Archive for May, 2012

Apple’s Big Expectations

May 30, 2012

According to CEO Tim Cook, Apple will soon be launching some amazing new products. Yesterday at the D: All Things Digital conference Cook said, “The juices are flowing. We have some incredible things coming out.”

Cook is clearly raising expectations for the new products. You don’t use the words amazing and incredible lightly.

Is this a smart strategy?

It is certainly risky. It can be difficult to deliver against high expectations. Disappointing people is not a great approach.

In about two weeks, many of my students will graduate from Kellogg and join new employers. When they arrive they could proclaim, “I am going to be an incredible employee. Boss, you are going to be amazed. I am going to be fabulous!” This would not be a good idea.

So is Cook making a mistake?

I suspect not. If Apple has something innovative in the works, raising expectations is critical. It builds anticipation for the new product and creates excitement among employees, investors and customers.

It is also a safe move because it is hard to disappoint people with a truly innovative product for the simple reason that people don’t know how to evaluate it. If you have the very first teleportation machine you can confidently proclaim, “This is just an amazing product.” People will then likely agree; it is very difficult to evaluate the merits of a teleportation machine. If you say it is amazing, well, it must be amazing.

Indeed, when introducing an innovative product it is critical to raise expectations. Rolling out a product with modest statements isn’t a winning formula. You can’t say “Well, this teleportation device is fairly good but it has certain limitations that we are working to address” and expect the product to take off.

Raising expectations doesn’t work in well established categories, where people know what to expect and can evaluate innovations. P&G’s recent advertising campaign announcing the astonishing, amazing Tide pods, for example, is a little flat.

If Apple has another highly innovative product in the works, then Cook is smart to elevate expectations.

Of course, that is a pretty big if.

GM’s Odd Super Bowl Decision

May 24, 2012

General Motors announced last week that it will not buy any spots for the 2013 Super Bowl.

This is a fairly surprising decision because this year  General Motors made a huge investment in the Super Bowl; GM ran four spots, including three for Chevrolet and one for Cadillac. The company also spent an enormous amount on production; the Chevy Sonic spot, for example, featured a bungee-jumping car and the musical group OK Go. I suspect it cost GM more than $3 million just to produce the Chevy Sonic ad, and that GM spent more than $15 million in total on Super Bowl advertising.

To completely reverse course is quite a change. GM could have scaled back the investment, perhaps running just one spot with a modest production budget. Total spending might have fallen by 80 percent. To walk away entirely is a huge shift.

So what’s behind the decision not to advertise at all on the Super Bowl?

The official line from GM is that the cost is just getting too high. Prices apparently will be up again, now reaching $3.8 to 4 million for a 30-second spot. In a statement, Joel Ewanick, global CMO at GM, explained the situation, “We understand the reach the Super Bowl provides, but with the significant increase in price, we simply can’t justify the expense.”

I’m confident that Joel is being totally honest about the rationale. But that still leaves the bigger question: why can’t GM justify the expense?

One thing we can conclude with certainty is that GM wasn’t pleased with the 2012 experience. If this year had gone well, then the company would stick with the current strategy. It would be easy to justify the expense.

Of course, I’m not surprised that GM wasn’t thrilled with this year’s game. The investment was huge and the impact was probably favorable but not great. The Cadillac spot was feeble (the Kellogg Super Bowl Advertising Review panel gave it a D) and the Chevy spots were individually strong ( Kellogg grade: B) but taken together the spots highlighted Chevy’s core positioning problem: What does the brand stand for, anyway?

Perhaps GM doesn’t want the scrutiny that comes with advertising on the Super Bowl, or maybe GM is worried about the competition.

Either way, I think it is an odd decision, and not a good one for GM. There is nothing like the Super Bowl, and  peopel will note GM’s absence.

I predict GM will be back in 2014, just as Pepsi returned after taking a pass in 2010.

Good News for the Coffee Industry

May 18, 2012

We got a lot of rather tough news this week, from more financial issues in Europe to slumping sales at J.C. Penney. But it was a good week for the coffee industry: the New England Journal of Medicine published a study showing that coffee consumption had a positive impact on mortality.  And the more you coffee drink, the lower your chance of death.

You can read the study here: http://www.nejm.org/doi/full/10.1056/NEJMoa1112010

I drink a lot of coffee so this is great news.

Things are unraveling in Europe but we can at least feel good about coffee.

J.C. Penney’s Predictable Stumble

May 15, 2012

Retail giant J.C. Penney reported some fairly grim results today. Fiscal first-quarter sales fell a remarkable 20%, the company lost $163 million and it suspended its dividend.

The news apparently caught many investors by surprise; the stock dropped more than 10%.

But if you’ve been following J.C. Penney the results are quite predictable. There is nothing surprising in the numbers.

In January this year J.C. Penney announced a major strategic shift. The company was moving away from its traditional emphasis on deep sales and embracing everyday low pricing. So J.C. Penney rolled back prices dramatically and scaled back the sales.

The move makes a lot of sense because J.C. Penney had become totally dependent on deep discounts. In a remarkable admission, the company said that it sold almost nothing at full price. Everything was on discount. This isn’t a healthy way to run a business.

The problem is that in the short run the promotion shift will lead to dismal results. Many people love sales; they find it simply thrilling to get a great deal. When Penney stops running sales, these people will leave; getting a reasonable price on a nice blouse isn’t anywhere near as exciting as getting it for 78% off. The deal shoppers are moving on.

And J.C. Penney doesn’t yet have a proposition to replace the losses with new shoppers. The company’s recent advertising is uninspired. It is pretty clear J.C. Penney is still work on the message.

So what happens?

Sales slump and losses pile-up. And the trends will continue as the deep discount buyers depart and J.C. Penney rebuilds its brand.

The only real question is whether the company will have the conviction, patience and financial resources to stick with the plan.

Lipitor, Pfizer and Pharma’s Branding Problem

May 11, 2012

The Wall Street Journal reported this week that Pfizer is giving up on Lipitor, dramatically cutting back on marketing support.

This isn’t surprising. Lipitor, Pfizer’s multi-billion dollar cholesterol lowering medication, lost patent protection at the end of 2011. A number of generic medications will soon enter the market, so Lipitor won’t be able to maintain a premium price as pharmacies and insurance plans aggressively move patients to the generics.

The move highlights perhaps the biggest single issue facing the pharmaceutical industry in the United States: brands have no value.

When you really think about it, the idea that Pfizer would give up on Lipitor is very strange. Lipitor is the most successful pharmaceutical product in the history of the world. Thousands and thousands of people take it and the product actually works. Lipitor is a well known and  trusted brand. But once that patent goes off, well, Lipitor has pretty much no value, so Pfizer gives up.

Why?

Coke isn’t built on patents. Tiffany isn’t built on patents. The Mayo Clinic McKinsey, Rolex, Advil, McDonalds, Tide, Target and BMW aren’t built on patents. A brand doesn’t need a patent; the brand creates value through the associations built around a trademark.

So why give up on Lipitor?

Part of the issue is that the pharmaceutical industry has let this happen. Pharma companies generally cut spending on a product when the patent expires. Lilly basically gave up on Prozac, another huge brand. Merck gave up on Fosamax. There wasn’t a big fight when pharmacies and insurance companies helped create regulations that let them automatically swap a generic for a branded product.

The idea of swapping in a generic for a brand is very odd. Applied to the soda industry, someone who went to Wal-Mart to buy Coke would instead be handed Wal-Mart Cola, on the theory that it is pretty much the same thing on a molecular level.

Giving up on brands might have made sense when there were lots of new pharmaceutical products coming along. There isn’t much reason to spend on building brands that lack a patent when there is a new patented product on the horizon.

Today, the situation is very different. Pharma companies are struggling to identify new medicines and get them through the rigorous FDA approval process. Without strong brands, pharma companies will always be a few years away from disaster. Solving the branding dilemma should be a top industry priority.

http://online.wsj.com/article/SB10001424052702304543904577394263634380548.html?KEYWORDS=lipitor

Best Buy and the Great Amazon Tax Subsidy

May 8, 2012

Best Buy is certainly struggling.  The company’s stock was above $50 per share back in 2007.  Today it is trading at about $20. The company is closing stores and analysts are skeptical about the future.

The company has a number of issues to address but I suspect the most important issue is what I call the Great Amazon Tax Subsidy.

The Great Amazon Tax Subsidy comes from the strange way local sales taxes are applied in the United States. Many municipalities raise revenue by taxing retail purchases. But companies that don’t have a physical presence in a given area don’t have to pay the tax. The result is that a retailer with a physical store location is at a substantial disadvantage when compared to an on-line player. In some cities this is a meaningful figure. In Chicago, where I live, the sales tax is 9.5%.

This means that in Chicago Amazon has a 9.5% cost advantage over Best Buy.  This is a hopeless situation for Best Buy. In 2012, Best Buy only had a 2% margin (pre-tax income/revenue). There is virtually no way that Best Buy can overcome this.

Customers that buy from Best Buy have to pay a substantial premium versus Amazon. They get the item immediately but in many cases waiting one or two days isn’t a big deal. Amazon is also more convenient and probably has a wider selection. Best Buy can’t win this battle.

Best Buy will continue to struggle if the tax policy remains in place. The company might not survive at all.

Of course, this isn’t just Best Buy’s issue. Many local retailers face the same problem. Politicians should shut down the Great Amazon Tax Subsidy and do it quickly before more local retailers go out of business.

Marketing Strategy Review: Nespresso

May 4, 2012

Earlier this week Nespresso announced that it was investing in its first national television campaign in the United States. This is big news.

Nespresso, of course, is Nestle’s remarkable growth engine, a highly profitable business with 2011 sales of over $3 billion, growing about 20 percent per year. The national television advertising is a big shift for Nespresso; the brand has done limited marketing in the United States to date.

 

Does the move make sense? I posed the question to my marketing strategy students today.

The average student score: B+

My score: A-

 

To understand this situation it is important to look at the strategy and then the creative execution.

The strategy makes perfect sense. Nespresso is a terrific, profitable product with little awareness in the U.S. and even less household penetration. The current slow growth approach is prudent. But there is a simple problem: Starbucks is preparing to launch its own high-end espresso machine later this year. Starbucks is a threat because the brand is strong and well-known, with deep credentials in coffee. Starbucks is certainly a stronger brand than Nespresso in the United States.

The Starbucks move changes the game dramatically. Nespresso now has to move very quickly; there is just a little time to build penetration before the competitor arrives.

With this in mind, a national television campaign is very smart. Nestle hasn’t released spending levels, but I hope it is significant.

The creative is pretty good. Importantly, Nespresso is using a café as the comparison point; this is a way to enjoy café quality drinks at home. The benefit is convenience. The imagery is high-end, relaxed and elegant. The branding is strong.

The spot isn’t perfect; the ad doesn’t have much break through and the imagery is a bit little odd. I wonder if they made a mistake by not using their George Clooney or John Malkovich, both of whom have been important for the brand in other countries.

Nespresso is clearly on the right track. But this is just the first part of the bigger battle to come. It will be a fun one to watch.

Some Marketing Insight from Kellaway

May 1, 2012

Lucy Kellaway, columnist at the Financial Times, had a terrific column in yesterday’s paper. The article has some important insights about marketing and influencing. It is also highly entertaining. I recommend you read the article. Here is the link:

http://www.ft.com/intl/cms/s/0/ab3795b8-8ef3-11e1-ab32-00144feab49a.html#axzz1terwY5fM

*****

I’ve heard from a number of people that they’d like me to do more frequent blog updates, so I’m now planning to post something every Tuesday and Friday. I’m not certain I’ll be able to keep up that pace for long, but I’ll give it a shot.


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