Category: business (Page 2 of 6)

How industry consolidation affects you: beer

September 23, 2014 /

Beer! Microbrew this and craft-brew that, how can beer be victim to consolidation?

The business of hops, yeast and malt is still fairly unconsolidated, but it has come together rather strongly in the past decade, to the point where the most famous American beer brands are all owned by foreigners. Anheuser-Busch InBev is the world’s largest beer manufacturer, with 21% of global sales. Don’t let the storied names out of St. Louis fool you; AB InBev is a Belgian-Brazilian company headquartered in Brussels.

In second place is SABMiller, founded in South Africa, headquartered in London, and owner of the Miller-Coors brands that hearken back to the Colorado Rockies. SABMiller sells roughly 44 billion pints of beer each year. SABMiller just made an offer to buy Heineken, a brewing conglomerate of similar size, which the Dutch company has so far rejected; should a deal go through, the combined firm would also control 21% of the beer market. The Economist also suggests that InBev may just buy SABMiller, creating a behemoth with combined production of nearly 600 million hectolitres (or, in practical terms, 125 billion pints) of beer per year.

Despite this consolidation, local and regional brewing continues to thrive. From mid-size producers like Sam Adams and Brooklyn to do-it-youself brewpubs, a wide variety of beers exist alongside the majors—some 3000 commercial entities in all, ensuring some diversity in a consolidating field.

Update: Flowing Data made a nice beer family tree that visually represents the industry.

This is the latest in a series of summaries of industries whose corporate consolidation has led to a small number of players controlling the majority of a sector, creating oligopolies in the mass market. Previously

What the watch industry is missing

September 16, 2014 /

I’ve been following the Watch reaction since its unveiling last week, and I keep coming back to the short-sightedness of the luxury watchmakers’ reaction.

Mostly, the watch industry has been complimentary, in its way, of the Apple Watch. They are right to compartmentalize it as fundamentally different from their products, and to appreciate it on its own level. Sample quote: “I do not believe it poses any threat to haute horology manufactures, I do think the Apple Watch will be a big problem for low-priced quartz watches, and even some entry-level mechanical watches.” (Monday Note has a good roundup.)

But here’s the thing: anyone who buys an Apple Watch is going to stop buying other watches, regardless of price point.

I keep thinking about my own use case. I’ve been a daily watch wearer since elementary school. I wear a watch with a great degree of pride, as the accessory I rely on. My watches are carefully chosen, and whether an inexpensive Swatch, an oversized Nixon or a finely crafted Breitling, they are a fixture in my life.

Of course, I’m also a daily Apple user, and an early adopter of their products. I own the first-generation iPod, the first iPhone, the first iPad. I undoubtedly will buy the Watch, even though I’m not a rabid message-sender, even though I’m not a jogger, even though I’m not yet 100% certain where the new device journey will lead me. It’s a new Apple gadget and it’s a watch—I’m powerless to resist.

And once I have the Watch, I’m going to wear it regularly. I will tinker with it, find its ideal use cases, answer a thousand questions about it, be proud of it as I was my other first-gen Apple products and every one of my watches. As with the iPhone, I expect it to become part of my daily routine.

And once I’m doing that, well, my other watches don’t stand a chance. Because as the Watch assimilates itself to my life’s rhythms (or, perhaps, vice versa), not wearing the Apple Watch will feel like something’s missing. The vibrations and alerts and shortcuts that aren’t offered by my quartz Zodiac will be glaring omissions. Before long, I’ll be strapping on the Watch every day, just as I put my iPhone in my pocket.

If the Watch works for me, my workaday watches will slowly get relegated to my nightstand drawer, and future watch purchases will shift from investing in the next object of beauty and personal expression to saving a few bucks for Watch 2. And Apple will then own a thirty-year habit of mine, just like they came to own my music and phone habits, too.

Frankly, I’m not even sure I’m happy about this. But I’m going for it. I expect millions of folks like me will, too, and when they do, the disruption to the watch industry will not be pretty.

Truth in advertising: New England Patriots Jersey Guarantee

May 8, 2014 /

The New England Patriots got some favorable press today, including a front-page link on ESPN.com, for their new “jersey guarantee.”

Under the terms of the guarantee, if a jersey is purchased of a Pats player who departs the team within 12 months of purchase, the customer is entitled to a new jersey at a 25 percent discount.

Generous? Not so much. Clothing markup is typically 40-50% from wholesale; that $100 jersey costs the Patriots $50-60 to procure. So at a 25% discount, the replacement jersey is in all likelihood still sold at a profit.

The Patriots aren’t accepting product returns or giving refunds. They’re offering a well targeted coupon code. The only certainty from this promo is that the Pats have a new path to selling more jerseys and making more money. Some guarantee.

Communicating value to customers

April 1, 2014 /

Southwest Airlines has been running an ad during the NCAA basketball tournament that touts its frugal ways. The ad is transparent, honest and pragmatic.

“You save money dealing directly with us,” the voiceover says of its website, and “we save money dealing directly with you.”

From there, the ad touts its low airfares—see? See?—as a clean extension of the value proposition behind the company.

I love this commercial for its win-win approach. Southwest is calling out on national television that they’re not playing games. If you work with us, they say, it costs us less, and in turn, we’ll help you spend less, too. In today’s savvy shopping environment, it’s great to see a brand talk frankly about minding costs and passing savings onto customers.

Compare this with the sign I see in the building cafeteria when I’m in my New Jersey office. It covers the front of every napkin dispenser they have.

“When our costs rise,” it says, in bold red type, “Your [sic] prices rise.”

This little sign could be a win-win, like Southwest’s ad. But it’s not. It’s antagonistic. It’s a threat. There’s no mutual benefit, no collaboration, just a warning. Waste our money, and we’ll take it right out of your pocket, bucko.

It helps that the cafeteria is the only place to grab lunch without a decent walk. They have a bit of a monopoly, and it shows: the food is somewhat expensive, the cooks refuse to go off-script, and certain stations randomly don’t open some days. All of which mirrors the attitude on the napkin dispensers. Don’t mess with me, eater. I’m all you’ve got.

The cafeteria misses an opportunity to create customer loyalty that could have been communicated simply and effectively. How much better would the napkin dispenser make customers feel if it said, “Keeping costs down keeps your lunch prices down,” instead of going toe-to-toe with diners?

How industry consolidation affects you: eyeglasses

March 31, 2014 /

Luxottica is in the news in the digital realm right now for its forthcoming collaboration with Google on Glass-wear.

Google went straight to the top on this one, as Luxottica is by far the industry leader in eyewear. The company makes eyewear under 27 different brand names, for both its own brands, such as Ray-Ban and Oakley, and a variety of high-profile licensees like Chanel and Prada.

Luxottica has the market pretty well covered on the retail side, too: if you’ve ever set foot in a Lenscrafters, Pearle Vision or Sunglass Hut, you’re on their turf. The company also takes care of the eyeglasses at Sears and Target, among others.

In total, Luxottica has roughly 80% of the major eyewear brands under its control. Main competitor Safilo has an impressive portfolio of licensing partners but a much smaller footprint and fewer known in-house brands.

Me, I’ve been wearing American-made Bevel glasses of late, and independent ic! berlins before that. But it’s interesting to know that when I made a big switch a number of years ago from Oliver Peoples to Paul Smith, I wasn’t really changing much of anything.

The real effect of surge pricing

January 14, 2014 /

While Uber is coming under a lot of fire (including from me) on its surge pricing, Wired’s latest piece on Uber’s situation clarified a point that is worth highlighting.

Surge pricing, according to Uber, is intended to stimulate supply and curb demand to ensure the two match. Otherwise, the logic goes, would-be riders are left stranded without a car. Last month, during the height of the backlash against Uber over fares reported at seven times the usual during a New York snowstorm, Kalanick told WIRED that the bad publicity his company faced over surge pricing would pale compared to the impact of Uber not being able to offer a ride at all.

(Emphasis mine.)

This is what Uber and CEO Travis Kalanick are doing with surge pricing: they’re getting the masses to back off. Anyone who’s encountered a surge pricing screen on Uber in the past few months has done so while trying to reserve a car that’s only a few minutes away, as usual. That car is available because of surge pricing—specifically, because higher prices get fewer people to grab at finite inventory, maintaining a decent supply.

Of course, Kalanick can’t say that out loud, so he talks at length about bringing more cars on the road. Yet that’s only part of the story, and he’s been challenged on whether surge pricing really aids supply. In truth, what surge pricing really accomplishes is throttling demand.

And this makes sense: if an Uber user tried to call for a car in bad weather, and the nearest vehicle was 27 minutes away rather than 6, or not available at all, what would the response be? Customers would give up on the service for lack of reliability, and return to hailing cabs and calling car services, which are equally imperfect but entrenched in society. Uber is not, at least not yet. To the company, “Uber doesn’t work” is a worse fate than “Uber is sometimes too expensive.” So premium fares continue.

Uber has decided that supply is the most important link in its chain, and is using surge pricing to maintain it. Which, while not the most satisfying thing to Uber users, is a rather logical approach.

Update: this wonderfully in-depth look at Uber’s economic and business decisions sheds additional light on the subject.

The bottom line is that the only real alternative to dynamic pricing is a ton of customers staring at screens that read “No Cars Available.” This is the fact that is least appreciated by Uber’s critics.

How industry consolidation affects you: meat

December 19, 2013 /

Buying some steaks or pork chops for dinner tonight? If you’re buying a name brand at a supermarket, chances are it’s coming from one of the four major players in each market segment.

As of 2007, the four biggest beef packers in the U.S. supply more than 83% of our total supply, with Tyson and Cargill owning the majority. That’s right: more than half of America’s beef comes from one of two meat suppliers. Swift & Co. and National Beef Packing Co are three-four but their combined total is barely more than Cargill’s alone.

The same consolidation exists in the pork packing industry, although Smithfield Foods is the leader, with 26% of the market. The top four players control two-thirds of the market and include—surprise!—Tyson, Swift and Cargill.

These five companies are providing most of our protein nowadays, which makes the locavore movement just a bit more interesting. (Source)

This is the latest in a series of summaries of industries whose corporate consolidation has led to a small number of players controlling the majority of the market, creating oligopolies in the mass market. Previously

On quality

November 25, 2013 /

I discovered Energy Kitchen in 2004 or 2005, when it had but one lonely outpost, randomly, on Second Avenue near 59th Street in Manhattan. I wandered in looking for a fast meal and emerged with freshly grilled chicken and brown rice in a healthy wrap. Low calorie, fresh and delicious—oh, and by the way, low-calorie and low-fat, too. Genius!

A few years later, Energy Kitchen went into expansion mode, and in short order had what felt like a dozen or more outlets around the city. One opened on West 23rd Street by my then-office. I excitedly stopped in shortly after opening, and found an updated menu—now with more nouveau options, like bison—as well as modern decor and a ticketing system for the lunch rush. Oh, and by the way, every entree was under 500 calories. Still genius.

Only now, Energy Kitchen wasn’t a friendly novelty restaurant. It was one of a growing chain, and it showed. The lunch rush at the store on 23rd was poorly managed; staff actually set up a holding pen for people to wait for their food, forcing us to loiter uncomfortably next to the trash cans. The wait times were often rather long. And despite the new fast-food underpinnings, the prices stayed high; if memory serves, that bison burger was a $12 item. (I never got around to trying it.)

And, most importantly, the food went downhill. As a burgeoning quick service chain with a fair number of stores, Energy Kitchen had to harness economies of scale. That meant pre-packaging some food items rather than cooking them fresh, which degraded both the quality and the flavor of a meal. I once watched in disappointment as the cooks carried a tray of chicken up from the basement: many small plastic bags of parboiled chicken, already cut, ready for a quick spin in a microwave and an unceremonious dump into a wrap. So much for fresh and grilled.

So today’s news of Energy Kitchen’s demise, while unexpected, is not that surprising. The chain positioned itself as having a smart product: healthy, flavorful and satisfying. But Energy Kitchen charged upscale prices for a product that ceased to be upscale, despite the claims on the front window. I imagine many health-conscious customers went looking for organic and locavore cuisine rather than save a few calories on pre-bagged poultry. It’s a classic case of failing to deliver on the brand’s promise.

Which is a shame, because at the outset, Energy Kitchen had a great idea and great execution. Above all else, the quality of the product will ultimately define the success or failure of an organization.

Instead of just narrowing airline seats, charge for better ones, too

October 25, 2013 /

The Wall Street Journal’s expose on airlines narrowing coach-seat widths seems, to me, yet another market opportunity for the airlines, if only they’d position it correctly.

Now, I’m no advocate of skimpy seating. I want to travel in as much comfort as I can afford. But the key word there is afford.

Consumers have continually shown that they have strong price sensitivity when they fly. This forces the airlines to keep their base fares low, which in turn forces them to find ancillary revenue sources. Upcharges for baggage, exit rows, and priority boarding are all designed to offset the cost of keeping airfares at competitive rates and aid profitability. (It’s working, too.)

So why not use this seating to their advantage? Selling more-hiproom seats in the same manner as more-legroom rows would undoubtedly prove profitable by servicing that segment of the policy (such as this author) that is willing to pay a small premium for an upgraded experience. If that extra seat in a nine-across row generates another $300 fare, having a handful of eight-across rows generating $40 per passenger in upgrade fees would be similarly profitable.

I do not look forward to my first 17-inch-wide airline seat. Here’s to hoping the more-space movement hits the front of the coach cabins on these planes sooner than later.

On the business of pricing

August 9, 2013 /

Two interesting articles came out this past week that provide interesting perspective on pricing models for service businesses.

One, in The Economist, declares that businesses need to get better at charging more. In a typical competitive market, firms are always looking to undercut rivals in order to secure business, which leads to ever-decreasing margins. Instead, many consultants are now advocating that firm pricing structures, tangible benefits, well-managed customer expectations and smart framing can boost asking prices and, in turn, the bottom line. Finding differentiators is an effective counterpoint to price competitiveness that leads to higher grosses.

The other article takes this notion and runs with it. In the New York Times, Adam Davidson asks, What’s an idea worth? He then explores companies that have pushed themselves away from hourly billing into business models that value expertise over pure labor. By identifying a niche or selling a targeted execution, firms can balance predictable costs with more valuable, and thus pricier, customer acquisitions. An important takeaway here is that hourly billing dates to the 1950s—perhaps revealing that it, like many other twentieth-century business paradigms, is approaching the end of its usefulness.

“It’s clear that the fundamental nature of work has changed,” writes Davidson. “In today’s austere age many businesses cannot depend on rising sales volumes to lift their profits,” notes The Economist. Both pieces point to the same conclusion: selling more specific, high-quality services improves both profitability and customer satisfaction.