Consolidation as Growth Slows

Recently, Vodapfone and Hutchison Whampoa announced that they will combine their Australian mobile telecommunications businesses into a joint venture. Currently, Vodapfone is the third ranked competitor in the Australian market, while Hutchison is the fourth. The combined subscribers of the new firm will still rank third in the market, but a relatively strong third.

This is a pattern common to an industry as its high growth begins to slow. Once an industry begins to slow down, the top competitors in the industry are usually capable players. These top competitors are unlikely, and unwilling, to cede share willingly to another competitor. In that situation, growth and market share is likely to come by way of consolidations, such as this one, or acquisitions.

A very important determinant of the success of these consolidations is whether the new company can retain all of the customers the two firms previously owned. (See the Perspectives, “Buying Share, Not Sand” and “Acquisitions: The Buy or Win Decision” on StrategyStreet.com.)

Did Amazon Leave Money on the Table?

Recently, Amazon introduced Kindle2. This e-Book reader is thinner and faster than its predecessor, which itself is only about a year old. One thing the new Kindle2 is not is cheaper than its predecessor. It carries the same $359 price tag.

The question is, did Amazon leave money on the table? Certainly, you can make a case for Amazon’s holding the price at $359. The new device is better than the previous device. In addition, the previous device sold out over the Christmas season of 2008.

On the other hand, you can make a case for a lower price point. History says that a lower price might help. First, in May of 2008, Amazon lowered the price of the original Kindle from $399 to $359 and sales increased notably. Second, Amazon has sold well over 500,000 of the original Kindles. The resultant economies of scale should have increased the margins of the new product over the old. Third, there seems to be a magic price level of about $250 that causes a consumer product to really take off with the masses. For example, the iPod Classic sells for $249. How many more Kindle2s could Amazon sell at $249 rather than $359? Finally, the Kindle2 might be something like the razor. In order to use it, the customer has to download books from Amazon. These books also bring additional revenues and margins. How many of these books will not be sold at $359 per Kindle that might have been sold at a $249 Kindle? (See the Symptom and Implication, “Prices on niche products continue to rise while other prices fall” on StrategyStreet.com.)

Reducing the Customer's Hassle Factor??

I’ve done it. I’m sure you have as well. In fact, virtually everyone has done it at one time or another. What is the “it”? You call for customer assistance or information and you get…India or the Philippines. Both India and the Philippines are fine countries. They both have much to admire. But their ability to speak English clearly to an American listener is, by most accounts, limited. They do speak English, though, and they ask for little in compensation in return. So, many companies have shifted their customer service, especially consumer customer service, offshore to these countries.

All has not gone swimmingly, though. Dell Computer, for one, had to bring back its business (that is, the larger customers in the market) customer service to the U.S. because of many complaints. The consumer service remains offshore. I wonder if there is a connection with Dell’s weakness in the consumer market?

Perhaps the tide is turning. Recently, United Airlines announced that it was dropping an Indian customer call center that handled customer observations or complaints. Instead, phone reservation agents in Chicago and Honolulu will be cross-trained to respond to written customer feedback. Yes, I’m sure you caught that. The customer now has to write. (See the Perspective, “Failure Shifts More Share than Success” on StrategyStreet.com.)

United Airlines has stopped publishing its customer relations phone number. That is the number that used to go to India. Instead, customers now have to send an email or a letter to complain. Of course, the United Reservation Center in Detroit, which covers United’s largest customers, will continue to take phone calls of complaining customers. (See the Symptom and Implication, “Competitors are emphasizing reliability in product quality” on StrategyStreet.com.)

Maybe the tide has not turned after all.

Price Increases at the Time of a Sales Decline

The world’s largest manufacturer of home appliances, Whirlpool Corporation, has seen a substantial decline in revenues and unit sales in the last few months. The company, as well as the rest of the industry, has responded with lay-offs and other overhead streamlining. And one other thing…a price increase. Despite the price increase, Whirlpool expects to gain market share in this troubled time for its industry.

Hertz Global Holdings, Inc. raised its car rental rates at North American airport locations an average of $5 a day, or $30 a week. The problem is that fewer travelers are renting cars, so the industry is struggling with higher costs.

In the magazine industry, newsstand sales of magazines are falling at the fastest rate in decades. Here again, the industry can point, in part, to increases in the cover price of magazines for a fall-off in sales.

The international food giant, Unilever, raised prices more than 9% world-wide in the fourth quarter of 2008. At the same time, world-wide commodity prices had fallen with a collapse in demand. The result: a bunch of unhappy food retailers. Oh, and private label food sales are taking more market share.

These price increases, at a time of declining demand, are dangerous moves. (See the Perspective, “How Price Kills Profits” on StrategyStreet.com.) If everyone in the industry follows along with the price increase, it will prove to be a boon for all industry competitors. But there’s the problem. In most declining markets, at least some competitors, if not most, will discount to maintain their current sales volume at the expense of their higher-priced competition. If these discounting competitors succeed, the industry leaders will see their market shares fall and will, eventually, have to reduce their prices.

The real purpose of a price in a tough marketplace is to discourage a competitor. Do that and everything else will work out, eventually.

A High End Retailer in a Leader's Trap

In a Leader’s Trap, an established industry competitor maintains a price umbrella and gives up market share to a discounting competitor. (See the Perspective, “The Leader’s Trap” on StrategyStreet.com.) The company in a Leader’s Trap believes that customers will stay loyal to the established company’s brand name by paying a premium for its product. Over time, the company in the Leader’s Trap not only loses share, but also sees its prices eventually fall to a level near the price established by the discounting competitor. Abercrombie & Fitch is now in a Leader’s Trap.

The company is refusing to discount its latest clothing lines, even though competitors are discounting their lines. Both American Eagle Outfitters and Aeropostale are offering discounts on their current lines. Not Abercrombie.

Abercrombie is a higher-end retailer, someone we call a Performance Leader competitor. American Eagle and Aeropostale aim for somewhat lower price points. Nonetheless, even though the companies compete at different price points, significant discounting in a marketplace affects all competitors. If an industry Standard Leader, who prices at average for the industry, or a Price Leader, who prices at the low end of the market, begin offering new significant discounts, even Performance Leaders have to follow or be willing to give up market share. (See the Symptom and Implication, “Most competitors are offering low prices after a period where leaders held prices high” on StrategyStreet.com.)

So far Abercrombie has refused to go along with discounts. Its market share is also falling. In December, its same-store sales fell 24%. Aeropostale’s same-store sales rose 12% at the same time. Eventually, Abercrombie will have to reduce its prices to stay competitive.

National Costs in a Global Economy

Dell Inc., the American computer manufacturer, is moving nearly half the jobs it has in Ireland to Poland. The move reduces Dell’s costs. It also sends a powerful message to the Irish and to other nations.

Ireland initially attracted Dell to manufacture in Ireland in 1990. Dell built a manufacturing facility in Limerick. Over the last few years, it has become the second biggest foreign employer in Ireland. Ireland’s low corporate tax rate and well educated workforce originally attracted Dell. Things have changed since 1990.

Ireland has now become a much costlier place to do business. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) Yes, its corporate tax rate remains low, at 12.5%, but labor costs have increased and productivity has fallen. Energy costs have risen as well. The quality of the country’s infrastructure has slipped. And, very importantly, there is now more business regulation. All of these changes have reduced Ireland’s competitive position compared to other countries.

The result: more jobs in Poland and fewer jobs in Ireland. The Poles offer a lower cost structure than the Irish. In an international market, jobs can and do move. (See the Perspective, “Can We Raise Margins with a Price Increase” on StrategyStreet.com.)

As the U.S. contemplates changes in its labor regulations, it should heed the warning of this Irish situation. If labor prices go up faster than labor productivity, national jobs inevitably evaporate into the global ether.

Layoffs, Expectations and the Economy

We are flirting with the highest levels of unemployment in a generation. Things feel bad and are bad. They could get a lot worse.

Consider some of the recent lay-offs. Macy’s laid off 4% of its workforce. U.S. Steel laid off 16%. Sun Microsystems announced plans to lay-off 15 to 18% of its workforce, Texas Instruments 12%, Sprint 14%. In most of these cases, the lay-offs seemed large, and they are.

But they are not as large as they may seem. In fact, an unscientific analysis suggests there may be a pattern here that contains a warning for the future. Most of the companies reporting in the last few weeks are laying off between 10 and 20% of their workforce. However, behind those lay-offs are reductions in current quarterly revenues of 20 to 30%. These companies are laying off at a slower rate than their revenues are falling. (See the Perspective, “Costs: The Last Consideration” on StrategyStreet.com.)

So, what does this tell us? Two things. First, the companies believe there will be a turn-around within a year or so. They are willing to see margins fall in order to hold experienced employees in anticipation of a rebound in demand. Second, the economy could be much worse than it is. If the average employer has laid off about 75% of the workers it would need to lay off to match the workforce with the current revenues, unemployment would be even higher than it already is. If the anticipated turn-around does not appear as expected, there would be a catch-up period as companies “right size” their organizations for the new, lower, revenue base.

Now there’s a scary thought for the politicians.

An Industry Leader Stumbles

For years, Chico’s FAS grew rapidly by selling attractively priced, colorful clothes, to baby-boomer women. But the company began to stumble in 2006. Its growth rate slowed and its core customers migrated to other companies’ offerings. The company’s costs rose faster than its revenues, squeezing margins.

The company stumbled by chasing after customers of other competitors, especially younger women. From the standpoint of their original core customers, baby-boomer women, Chico’s failed to deliver the products that they had come to expect from Chico’s. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” on StrategyStreet.com.) In this case, the failure was a failure in Reliability, one of the key measures of the Customer Buying Hierarchy.

Since its failure started as recently as 2006, there is a good chance that Chico’s can recover from its mis-steps. The company searched for new customers at the expense of its core customers and threw the baby out with the bath water. (See the Perspective, “Convenience: Much Tougher than it Looks” on StrategyStreet.com.) Other companies have succeeded in search of new customers by ensuring that their core customers are well provided for before the search begins, and while it progresses.