Archive for September, 2010

The Southwest AirTran Acquisition: What Are They Thinking?

September 28, 2010

You might presume from the title of this post that I’m opposed to Southwest’s acquisition of AirTran. But that isn’t actually the case. I’m just confused. Why would Southwest do this? I don’t follow the logic.

I can easily identify reasons why this deal isn’t a good one for Southwest.

  • Southwest has a very distinctive and unique culture. Merging with AirTran will put this at significant risk.
  • Southwest has long benefitted from having just one type of plane, the 737. With the AirTran acquisition, Southwest will start flying the 717. This is a big shift.
  • AirTran’s main base is Atlanta, a huge Delta hub. Southwest has long avoided the hub model, especially at major airports like Atlanta. Again, this is a major strategy change.

Overall it feels like Southwest is becoming more like the other big domestic airlines. And why would Southwest want to do this? Financially, most domestic airlines have been a disaster over the past 10 years. Southwest, with its very unique model and culture, was the one shining star.

I have a much harder time identifying reasons why the deal makes sense. Perhaps this is a defensive move; Southwest might be nervous about AirTran, so the acquisition is primarily to eliminate a threat. This could be the case, but I find it unconvincing.

So if I owned any Southwest stock (I don’t) I would sell it.

Or am I missing something?

Savvy Pricing at Starbucks

September 23, 2010

Yesterday Starbucks announced that it was increasing prices.  You can read an article about it here:

The announcement isn’t a surprise.  The price of green Arabica coffee has risen dramatically this year; it is now close to a 13 year peak.  With that sort of increase in cost, Starbucks had to do something to maintain profits.

What is a surprise is that Starbucks is being quite strategic about the price increase.  Instead of taking a simple across the board increase, Starbucks will increase some prices while holding or even decreasing other prices.

This is very smart. 

Starbucks knows that there isn’t one single customer and there isn’t one single buying occasion.  The person who springs for a $5.00 vanilla skinny soy latte is looking at a very different value proposition than the person who opts for a tall cup of black coffee.  The economics of the transition are different, too.  Similarly, the person buying a bag of Starbucks coffee in the grocery store is looking at a completely different set of choices.  There is only one Starbucks store, but there are all sort of nice brands of coffee in the grocery store.

By strategically managing pricing, Starbucks can increase prices where feasible, and hold prices where it must.  In addition, by keeping some prices flat, Starbucks avoids the obvious PR risk: headlines proclaiming that Starbucks is increasing all its prices. This could have an impact on consumer perceptions around value.

Pricing is one of the most important levers for driving profits.  Starbucks is very smart to approach it with thought and discipline.

Nokia’s Branding Problem

September 14, 2010

Nokia continues to clean house. On Monday Nokia announced that the head of its smartphone division was leaving. This follows a change in CEOs. Rumors are that Nokia’s chairman, Jorma Ollila, will leave later this year.

These moves seem very appropriate given Nokia’s stunning collapse. Several years ago, Nokia was one of the dominant global players in the world of mobile communications. Today, Nokia is being left behind by Apple and Blackberry. The company’s stock price has fallen from a high of about $40 per share to less than $10 per share, reflecting the decline in the business.

One of the reasons Nokia has fallen so fast is that it has a simple branding problem: Nokia isn’t a distinctive brand. It is a brand with positive associations and high awareness, but it isn’t unique.

For many years, Nokia seemed to successfully do what marketing experts say you can’t do: serve all segments in a market. Nokia sold very high-end, technologically advanced phones and simple, inexpensive phones, all under the Nokia brand. The branding structure was very simple: the Nokia brand with a product number, such as N8, the company’s newest smartphone, or E7.

Of course, many branding problems only surface over time. And that is certainly the case for Nokia. By playing in all segments of the market, Nokia watered down its brand, eroding its meaning. What is Nokia, anyway? What would I Nokia smartphone be like? I really don’t know.

Nokia has competitors with very strong brands. Apple has created a remarkably strong brand portfolio with well-defined brands: iPod, iPhone and iPad. Blackberry is a strong brand, too.

The new leadership team at Nokia has a long list of challenges. Developing a more compelling brand portfolio should be one of the top priorities.

Chicago Loses its Brand Champion

September 8, 2010

Yesterday Chicago Mayor Richard Daley announced that he would not seek reelection in 2011.  This was surprising news; Daley has been mayor since 1989 and would easily have won reelection to another term.

Daley’s decision is a big loss for Chicago’s brand.

Mayor Daley is a brand builder; he understands the power of branding and has worked hard to build Chicago’s brand on the global stage.  He traveled widely and was quick to embrace ideas from other cities.  He spruced up the city, planting trees and cleaning up parks.  He supported Chicago’s Olympic bid.

In many ways Daley personifies the Chicago brand: tough, direct, smart, pragmatic, pro-business and down to earth.

Daley leaves Chicago with a strong, distinctive brand.  The city is clearly a global business powerhouse, with major assets, a vibrant corporate community and generally positive associations around the world

Still, there is more work to do; the next mayor should make branding a top priority.  Chicago needs to better define its brand and stand out on the global stage, especially in international markets like China and India.  Chicago needs a vibrant economy and that depends on building a brand that will attract businesses to the city.

Brands don’t change quickly, especially well established brands like Chicago.  Richard Daley has built Chicago’s brand and his impact will be felt for many years to come.

The Cash for Clunkers Hangover

September 2, 2010

This week automakers released sales numbers for August.  The results were dismal.  According to The Wall Street Journal, sales in the U.S. fell 21% versus 2009.  Sales at Nissan, GM, Toyota and Honda all fell more than 25%.

These results aren’t a surprise, since U.S. government’s Cash for Clunkers program boosted sales last year.  The Cash for Clunkers program gave some auto buyers a credit of up to $4,500 on the purchase of a new car.  Essentially, this was a huge short-term discount, funded by the taxpayers.

Big discounts like Cash for Clunkers have a huge impact on sales.  When the discount is in place, sale will almost always jump.  When the discount ends, sales fall.  And if the discount isn’t offered the following year, the year to year comparisons will be grim.

Discounting is a bit like partying.  Everything is wonderful and fun while the party rolls on.  But inevitably the party ends and when the sun comes up the hangover remains.  And in general, the bigger the party, the bigger the hangover.

Companies need to be very careful when it comes to discounting; the short-term jump is pleasant but fleeting. 

Heinz this week announced that sales were up in the latest quarter, in part because the company cut the price of ketchup at Wal-Mart to $1 for a 40-ounce bottle.  This offer drove a lot of volume, as one would expect.  But it was just a short-term gain.  Ketchup doesn’t usually cause hangovers, but this offer surely will.


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