Archive for August, 2011

Time to Sell Apple

August 25, 2011

Yesterday Steve Jobs announced that he was stepping down as CEO of Apple. The news is unfortunate but not entirely a surprise given his ongoing health issues.

The stock is holding up pretty well today, just down a tad. And if I had any stock in Apple, I would sell it.

First, let me note that I’m not a high frequency stock trader. If I buy a stock I usually keep it through all the ups and downs and sell only if I need the cash or there is a compelling reason to believe things are about to get substantially worse. I sold my stock in Borders when I saw that Amazon was pretty much unstoppable and I’m still feeling pretty good about that move.

So the question I think about: is Apple likely to keep going up over the next five or ten years?

And my opinion is that it might, but the odds of this happening are small indeed.

There are two issues. The first problem is of course the loss of Jobs. He is an incredible leader, innovator and brand builder. People note that Apple is full of great people, and I’m certain this is true, but replacing Jobs isn’t an easy task.

The bigger issue, however, is that Apple is in a punishing industry. The challenge in technology is that things are always changing and evolving. What is notable and unique today will be standard in a couple years. This is huge business challenge; companies have to keep innovating. A technology company that stands still will fall behind.

It is interesting to compare the long-term outlook for Coke and Apple. Coke sells Coke. It sold the same product twenty-five years ago, and I’m pretty certain it will be selling the same product twenty-five years from now. Apple sells technology devices. All of these devices have been on the market for just a short period of time, perhaps a year. And I’m very confident that none of the
devices Apple is currently selling will be on the market in three years.

Apple has to reinvent its entire product line again, and again, and again.

Can Apple continue to launch brilliant product after brilliant product? It could happen. But odds are this trend won’t continue.  And the chance that Apple will be able to do this without the input of Jobs seems remote indeed.

For long-term investors, holding Apple stock requires a lot of wishful thinking. This is a good moment to sell.

Wal-Mart’s Positioning Problem

August 16, 2011

Wal-Mart is an incredibly strong brand. It has very high awareness and an exceptionally clear positioning: Wal-Mart stands for low prices. The company is relentlessly focused on reducing costs and giving consumers the lowest prices.

But Wal-Mart has a very big problem; many people no longer think Wal-Mart has the lowest prices. The Wall Street Journal is reporting today that recent studies indicate most consumers in the United States think other stores are cheaper. A Morgan Stanley study, for example, revealed that 60% of Wal-Mart shoppers don’t think Wal-Mart has the best prices.

This is a huge problem for the Wal-Mart brand.

People don’t shop at Wal-Mart for the exceptional service or for the marvelous shopping experience. Indeed, going to Wal-Mart can be rather painful. People go to Wal-Mart because it is cheap.

But if people start to think other stores have lower prices, then Wal-Mart’s entire value proposition erodes. Dealing with weak service is fine when the prices can’t be beat. It is much less acceptable when you are paying a premium.

The biggest problem is that this is a perception issue. People have trouble keeping track of exact prices, so perceptions are important. If people think a price is low, then it is appealing regardless of the actual price. If people think they could get a lower price somewhere else, then they will likely go somewhere else, regardless of whether the prices actually are lower.

So Wal-Mart won’t be able to fix this issue by just ensuring that prices are low, or even by advertising that prices are low.

Wal-Mart has a major problem indeed.

Kraft’s Big Split

August 4, 2011

Kraft Foods today announced plans to split the company, spinning off the North American grocery businesses. The company has about $48 billion in revenue today. After the transaction there will be two companies, a global snacks business with about $32 billion in revenue and a grocery business with $16 billion in revenue.

The move makes enormous sense. At the core, Kraft management is recognizing a few truths.

First, some businesses simply can’t grow very quickly. When I was at Kraft, there was a relentless focus on profit growth. As one executive proclaimed, “There are no bad businesses, just bad brand managers.” But driving substantial profit growth on mature brands like Miracle Whip and Kraft BBQ is far easier said than done; it is hard to increase consumption, boost prices or reduce costs.

Kraft is wisely recognizing that some businesses can grow quickly and others can’t, and a company focused on fast growth should build a portfolio of brands that are able to deliver that.

Second, expanding brands globally is a challenge. On the surface, taking U.S. grocery brands to other countries is an obvious opportunity. In reality, however, this isn’t an easy task. There are existing brands in the different countries; these
brands will defend. Breaking into a new country is very difficult, especially when the move involves a behavior change.

In the split announced today, Kraft is acknowledging that its North American grocery brands are not destined for global success. The concept that Cadbury sales representatives would manage to build Miracle Whip sales in Vietnam or Romania is far-fetched

Third, you can only focus on a few things. Kraft in recent years has embraced the snacks and candy business. The grocery business was clearly a relatively unimportant part of the mix. This has a big impact on staffing, career planning and resource allocation. Working on a grocery business today at Kraft must be a discouraging task.

After the split, Kraft will have companies focused on each business group. This should help both parts perform better.

The split announced today makes enormous sense; Kraft’s executives have recognized some difficult truths and made a smart decision.


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