Going, Going … Gone? Why Are Big Brands Hitting the Skids?

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Been noticing any bare spots in the retail landscape lately? Well, expect to see lots more—especially with the economy tanking. Here’s the box score to date:

The once ubiquitous CompUSA was pulled up by its roots in December. A venture capital firm bought the remnants for salvage and promptly closed the remaining stores. The chain started imploding last summer, as customers bought only sale items and ignored full-price goods—partly a result of horrible employment practices that beat employees to a bloody pulp. In fact, the pressure on employees to move merchandise became so extreme that it created the perverse effect of customers who wouldn’t buy at regular prices becoming “the enemy” for some employees. But another contributor was employees not being able to spell the products they were selling.

Circuit City, once at near parity with its category competitor, Best Buy, has been left in the dust. Worse yet, the company is hemorrhaging cash at an alarming rate. To add to the turmoil, the board just gave the heave-ho to the dim light bulb CEO who fired all the experienced sale staff last year to save money. The new CEO won’t have much time to turn things around, but there’s no replacement lined up. And the new sales recruits, fresh from flipping burgers (or from CompUSA)? They can’t sell squat, which led to this delicious headline in the January 3 “Information Week: “Clueless Circuit City Scrooges Itself Out of Christmas Sales.” Way to go, IW.

Sprint makes the list after announcing on January 18 that it would lay off 4,000 more employees and shutter some 120 retail stores. Sprint’s business customer base seems relatively stable, but consumer customers are fleeing like ships leaving a sinking rat. And no wonder. Consumer service is atrocious. Rate plans aren’t competitive. And the company, which also has a new CEO, is focused on cutting costs rather than finding out what’s wrong on the customer side. That’s what happens when number crunching, C-level execs treat customers as statistics—as if they’re a fixed value in a rapidly deteriorating equation.

Who’s next in line? Chrysler’s a good candidate. Actually, Ford could be too. So are several retail and investment banks with sufficient hubris to believe they could whip ether into profits, as in make something from nothing. Northwest airlines won’t totally tank, but it’s too weak to stand alone, and the brand’s about to disappear. Radio Shack? A possibility. Macy’s? Sears?

What really fascinates me is what all these retailers have in common. They all built powerful brands—then tried to survive on brand strength rather than responding to customers. They advertised their brains out and relied on fooling and manipulating customers, without grasping that customers will decide their fate based on their own perceptions¬—which all the brand advertising they can shovel out won’t influence.

For years customer advocates have been preaching the gospel of customers ascending the dominant position in buyer-seller relationships. But business wasn’t listening. Now, the gospel’s getting very hard to ignore. Nonetheless, the carnage will almost certainly worsen over the next five years—and not just in retail, but in B2B as well.

11 COMMENTS

  1. Dick

    As most financial commentators recognise, whole industries and individual companies within them go through lifecycles. Over time, the fortunes of most companies revert to a mean where ROIC is equal to WACC. Some companies do much better, but the analyses carried-out to-date have largely failed to find hard-and-fast factors that drive persistently superior results (and that don’t fall foul of the Halo Effect). Michael Mauboussin of Legg Mason Capital Management describes this graphically in a couple of recent papers on Death Taxes and Reversion to the Mean and ROIC Patterns and Shareholder Returns.

    What this means is that it is very difficult to systematically pick stocks of companies that will do better than average in the future. (I think we all knew that!) And that it is equally hard to say with any degree of statistical surety that customer-centricity leads to persistently superior shareholder returns.

    Back to the drawing board.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  2. I like numbers and analysis, but if I listened to the people who said that 50% of new businesses fail, I never would have started my own.

    It may be true that over time that companies “revert to the mean.” It’s also true that I’m going to die someday. Does that mean I should stop living, because there’s no point to it anyway?

    Business is an evolving art and science. Theories come and go, businesses rise and fall. Academics can’t find the magic formula, because it’s constantly changing.

    Dick, the companies you’ve mentioned have lost their way, but I don’t think it’s a random occurance. Nor is it random that Apple, IBM and other companies have been up, down, then up again.

    Andy Grove of Intel said it best in his book entitled “Only the Paranoid Survive.” Personally, I think the best signal of upcoming problems is success. Not because of statistics, but because it’s human nature to become complacent, thinking that what worked yesterday will work tomorrow. It’s also human nature to take relationships for granted sometimes, with customers and otherwise.

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

  3. Bob

    Not all companies revert to the arithmetic mean. As Michael Mauboussin showed in his analysis, some do significantly better than others. The problem is that we are not sure exactly why they do and that it is hard to remove good old-fashioned luck out of the equation.

    That shouldn’t be a cause for doing nothing in despair, or worse, to retreat into doing almost anything driven by wooly management thinking based upon half-baked theories. It is time for fact-based management and robust experimentation to expand the body of knowledge available to and for management. To reinvent management as Hamel & Bryan discussed in a recent article on Innovation Management in the McKinsey Quarterly.

    I believe as you do that customer-centricity is a driver of value creation for business. Michael Mauboussin’s articles also highlight the same position, even though the evidence is not strong. It is up to us to get down off our soap boxes and to show through diligent analysis, experimentation and re-analysis that it is so. And how it works. So far, we have been strong on the many flavours of how it works without the empirical support for hardly any of them.

    Perhaps it is time for business to become a bit more like science and a bit less like art.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  4. Dick

    It is not only Circuit City and Best Buy that are struggling to cope with the brave new networked world we find ourselves in. According to the New York Times, Target has some of the same problems too.

    When will these inside-out companies finally understand that they are no longer in charge of the brand. Customers are. The grandaddy of them all, P&G, seems to have understood.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  5. Graham – nice data points, but the wrong ones. Far and away the most definitive study correlation customer satisfaction with profitability comes from the Ross School of Business, University of MIchigan, which updates data annually. The folks there have established beyond statistical doubt that companies with customer satisfaction in the top quadrent have a strong tendency to be in the yop quadrent profit-wise, and vice versa.

    Dick

  6. Target is suffering from a big turndown in consumer spending here in the U.S. It’s also suffering because in our current conditions, folks who dislike Wal-Mart (which tends to be counter-cyclical) will shop there anyway. There’s no question that Target still leads U.S. discounters in customer service. Of course, that’s only relative, because the category isn’t terribly customer-friendly. But if we want customer-friendly, we go up a notch.

    Dick

  7. Dick –

    There is clearly a difference between Brand “awareness and recognition”, what that Brand means to the customer and what “value” that Brand has.

    As you mentioned before, look at the “Discount Department Store Category”: Target, Walmart (and even K-Mart) are recognized Brands (and, I agree with you, none of them are very customer-friendly). Walmart is the perceived leader in “Price”, while Target is the leader in “cool, designer stuff at great prices”, and K-Mart, well…. Go back 30-40 years, before EJ Korvettes, Venture, Caldor, Zayre’s (all gone), and WalMart, Target, K-Mart exploded, and Sears was the top Discount Department Store in the U.S. Along come the “discounters” with better pricing, and Sears became a “mid-tier” (and very recognizable) Brand – not the high service model of the (primarily apparel) regional DEPARTMENT STORES, and not the lowest price model of the new “discounters”. Then along come the category killers, Best Buy, Kohl’s, etc, with better/broader selections, and the pie (which, by the way, doesn’t grow because there are more players) gets sliced thinner, and Sears is squeezed even more. Today, Sears is a highly recognized Brand, and it has some house brands with great brand equity and “value” to customers – Craftsman, Kenmore, (Land’s End), etc, but these are not enough to profitably support the entire box.

    Brand awareness cannot insure survival. Even a brand with high equity/value doesn’t guarantee success (ie; current economy’s impact on Target and WalMart sales), if success is measured in short term earnings.
    Companies that rely on Brand recognition to weather using customer-unfriendly tactics to boost short-term earnings, will suffer consequences if the “value” of the brand (in the customers mind) is less than the “awareness”.

    It’s always important to remember that the customer determines the “value”, not the companies branding campaigns.

  8. Scott – I agree with you completely. My admittedly “jaded” perspective comes from years in the agency business where the prevailing belief is that clever advertising, irrespective of customer experience, can shape customer perspectives. I see this played out every time I turn on the TV, open a newspaper or read a magazine. But then again, imposing this “prevailing belief” on clients is what keeps the advertising agency business profitable.

    Thanks for your input.

    Dick

  9. I couldn’t agree more that the customer decides what is the value of the brand, and that the total experience is what really matters, not advertising slogans.

    But a little voice keep whispering to me: why is it that some cleverly advertised brands seem to get more value than they might deserve? I’m thinking mainly of luxury brands, but the same could be said for brands that make a certain “statement.”

    The iPod, for example, is not world beating technology, but it has a certain image and you have to admit that Apple ads are very clever. I’m an ex-IBMer, but I’ve bought an iPod and laugh at those PC vs. Mac commercials portraying the stuffy PC owner vs the hip Apple customer.

    And now that that super thin Mac is out, I’ve thought, why can’t I have one of those?

    Advertising presents an image of what the brand is about, and good campaigns evoke feelings that make the consumer want to own that brand. And a feeling of satisfaction after purchasing. Isn’t that real value, in the customers’ mind?

    While I agree that the company can’t totally build a brand through marketing promotions, wouldn’t it be fair to say that marketing messages can have some impact, especially if what is communicated is consistent with the customers’ experience?

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

  10. Bob –

    I love Apple products! Love the IPod, Mac, etc. However, my customer experiences in the two local Apple stores have been slightly more often than not, poor and once, down right horrible – almost to the point where I won’t go back there. ALMOST, though. Why, because I love their products.

    Their innovative product design group and their advertising built that brand. No question.

    What makes me keep going back is my personal internal struggle in weighing my options – something we all do consciously or unconsciously – product, price, place, experience (people), etc.

    I personally feel very strongly that there is no excuse for bad service or bad experience(s), but, at the reality level, I am willing to put up with a less than stellar (or even average) experience if the most important factor(s) to me, at that time, in the 4 P’s above (or 3 P’s and an E) outweigh that.

    Times are changing – not only does the internet increase the options, but the consideration set to define value – the set of drivers/options we weigh in deciding what to buy and where. (For instance, my college-aged son weighs the social consciousness/policies of the company heavily in his consideration set).

    Advertising is very important in creating a brand image, but the success of the brand is dependent upon the value equation of each customer and the weights they place on each factor, each and every time they make a purchase decision.

  11. Bob – you’re certainly right, and I’d use Neiman Marcus (Needless Mark-up) as an example. With hindsight, what I should have said is that brand advertising can be effective when based on the customer experience – but brand advertising is ineffective (or even counter-productive) when it tries to shape the experience.

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