site makes the following offer: No late fee for your first late payment; 5% cash back in categories that change each quarter; unlimited 1% cash back, not points, on all other purchases; an assurance that paying late won’t increase your APR (annual percentage rate), and a host of other things.

This more generous approach to consumers has already been adopted to varying degrees by other credit card companies, including Citigroup and Barclays, according to an article in The Wall Street Journal, which also points out that this new leniency on late payments does come with a caveat: Late payments can still show up on a consumer’s credit report, “which could make it difficult to qualify for new credit cards, mortgages and other loans.”

Still, credit card companies are most likely taking a financial hit when they give up the late payment fees which for so long had been paid by captive consumers. So what is the motivation for this new strategy?

Wharton marketing professor Stephen J. Hoch suggests that the issuers are “simply dealing overtly with a situation that they dealt with on a case by case basis before. Previously, if you were a timely payer and missed a payment, you could always call up and give the credit card company a one-time excuse, and they would usually forgive you that one time. Many consumers did not take advantage of that, either due to lack of knowledge or lack of caring.”

The lenders have now made this “one-time forgiveness explicit,” he notes. “It appears to me that if you chronically pay late, then you will get hit with fees. The other thing to remember is that when you pay late without an excuse, then you do get two months of interest charges, which can be hefty depending on the account balance. So [lenders] still make money off the credit revolvers, which is how [these lenders] pay for everything else, such as rebates and so forth.”

Hoch also suggests that if all the banks are offering these new concessions, then there is little competitive advantage to be realized. “The effect on loyalty would seem to be minimal. For people who use credit cards as a convenient payment method — no balances — it is all about rebates and other perks, such as miles. For revolvers, it is all about finding some bank willing to give them a big enough credit limit at not-too-high an interest rate.”

In 2009, with congressional passage of the CARD Act and its enactment a year later, some of the more questionable bank practices were reined in, such as charging hidden fees and offering low introductory interest rates that would suddenly and substantially increase.

Even with the CARD Act, lenders are still “quite clever in finding ways around the regulations,” Hoch says. “Credit card companies have increased merchant fees in order to make up for any lost profits from consumers. Also, if the credit card companies continue to try to make up for lost fees from consumers, then merchants may finally revolt and add surcharges which they think the new regulations may allow them to do.”

Hoch says he “can imagine that new payment mechanisms could develop that no longer conflate the availability of credit with the ease of payment.” Debit cards currently serve this function, but in the future, this may be “easier to do, like paying on your phone” — which some consumers already do — “or paying after a device reads your eyeball or thumb print.” Profits from credit cards, he adds, “are decidedly in the rear view mirror given the opportunities afforded by a more electronically connected world.”

 

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A Day to Give, not Spend

Posted on November 27, 2012

Consider it the antidote to Black Friday, Small Business Saturday and Cyber Monday.  A national coalition of organizations and individuals wants to brand today – the first Tuesday after Thanksgiving – as #GivingTuesday, an opportunity for people to give, not spend, as they enter into the holiday season.

According to the #GivingTuesday website, “more than 2,000 partners have come from all 50 states of the United States, and are either registered charities [a 501(c)3] with a specific #GivingTuesday initiative, or they are for-profit businesses, schools, religious or community groups who have committed to spearhead a project that will benefit at least one 501(c)3.”

The initiative’s sizeable list of participants ranges from The United Nations Foundation, The American Red Cross and Microsoft to The Economist, Groupon and Mashable, to name a few. The list also includes animal shelters, Big Brothers Big Sisters organizations, performing arts centers, city mayors and New York’s 92nd Street Y – a major catalyst behind the movement.

One wonders, however, how successful this initiative will be, given shoppers’ stretched budgets, their continuing focus on finding the best deals and the fact that many other charitable groups use this time of year to ask for donations.

Wharton marketing and psychology professor Deborah Small applauds the concept. “In general, #GivingTuesday is a good idea,” she says. “Although personal budgets may be constrained due to holiday shopping, charitable giving does go up at the end of the year. This could be due to associations between the holiday season and charitable giving, which I believe is what #GivingTuesday is trying to capitalize on, but it could also be due to tax incentives. People want to get in their donations by the end of the year to get the deductions.”

In terms of the recession, “charitable giving has gone down in absolute terms, but not relative to GDP,” Small adds. “In other words, people are spending less on charity just as they spend less on most discretionary purchases because they have less. However, they are not becoming stingier – i.e, giving a smaller proportion. This could be because social needs are more pervasive when the economy is weak so people feel a greater desire and responsibility to help others.”

According to Katherina Rosqueta, executive director of Penn’s Center for High Impact Philanthropy, the period between Thanksgiving and New Year’s has “historically been one of most active times of the year for philanthropic giving. So in some ways, #GivingTuesday is not really creating a new tradition; it’s highlighting a tradition that has long existed.”

What’s interesting, she says, is that people’s generosity remains alive and well, despite the recession. She points to the fact that donor advised funds – those specifically set aside for charitable giving – continue to increase in assets. Also, perhaps because of the recession, people want to make sure that their giving “actually makes a difference….  If you don’t have as much to give, you want to be smart about where [you donate]. This ability to have more confidence that what you are giving really matters is more in the forefront because of the recession.”  

Several studies have shown that, for individual donors in particular, “the information they value the most — and that is still not as available as they would like — is information around the effectiveness of their gift,” Rosqueta notes, adding that #GivingTuesday “provides an opportunity for people to make the case around what are some of the smartest philanthropic [opportunities] available to donors. Because of this initiative, maybe people will think, ‘Okay, today might be a good time for me to make a gift.”

The only downside to #GivingTuesday, Rosqueta suggests, would be if “it gets too noisy, so that donors no longer trust the information they receive. If voices like ours — which focus on bringing money to organizations and models that have evidence of impact — get drowned out by marketing, and people then tune out, that would be unfortunate. But the more that organizations are encouraging giving and actually providing solutions for people to consider, the more successful this can be.”

Wharton marketing professor Stephen Hoch is somewhat less hopeful. “I think this event is going to be buried by all the worthless media attention on Black Friday and Cyber Monday and so will receive little traction with the media, which is important in getting any attention from the public,” he states. “Moreover, I think that the entire Black Friday pseudo-sale is losing steam; it is so over the top at this point. It won’t be going away, but it will become more passé, since retailers can only open so early and there can only be so many door buster offers. My own view is that smart shoppers would be better off not shopping this past weekend and waiting for the inevitable markdowns if they really are interested in bargains.”

All non-profits struggle with fundraising, Hoch says, “but it is worse since the recession because once people start cutting back on their giving, it is not that easy to get them back into the giving groove.” At the same time, he adds, “I see no downside to trying this for either the organizers or the partners.”

 

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Is Burberry the Canary in the Luxury Coal Mine?

Posted on September 24, 2012

When Burberry recently reported that sales at stores open a year or more were flat, and suggested that profits are likely to be on the disappointing side, some people began to wonder if Burberry might be the canary in the coal mine – a harbinger of lower sales in the luxury sector over the coming months.

A Wall Street Journal article today supports that theory, noting that diamond sales in China are expected to grow more slowly this year than last, while Daimler AG has announced that its Mercedes-Benz division would miss its profit target in China and expects lower sales for its Porsche division.

Is London-based Burberry indeed an example of what we will see in the luxury goods market? What are the implications for the global economy and, equally important, for the upcoming holiday season?  

Burberry suggests that its slowdown is “a sign of an upcoming trend in the luxury segment,” says Wharton marketing professor Barbara Kahn. “Although it is hard to know for sure, there is some indication that this might be a correct analysis.”

Much of the ability of the luxury segment to maintain steady growth has been due to strong performance in China, she adds, and “recently, this growth has slowed down for several reasons. First, as the Chinese luxury consumer gets more sophisticated, [his or her] need for purchasing high-end visible status symbols slows down. Many of Burberry’s products are high status — and visibly so, due to the famous ‘check’ [design].” Now that consumers are gaining more confidence “in their own positions of wealth, these types of purchases may decrease.”

In addition, Kahn says, China’s economy is slowing down, “and there are indications that the government will not provide substantial stimulus mechanisms, as they have in the past, to keep up the growth levels.”

Burberry, a luxury fashion house that sells accessories and clothing for men, women and children, has approximately 235 stores and outlets, and can be found in more than 200 upper-end department stores worldwide.

An article in The New York Times noted that Burberry’s main customers, “known in the industry as traveling luxury consumers, [include] just over a third in Asia, a quarter in the Americas and a little less than a third in Europe.”  The article, published shortly after the disappointing figures were announced by the company, quotes Burberry CEO Angela Ahrendts acknowledging that “the external environment is becoming more challenging,” and suggesting that Chinese consumers may be slowing down their luxury purchases only temporarily, waiting to see how the upcoming leadership changeover in China affects their purchasing power. 

Wharton marketing professor Z. John Zhang has a slightly different take. “I don’t believe that the overall consumption of luxury goods in China is going down, and even if it is, it will not last for long,” he says, adding that economic downturns typically do not affect many luxury goods consumers, “especially in a country where the income disparity is huge. If anything, in a downturn, you need to look even better to impress your peers.”

Burberry’s lower sales could be due to a number of reasons, according to Zhang. “First, more and more people in China are going abroad for shopping. The people who could afford to travel abroad are those who could afford to buy luxury goods, and there will be a substitution effect. Second, there may be more fake luxury goods in the Chinese market. After all, during a downturn, you do what you must to survive. The supply of fake goods may have increased considerably now that the economy is getting tougher.”

The worst outcome for Burberry in China, he adds, is that “it is no longer on the top of the Chinese customer’s list of luxury goods [to purchase]. These consumers are constantly looking for new ways to distinguish themselves and to stand out in a crowd. It is an arms race [among] luxury brands to find new ways to provide exclusivity to their customers.” The disappointing news from Burberry could reflect the fact that the company “is losing favor with exacting Chinese consumers.”

So what’s ahead for Burberry and other luxury goods retailers?

“The luxury retail sector was the first to recover after the recession, partly due to strong demand from China,” says marketing professor Stephen Hoch. “Maybe they are now at a pausing point.” Any weakness that is evident, he adds, “would be due to Europe and China rather than the U.S., where the rich seem to be doing just fine relative to everyone else.” In China, if the new stores — where you would expect the biggest increase in same store sales since they are new — showed any weakness, “then this could be a big contributor,” he points out. “It is hard to predict whether Burberry is a harbinger of anything else. I tend to doubt it, but we will see.”

Kahn notes that the continuing uncertainty in Europe is definitely a factor in lower luxury goods purchasing. In addition, she has read reports suggesting that the new Chinese leadership team – expected to begin transitioning as early as next month – “is not likely to provide as much stimulus to the economy as they have in the past.”  Finally, if Burberry’s slowdown is indeed a general trend, and not unique to Burberry, “I would expect to see similar slowdowns in other highly visible status luxury purchases, such as LVMH and Chanel.”

And the outlook for the luxury goods sector during the all important holidays? “As usual, it is hard to predict the upcoming holiday season,” Kahn says. “The back-to-school season was reasonably strong — relative to our new, more moderated expectations — so people are cautiously optimistic. I think the current thought is that we should see a holiday season fairly similar to last year – which is reflecting the slow but steady growth patterns.”

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Best Buy’s Best Bet: Focus on the Long Term

Posted on August 27, 2012

The prospect of electronics retailer Best Buy going private gained some traction today after the company agreed to let its founder and former chairman, Richard Schulze, prepare an offer to purchase the firm for $8.8 billion. But going private won’t solve all of the company’s problems. According to Wharton marketing professors Stephen Hoch and David Reibstein, the retailer now has precious few life lines as it awaits its newly named CEO, Hubert Joly, to take over in September.

Best Buy’s share price jumped nearly 7% to above $18 this morning after Schulze’s buyout plan was announced. Last week, for its latest quarter ending August 4, the company posted a 92% drop in net earnings — to $12 million from $150 million during the same period last year. Following its quarterly report, the company announced that it would not provide earnings guidance for the rest of the year.

Stiff competition from online retailer Amazon is seen as a primary reason for the losses, in addition to unsustainable overhead costs. Top-level instability also took its toll. Best Buy has been in the headlines since former CEO Brian Dunn quit in April amid a controversy over his relationship with a female colleague. Schulze’s exit as chairman followed, after it was revealed he knew about Dunn’s relationship but failed to disclose it to his board of directors.

Given the longer-term problems Best Buy must deal with, Hoch doesn’t see any easy solutions. First, Best Buy, like any other retailer, is a victim of “show rooming,” where prospective buyers check out products at its stores but buy them online from Amazon or elsewhere. “Although Best Buy has its own web presence, Amazon will win that war due to scale, a lower cost structure and a mentality that says [Amazon] will eventually make it up on volume,” he says.

Second, Best Buy sells a lot of expensive but low margin items — like televisions and computers — that call for big inventory commitments. “This hurts their margin structure,” Hoch notes. Third, he points out that many customers are reducing their dependence on Best Buy’s customer service. “[Consumers] have become more comfortable buying high-tech items sight unseen and without hand holding.”

Additionally, Best Buy operates in “a very fast-paced, dynamic market” where high-tech products and services are constantly evolving. The company lost its biggest bricks-and-mortar competitor after Circuit City closed down in 2009, but the firm faces lots of competition in each product category, Hoch adds. “So they get hit from all sides.”

Lastly, Hoch notes, Best Buy has too many stores. “But as other large retailers have found out … it is difficult and expensive to shrink the store base in the short run.” In March, Best Buy said it would shut 50 of its 305 stores and lay off 400 employees in an attempt to save $800 million.

All told, Hoch adds that he is amazed Best Buy has managed to remain a leader in big-box electronics retailing. Several others in that sector have failed over the years, including Circuit City, Tweeter and CompUSA. “Maybe the same thing will happen to Best Buy, but maybe they can somehow reinvent themselves one more time. I have no clue what can save them.”

Wharton’s David Reibstein offers Best Buy some suggestions. Online retailers have significantly lower costs than Best Buy because they do not have to employ sales staff, build stores and carry inventories across numerous locations, he says. But Best Buy could find solutions in stocking unique products “or exceptional service that cannot be replicated online. It’s all about differentiation on important dimensions to the customers.”

New CEO Joly may work some magic, Reibstein adds. A turnaround veteran, Joly comes from hospitality company Carlson. “The best lessons from the hotel industry are found in segmentation and differentiation,” he notes. Hotels have been “very successful in identifying segments to target and creating strong brands around those segments.”

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When Retailers Make Strange Bedfellows

Posted on July 13, 2012

The Neiman Marcus luxury retail chain announced a new partnership this week with discounter Target that will offer a limited collection of items from 24 American designers. According to an article in The Wall Street Journal, the items – ranging from clothing and accessories to leather goods and stationery — will be sold for the same price in both stores, and carry both company logos on their labels.

Neiman Marcus and Target are not two retailers one typically talks about in the same breath. But Wharton experts generally applaud the initiative and suggest it takes advantage of several shopping trends that have gained momentum since the economic downturn.

These days, “you can’t pigeonhole a customer into one store or type of retail experience,” says Wharton marketing professor Barbara Kahn, who is director of Wharton’s Jay H. Baker Retailing Center. “Neiman shoppers may also shop at Walmart or Target. People who stay at the Ritz Carlton for business may stay at Marriott when they are traveling with family. People who routinely shop at Walmart or Target may splurge for a special occasion at Neiman or Saks.”

Target has been partnering with many luxury brands “in hopes of continuing their own cache as a design-oriented retailer,” Kahn adds. “This partnership with Neiman Marcus follows in that stream. For Neiman Marcus, the idea is to lure customers who may not usually shop in Neiman to come into the store – particularly the younger consumer. Even Neiman’s core customer may buy at lower price points from time to time in other channels or retailers.”

Wharton marketing professor David Bell notes that shoppers are going to multiple retailers “and might be prepared to spread their patronage across seemingly very different types of stores. Segmentation is no longer completely ‘cut and dried.’ Target already has been able to attract a clientele that is more upscale than the stores’ product mix would imply. I doubt Neiman Marcus would do this kind of deal with J.C. Penney.”

According to the Journal article, the new collection will be available December 1 for three weeks at Target and Neiman stores and on-line. Target will be producing the 50 items being offered at a price range of $7.99 to $499.99 (with an average price of $60) and will feature such designers as Diane von Furstenberg, Derek Lam, Rodarte and Tory Burch, the article adds.

All this raises the question of what each store – and the individual designers – will be getting out of this partnership. For Target, the advantages are clear, says Erin Armendinger, managing director of the Baker Retailing Center. “It will bring a high-end feel and great designer brands to their customers – who tend to care about these things: Look at the Missoni deal last year.” As for Neiman, “it is hoping to bring in a new customer.”

Wharton marketing professor Stephen Hoch sees each retailer “borrowing brand equity from the other. Target borrows luxury and exclusivity from Neiman, and Neiman borrows affordable chic and democratization from Target.”

As for the designers themselves, they clearly stand to benefit from this deal. “It broadens their appeal and gets their name/designs better known,” says Kahn. “Although there was some reluctance earlier on by some designers, the Target promotions have been so successful and fun, and have not seemed to dilute the appeal of the designers who have participated, so I think people are less risk averse.” Hoch notes that “the designers want scale and more exposure beyond the cloistered world of haute couture. There have been many successful attempts like this one and I know of no disasters for the designer.”

And for whom does this experiment post the greater risk? “Definitely for Neiman Marcus,” says Armendinger. “They risk diluting their brand. The worst thing that could happen is that their customers perceive this as [the store] moving ‘down.’ On the other hand, in the best case, they will seem hip, young, fresh and a little bit more accessible.”

The biggest risk overall, adds Bell, is “brand dilution and erosion of positioning. Each store already has a pretty strong image, along with unique strengths and weaknesses, and the positioning could be disrupted by a ‘blending’ of the two stores. In addition, the risks and benefits might be asymmetric: Neiman could be seen as ‘cheap’ – or, in a better case, ‘good value’, while Target might be seen as ‘expensive,’ or, in a better case, ‘upscale.’”

The Journal article notes that the median household income for Neiman Marcus shoppers is $150,000 to $200,000 versus $64,000 for Target, while the median age is 48 at Neiman versus 40 at Target. Neiman has 77 stores versus 1,763 for Target.

Meanwhile, are there other retailer-combinations out there for whom such an experiment could work? Saks and H&M? or Nordstrom and T.J. Maxx or Walmart? According to Wharton marketing professor Leonard Lodish, “Target is different than the above retailers because Target has used design as part of its positioning since it was started. It will be harder for Walmart or T.J. Maxx to pull something like this off successfully.” Kahn, too, cites the design appeal that both chains have typically focused on: “The connection between Neiman and Target is that they both pride themselves on high-end design appeal, and they execute consistently to their own missions. They don’t try to be what they are not. That protects their brand when they experiment.”

Other “odd couple matchups” are possible, adds Hoch, although Target and Neiman “have a first mover advantage and a novelty effect.”

What could Neiman and Target do to ensure that this experiment is a success? “If they start doing things with these items that are not consistent with the designer image, it will mess things up — like sending out coupons or having temporary price reductions,” says Lodish. “They also need to very clearly differentiate the Target-Neiman [merchandise] from the Neiman-only [merchandise].”

One possible downside for Neiman, adds Kahn, is if the partnership “encourages too much traffic into their store at a busy time, which might chase away core customers. A temporary leave is bearable, but one hopes [customers] don’t translate this into never coming back. The other problem is if [the two retailers] haven’t put the collection together well and if it does not appeal to anyone, then there is excess inventory to get rid of.”

In the end, says Hoch, “the risks seem very minimal. It is an in-and-out promotion with minimal inventory commitment, like a flash sale. I am sure that they will produce [small] quantities and run out quickly. It is all about the buzz.”

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Has Procter & Gamble Made Some Bad Bets?

Posted on April 30, 2012

Last Friday’s quarterly earnings conference call put Procter & Gamble CEO Robert McDonald squarely in the hot seat, as some analysts openly blamed him for weak profits and a series of missteps, according to The Wall Street Journal.

Sales for P&G — the world’s largest maker of consumer packaged goods — increased 3%, compared to 8.5% for Unilever PLC and 6.5% for Colgate-Palmolive, the Journal reported, while its stock price has remained relatively unchanged compared to an increase of 13% for Unilever and 17% for Colgate.

Two unrelated issues are hurting P&G, says Wharton management professor Lawrence Hrebiniak. “The first is a strategic, product-mix issue. P&G has been focusing more and more on higher-end products, including beauty and cosmetics. These products are being hurt by down markets, especially in Europe. Some high-end products are doing well because of pent up demand and/or low interest rates — such as autos — but the same doesn’t hold for P&G’s stable of expensive offerings. The day of ‘rack ‘em, stack ‘em and sell ‘em’ at low cost that characterized the marketing of Tide and other commodities has changed, and the newer emphasis on the high-end isn’t faring well worldwide.”

A second, related issue is that growing emerging markets are looking for the low cost commodity products that P&G is emphasizing less and less, Hrebiniak adds. “Greater decentralization of structure and operations is needed to cater to local tastes and demands, but P&G seems weak in this regard. Perhaps too much centralization, coupled with downplaying the products that emerging markets are looking for, is hurting market share and the bottom line. McDonald and his team need to look carefully at strategic and operating issues — especially decentralization and getting closer to emerging markets — to turn things around.”

Some of the analysts on the conference call took the unusual step of blaming McDonald for the company’s woes, according to the Journal, which also pointed out that P&G saw a 16% decline in earnings, registered drops in market share in 55% of the categories and countries it operates in and plans to cut 4,000 jobs by 2016. P&G brands are available in 180 countries and range from Bounty, Crest and Pampers to Gillette, Tide and Pantene.

McDonald, who joined P&G in 1980, has been president and CEO since 2009 and chairman since 2010, and has been credited with spearheading a number of innovations at the company. What he hadn’t counted on, however, was a recession that has led to consumer demand for cheaper brands, and a backlash against the company’s decision to raise some of its prices at a time when other companies were holding steady. As Wharton marketing professor Stephen Hoch notes, “Consumers have turned much more price sensitive, and grocery retailers reinforce those behaviors [by] fighting to retain market share and continuing to push their store brands in order to reinforce a value image.” What P&G is mainly focused on, Hoch adds, is “retaining market share, since when you lose it — and they have plenty to lose as the top dog — it is not easy to get it back.”

Wharton management professor Louis Thomas says P&G’s current woes are because “its strategy over the years has been to build dominant market positions in product categories by starting price wars with competitors. In fact, P&G brand managers are given a strong incentive to defend market share and not profits. So brand managers routinely cut price, and thus margins, in order to hold market share.”

That strategy, Thomas says, has at least two limitations: First, “it is only effective as long as rivals are more financially constrained…. [But] many of P&Gs rivals, such as Unilever, are not financially constrained. In this case, P&G’s strategy simply leads to a prolonged price war, and because it is the bigger firm, it is hurt more than its rivals.” Second, this strategy is “vulnerable to innovation,” Thomas notes. “Other firms can introduce new and better products to limit the effectiveness of P&G’s price cutting. Unilever and Colgate have recently out-innovated P&G in many product categories.”   

What P&G needs to do, he adds, is “focus on improving existing products and introducing new ones [as well as] increasing advertising expenditures on these new products. This will allow prices/margins to improve and limit share gains by rivals. In the long run, firms simply cannot rely on price cutting to maintain their position in markets.” 

Innovation is key. “P&G has simply tried to raise prices without increasing differentiation,” Thomas says. ”This just leads to a classic prisoner’s dilemma where all firms lose in price wars. One way out is through product differentiation via innovation…. Aggressive pricing strategies have to go together with innovation for the industry leader if it wants to stay the leader. It’s like a strategic one-two punch.”

As for how much McDonald is to blame for the weak results, Thomas suggests that “the problems in certain categories like … shaving and detergents seem attributable to him. P&G was well ahead in those categories but rivals have gained as P&G slowed innovation.”

As for Hoch, “I don’t believe in the great man theory of leaders, and so I don’t see that McDonald is to blame exclusively…. Long term, I would absolutely not bet against P&G. This is not to say that they never blow it; they do. But they are still the class act in consumer packaged goods.”

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