Focus On: Jagmohan S. Raju

BlackBerry Reaches for New Markets

Blackberry Q5Following a lukewarm reaction to the U.S. launch of its latest device — the Z10 — BlackBerry announced in May that it plans to roll out a low-cost smartphone that uses the latest BlackBerry operating system in emerging markets this summer. The new model — the Q5 — will incorporate the firm’s popular QWERTY keyboard and will be available in vibrant colors in select markets in Europe, Africa, the Middle East, Asia and Latin America, according to the company.

Last year, BlackBerry announced it was working with two banks to review its strategic options, leading many analysts to think that the company would sell off all or part of its business. But now, instead of focusing on North America — where its market share is dwarfed by Apple and Android-based smartphones — BlackBerry seems to be hoping that it can replicate the earlier success of its lower-priced BlackBerry Curve in developing economies. Additionally, the firm announced it was planning to offer its popular BlackBerry Messenger (BBM) service on Apple and Android platforms.

Will the strategy work? “I think it will, because the strategy is also being implemented in conjunction with cheaper service plans,” says Wharton marketing professor Jagmohan Raju. “As far as the messenger service is concerned, making it available on other platforms will be good for retention” in the North American market, he adds.

Wharton legal studies and business ethics professor Kevin Werbach agrees that at least in theory, focusing on emerging markets makes sense. “There are over six billion mobile phone subscriptions in the world today, so by definition, a huge percentage [of those] are in the developing world. North America is roughly 5% of the global mobile phone market in terms of units, so focusing elsewhere isn’t necessarily a crazy strategy. There is already a good deal of regional variation in the mobile industry. Japan, for example, has long been a market unto itself, because it has a big enough internal economy and uses different technical standards.”  

However, Werbach has his doubts about how things will play out in BlackBerry’s case. “The problem for BlackBerry is that a disproportionate share of the profits in the mobile industry are concentrated at the high end of the market. That’s why Apple and Samsung are generating so much cash, relative to Nokia and other manufacturers. And it’s hard to see how BlackBerry will beat the low-cost Asian manufacturers at the low end. BlackBerry made its name as a device for power users — investment bankers and others who needed efficient, bulletproof mobile email. It’s going to face challenges tackling the other end of the market.   

“The key question is for BlackBerry to explain what it uniquely brings to the table, and how the low-end devices are synergistic with its traditional high-end lines,” Werbach adds. “If it can’t make that case effectively, a device targeted at emerging markets will just create confusion.”

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J.C. Penney’s New Strategy: Consumers Aren’t Buying It, Yet

J.C. Penney lost $163 million in the first quarter, compared to a gain of $64 million a year ago; sales fell 20%, while comparable store sales dropped 18.9%, and the store is discontinuing its quarterly dividend. 

This is despite a new approach to pricing recently announced by CEO Ron Johnson that relies less on discounting and the ever-present coupons, and more on everyday prices and special value offers. But given the figures announced this week, it seems that consumers aren’t buying into the new strategy – at least not yet.

KnowledgeToday asked two Wharton marketing experts for their views on the new strategy, and what Johnson, a former executive at Apple, should do moving forward.

Wharton marketing professor Barbara Kahn, faculty director of the Jay H. Baker Retailing Center, says she was initially excited about the new strategy. “In theory, it makes a lot of sense. It is not only about the pricing strategy, which is basically a return to everyday low prices, but it is also a merchandising strategy – including new brands in a store-within-store setup designed to create excitement.”

But she cites two problems with the pricing strategy’s implementation. The first is that customers don’t understand it, and may have trouble grasping it in the future as well, because “they have become addicted to high/low pricing in which a high price is listed to communicate the value of the good, and then a coupon or price discount is issued to signal a ‘good deal.’” Under the new strategy, Kahn says, consumers have “no reference price to signal what the ‘fair’ price should be. They [are not used to] buying on absolute price figures, but on relative price figures, and they are having trouble adapting.”

The second problem, Kahn says, is that the new look/new brands part of the strategy will take “a long time to fully implement. I think Ron Johnson said close to five years. So the consumers are not seeing the new JCP [J.C. Penney] in the stores yet. The employees who are there are the old employees for the most part, and they don’t really know how to [explain] the new strategy.” Unless JCP does a better job of communicating to the consumers that the prices in the store are fair and “low,” the strategy will not work, she notes.

Kahn also points out that before Johnson joined Apple, he worked with Target, whose approach to merchandising is similar to Penney’s. “Target has been doing well, so it is clear this type of strategy can work. But JCP is a different store, and department stores have a different relationship with consumers than do mass merchandising stores.” Macy’s, which was the subject of a recent Wall Street Journal article describing its new on-line sales distribution centers, is also doing well. “The real competitor here, though, is probably Kohl’s,” says Kahn. “Kohl’s responded in part to the JCP strategy by offering new discounts and coupons, which, at least initially, were well received by the customers.”

If Kahn were Ron Johnson, what would she do in the coming year? Perhaps offer “new cues so that the customer understands the low price,” Kahn says. “For example, follow some sort of ‘low price guarantee’ strategy, or do promotions that [list] the price at JCP and the comparative price at a competitor’s store, and then show how it is cheaper at JCP. The customer is looking for in-store cues that these prices are indeed low.” The commercials are not effectively communicating that fact, Kahn adds, “and the message is not being reiterated in the store.”

In addition, she says, “the faster Johnson can get some merchandising excitement into the store, the better. He might use events – such as the Target Missoni campaign, which was a huge success – to draw traffic.”

Wharton marketing professor Jagmohan Raju offers a general look at pricing strategy. In theory, he says, “not discounting essentially means you will not do any price discrimination. If done well, price discrimination can lead to higher profits and sales [by offering] discounts to people who would not have bought otherwise. In practice, however, discounts are often used by people who would have bought the product anyway. This is where the dilemma comes in.”

Discounting can also be used as a loss leader strategy to get people in the store who will then buy other items, he adds. So even if people “who would have bought the product anyway buy it on discount but buy many other things also, the strategy can work. Discounting also allows one to advertise prices and create an image of good prices, which always helps, especially when your clients are short of money or not rich to begin with.”

The problem with the strategy is sequencing, Raju says. “For the strategy to work, one should not be able to compare prices across stores, which means you must have products that only you sell — or if others sell it, they sell it at the same price. This requires a strong brand, what we might call [in the apparel category] ‘private labels’… But people like variety in apparel, so relying solely on your brand is often not easy, especially when you are catering to the mass market.” If retailers rely on multiple brands to offer variety, and these brands sell in other stores also, then “price comparisons are easy,” Raju notes. “Discounting, therefore, [is offered as a way] to attract the other stores’ customers.”

As for Johnson’s strategy for Penney, “it might work,” Raju says, “but then JCP might become a smaller niche store with a strong brand – smaller, but profitable.”

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Smucker’s in a Jam?

J.M. Smucker Co. — the Orrville, Ohio-based manufacturer of jams and jellies, peanut butter, ice cream toppings, Crisco, coffee and other products — had a bad day last week when it announced its fiscal 2012 third quarter results. The report showed significant declines in sales volume (10%) and earnings (11%) which, in turn, caused an 8% drop in share price. The quarter ended on January 31.

The figures reflect a decision by the company before the 2011 holiday season to significantly increase prices — overall by 16% — on some of its most popular products. The cost of Jif peanut butter alone rose 30%. Vince Byrd, Smucker’s president and COO, noted in the earnings report that “although sales increased 12% for the quarter, we were disappointed with overall volume and its impact on earnings.” Despite the presence of “strong merchandising programs” in place around the holidays, he added, “our volume was lower than expected as a result of our higher price points coupled with lower consumer demand across the food industry.” The company also cited higher costs for peanuts as a reason for the price hike.

Yet one wonders how Smucker’s could have missed the fallout of a 30% price increase on its sales volume, especially during a time when consumers are conscious of price hikes in all categories, from groceries to gas to clothing.

As Wharton marketing professor Z. John Zhang notes, “If Smucker’s raises its peanut butter prices so aggressively, yet it does not expect a significant demand drop, you wonder if its managers were napping on the job. In general, consumers feel better accepting price increases” if they know that a firm’s costs — for raw materials, for example — are higher.  ”This is clearly not the case even if costs did indeed rise. There is no big publicity about the shortfall of peanuts like [there was about] the recent case of orange juice shortage in the U.S.”

In addition Zhang says, “it is always a dicey situation for a firm to unilaterally raise its prices, because the competition can always take advantage of it. After all, a hungry kid may not notice the difference in a lunch sandwich, and there are plenty of substitutes out there. A better way to do this would have been for the company to raise prices slowly, feeling its way forward, and thus give customers some time to adapt and adjust, especially in today’s down economy. Now Smucker’s will have to win back lost customers,” a number of whom have been trying out, and liking, cheaper competing brands.

In its earnings announcement, the company attributed the volume decline to several reasons, including: significantly higher “retail price points in the third quarter of 2012 compared to the prior year;” significantly higher “consumer pantry loading [i.e. hoarding] of peanut butter during the second quarter of 2012,” which resulted in lower volume during the third quarter; key retailers’ decision to “manage inventory levels down during the quarter,” and “particularly aggressive … competitive practices and price points” in some of the company’s product areas.

For Wharton marketing professor Jagmohan Raju, the point here is “not that consumers are cutting their grocery bills, but probably switching to lower price peanut butters or jams and jellies, most likely private labels. If price increases by Smucker’s were not matched, it is quite likely that this can happen. Probably competitors, especially private labels, did not raise prices as much,” he says, noting that he would have expected “a greater decrease in unit sales than what they saw. Either there was some increase in prices by other brands, or Smucker’s is a strong brand.”

 

 

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