Tag: 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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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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Return of the Founder

Posted on January 17, 2012

It’s been a dramatic time for Urban Outfitters: First, CEO Glen Senk surprised everyone by resigning. Then Urban Outfitters founder Richard Hayne stepped forward to appoint himself to the CEO job. A few days later, Senk announced he had accepted a new job as CEO of David Yurman jewelers. Meanwhile the company stock started a roller coaster ride, falling almost 19% before showing a slight rebound.

This is not the first time the founder of a company has quickly stepped in to replace a CEO who has left or been fired. (In 2007, Michael Dell ousted Dell president Kevin Rollins and took back the CEO reins.) The question is, how well does it work in general, and how well can it work at Urban Outfitters, given that the company has experienced a sales slump in key divisions over the past year?

In addition to the Urban Outfitters stores, the company owns Anthropologie and sells clothing under the Free People label. It launched the BHLDN bridal brand last year. Initially named The Free People’s Store, Urban Outfitters was started by Hayne in 1970 in a neighborhood adjacent to Philadelphia’s University of Pennsylvania campus.

According to Wharton management professor Larry Hrebiniak, the company’s “precipitous” stock decline last week signaled that many considered Senk’s departure to be “a huge loss to the company. Truth be told, however, the company under Senk has been struggling,” Hrebiniak adds. “Recent sales have been down significantly. Inventory problems plagued the company and [continue] still, forcing price slashes and profit declines. Stock price under Senk underperformed the retail sector by a good margin. Senk was making some headway, but the future certainly wasn’t yet rosy. He was okay as a CEO, but certainly not irreplaceable as a leader.”

The question is, “Can the founder work his magic and finally get the company on a solid track?” Hrebiniak asks. Hayne clearly is a “stopgap CEO. He has a few years, at most, before a more permanent CEO candidate is found. Still, it can work. He founded the business, so he must know something about the steps needed to prosper in a competitive retail space.”

Hayne’s success and that of his company will depend on three things, Hrebiniak says. First is his “commitment to the tough task ahead: The 64-year-old leader must live the part and push hard with his reforms. Second, the quality of the top management team working with Hayne is critical, especially in light of Hayne’s pro tem position. The company needs day-to-day involvement and commitment, strong hands in operations, inventory control, marketing, product design, etc., to make things work. In my opinion, the top management team is up to the task.”

And third, Hayne and his team “must clearly lay out their strategy going forward. Functional plans must be articulated clearly to convince shareholders and analysts that the company sees a path to improved performance. A strong strategic and operating stance will also positively affect buy-in among employees…. There is an upside that Hayne and his team can envision and target.”

In a previous Knowledge@Wharton article, Wharton management professor Peter Cappelli commented on the performance of companies where founders come back to take on the CEO job. “The record is mixed,” he noted. “Generally, there’s a sense that organizations need different skills at different times. And so the people who have founded organizations and have the entrepreneurial zeal and ideas often aren’t the people who can take the organization to the next phase.

“Sometimes you need more administrative skills, more management skills,” Cappelli added. ”Sometimes leadership and zeal isn’t enough. On the other hand, the founders have a symbolism that becomes very important when they step back in — in terms of … their ability to sell ideas to the outside audience at different points in time.” 

As for Urban Outfitters, Wharton marketing professor Stephen J. Hoch suggests that it “makes sense for Hayne to take over again” because he still appears to be “completely engaged. I am sure that they will bring in a CEO/COO type soon enough, either an internal person or one from the outside.” Michael Dell was still very young when he returned to the CEO position, Hoch points out. Because Hayne is 64, “he is not going to be doing the CEO thing for too long.”

Observers also wonder whether the company will explain the circumstances behind Senk’s abrupt departure and the quick announcement of his new job. So far, no explanation has been forthcoming. Says Hoch: “Should Hayne come clean and explain what happened? I guess that depends on what happened.”

 

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Food for Thought

Posted on October 3, 2011

With online grocer Peapod now expanding its shopping and home delivery service to consumers in the Philadelphia, Pa., area, the question again arises: Can this business model work? 

It certainly didn’t for Webvan, the Internet venture started during the dot-com boom by Louis H. Borders with the goal of revolutionizing the low-margin, intensely competitive grocery business. Armed with more than $122 million in initial funding from blue-chip companies and backing from top-notch Silicon Valley venture capital firms, Webvan opened for business in the San Francisco Bay area in 1999. After burning its way through more than $1.2 billion in two years, the company declared bankruptcy in 2001.

Peapod, however, is banking on a different market. According to a recent article in the Philadelphia Inquirer, the company is targeting young consumers who are comfortable ordering food on cellphones and iPads. The company is also relying on a logistics system that fills orders in a storage warehouse in Maryland, ships the goods to Philadelphia in temperature-controlled tractor-trailers, then moves them onto smaller delivery trucks and into people’s homes.

The company, which started in the late 1980s in Chicago, is now owned by Ahold, a Dutch retailer with several regional supermarket chains in the U.S., including Stop & Shop and Giant Food. Peapod currently offers online grocery shopping in more than 20 locations, including Baltimore, Boston, Chicago, Manhattan, Milwaukee and Washington, D.C.

According to the Inquirer article, consumers in the Philadelphia area will pay $9.95 for a minimum order of $60, $8.95 for orders over $75, and $7.95 for orders that total $100 and above.

“The biggest problem with these home-delivery grocery systems is that they are quite expensive to deliver to a specific home unless there is a lot of demand in a particular area,” says Wharton marketing professor Barbara E. Kahn, director of Wharton’s Jay H. Baker Retailing Center. “Manhattan has worked well because of the high density of consumers. When a delivery is made to an apartment building and there are several recipients in that building or the one next door, the fixed costs of delivery are covered. On the other hand, when the deliveries are far apart and there is only one at a time, the cost of delivery is a significant factor.”

Kahn agrees that young consumers these days have no problem ordering on line or through apps, but suggests that the minimum order of $60, with a $9.95 delivery fee, “seems steep. Also, people frequently think of grocery shopping as many quick, or fill-in, trips a week, rather than a single large major delivery. And [having to] be at home when the food is delivered may prove to be a trouble spot as well.”

“The business model is clearly a niche,” adds Wharton marketing professor Stephen J. Hoch.  ”Home delivery has apparently worked best in New York City. Fundamentally, the issue is that shopping at a supermarket is about as efficient an experience as it gets as long as you have transportation and don’t live in a densely packed urban environment where there is limited space for a big store. I don’t believe that Peapod’s ‘new’ business model of pulling from a central warehouse rather than stores is any different.”

As for how successful Peapod’s expansion into Philadelphia will be, Wharton marketing professor Leonard Lodish says “it depends on the cost of getting each new customer and the incremental profit stream from each new customer…. If this is enough of a positive number so that the fixed costs are eventually covered, then the business can be successful. If Peapod runs out of money before the fixed costs are covered, it won’t be.” Given that Peapod has a well-established corporate owner, he adds, it “may have quite a long leash.”

What would help Peapod make a go of it is whether “people love the service and tell their friends,” Lodish adds. “That will significantly lower the cost of getting each new customer. And if their logistics truly are innovative and [can deliver] at a much lower cost than the previous attempts, then that will be a big help. Peapod needs to have amazingly effective customer service to delight their customers. If they don’t, it will sink them.”

Lodish does not see the stagnating economy as a huge barrier for Peapod. “Not in their affluent target market,” he says. “The affluent are, in general, still doing pretty well.”

 

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