Archive for August, 2012

Spirit Attacks United

August 30, 2012

Spirit Airlines this week announced plans to attack United on one of its core routes: Chicago O’Hare to Houston’s George Bush Intercontinental. Spirit will begin service on October 4.

On the surface this seems like a very bad idea. Directly attacking a strong established player is likely to spark a rather powerful defensive effort. The last thing United wants is a discount carrier on one of its core routes. United could easily put together a defense plan and make sure that Spirit fails to attract many customers on the route, loses real money and eventually folds.

But Spirit is being smart. The airline is flying just one flight a day on the route, leaving O’Hare at 8:15 in the evening and departing Houston the following morning at 6:15.

This makes United’s next move much more difficult. One flight isn’t a lot; United flies eleven flights every day on the route. And the new entrant isn’t likely to attract many of United’s important business travelers; Spirit is quickly developing a reputation for delivering the sort of terrible service executives avoid. Spirit is also charging next to nothing: flights in October are selling for just $71 round trip.

So will United defend? I suspect not; the downside appears to be limited and the cost of defending would be enormous.

Without a response from United, Spirit will attract price sensitive customers and fill up its planes. After a few months the airline will likely add a second flight, and then a third. By the time Spirit becomes a major concern for United it will be difficult to slow them down.

This is good strategy: thinking through your competitor’s situation and developing a plan to win. Spirit appears to understand United’s situation and is making some savvy moves.

Spirit is an airline to watch.

Can Anything Save Best Buy?

August 22, 2012

This week brought more bad news from Best Buy. Profits fell 91% in the latest quarter, same store sales dropped and the company’s stock continued to decline. It now trades at about $17 per share, down from almost $45 in 2010.

Best Buy’s slide raises interesting business questions: can anything stop the fall? Is Best Buy doomed?

Traditional retail is a difficult space. There are big fixed costs: real estate, inventory and staff. Margins are usually tight because one store can only charge so much more than the next. Consumers will move if the price difference is significant.

Once a retailer stumbles it can be difficult to turn things around. When sales slow, the financial situation deteriorates quickly. This makes it hard to invest in the store environment, salaries and employee development. The customer experience then erodes and sales fall further, which puts more pressure on the financials and the shopping experience gets worse. And then it all ends.

It isn’t a surprise that the world is full of failed retailers: Borders, Circuit City, Ames, Wards, the list goes on.

Best Buy is in a particularly bad spot because on-line retailers provide comparable or greater selection and lower prices. The very odd sales tax situation in the U.S. means that Best Buy customers often have to pay significantly higher taxes. This puts Best Buy at a fundamental price disadvantage.

Customers can visit a Best Buy, try out the item they want, immediately order it on-line via their iPhone and pay less money. They then receive it in a couple of days, which is often just fine.

The only way Best Buy can succeed is if the company’s transforms its business model, focusing on goods and services that can’t be easily replaced by cheaper players. Service, for example, might be an opportunity.

The problem is that Best Buy is locked into real estate leases. The company has massive stores all over the United States that it simply doesn’t need. This means Best Buy has significant fixed costs that it has to cover somehow.

So can Best Buy survive? There might be a way: amazing things happen. But it doesn’t look very likely to me.

*       *       *

My new book is now available for pre-order on Amazon. You can see it here:

http://www.amazon.com/Defending-Your-Brand-Companies-Competitive/dp/0230340342

In Defending Your Brand: How Smart Companies Use Defensive Strategy to Deal with Competitive Attacks I explore the shadowy world of defensive strategy. The topic is rather controversial; I think it is fascinating and important.

It might have helped the folks at Best Buy. I fear it is now a bit too late.

Something Different from Apple

August 17, 2012

Apple is a remarkable business success story; through creativity, strategic thinking and almost flawless execution it has become the dominant technology firm in the world and made many people wealthy in the process.

The key question now: can Apple keep it up?

It is certainly possible; Apple has motivated and talented employees, wonderful products, a huge pile of cash and a terrific brand.

Today’s news, however, is a bit concerning.

According to Bloomberg, Apple is publicly admitting that it made mistakes with its store network:

“’We recently implemented some changes in retail staffing,’ said Kristin Huguet, a spokeswoman for Apple. ‘Making these changes was a mistake and the changes are being reversed.’”

On its own, this isn’t a big deal. But it does suggest that the era of Apple’s flawless execution is coming to an end and there are some challenging times ahead.

Olympics Advertising: Gold for Omega

August 8, 2012

If you’ve been watching the Olympics you’ve seen a lot of swimming and gymnastics. You’ve also seen a lot of Omega.

The Olympic Games is a core part of Omega’s global marketing effort. This year Omega invested a small fortune creating a rather striking spot featuring the Rolling Stones song, “Start Me Up.” Licensing for the song alone was probably near $500,000.

So does it work?

I think so.

Any effective spot has to deliver against the 3 Bs: breakthrough, benefit and branding.

The Omega ad certainly has breakthrough; the music is instantly recognizable and the images are powerful. The ad draws you in.

The benefit is also clear. Omega is the official time-keeper of the Olympic Games, which means that it must be accurate and reliable. It is hard to think of a more powerful endorsement.

The branding is a little weak, to be honest; it comes mainly at the very end of the spot with only a visual image. But Omega is running the ad so much that eventually the linkage works.

Omega captures the spirit of the Olympics: the drama and the excitement. Using a Rolling Stones tune fits with the setting. Most important, Omega’s spot delivers a benefit that is relevant.

I’ll give Omega a Gold for this one.

Olympics Advertising: Building the P&G Brand

August 6, 2012

The Olympics is entering its second week, so it is a good time to take a look at the advertising. I’ll post my thoughts on a few of the spots this week.

First up: P&G

P&G became an Olympic sponsor in 2010. This year we are seeing the company’s first big campaign.

The overall message is quite clear: P&G salutes Mom. The company is running several heart-warming spots highlighting the role of mothers. The ads are endearing and warm. I’m confident they scored well in consumer testing with moms all around the globe.

But I don’t see how the campaign is going to deliver much in the way of a financial return for P&G.

I see three potential issues.

Problem 1 is that the ads don’t provide a clear benefit. They are emotional and sweet but lack any rational reason to buy. Emotional benefits can work, of course, but there are two other issues.

Problem 2 is weak branding. You have to wait until the end of the spot to see the company behind it. The high order idea doesn’t immediately connect with the product category. Linkage seems weak.

Problem 3 is that the ads focus on both P&G and the product brands. At the end of each spot, a series of P&G brands flash by before the P&G logo appears. This is clearly an effort to connect the individual brands back to P&G. The overall impact, however, is hard to follow.

P&G is apparently very enthusiastic about the campaign. CMO Marc Pritchard told Reuters several weeks ago, “…it’s one of the highest returns on investment campaigns that we have done.” He also said it would generate $500 million in incremental sales this year.

If we believe the statement, P&G delivered incredible returns on the Olympic effort even before the event began, which would really be an accomplishment.

I suspect that what Marc actually meant to say was, “We hope it will be one of the highest returns on investment campaigns that we have ever done.”

While P&G’s spots warm the heart, I’m not certain that financial hope will come to pass.


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