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Sunday, January 30, 2011

Wal*Mart is WalSmart

Last year, I wrote a post entitled “The Wal-Mart Conundrum”. It attempted to provide a balanced view of the world’s largest retailer (see Media Realism, May 26, 2010). The post generated a great deal of mail both pro and con. I promised to continue to monitor the retail powerhouse and that is what I will be reporting on in this entry.

A few years ago, William Marquard, a very solid business consultant, wrote a book entitled “Wal-Smart, What it Really Takes to Profit in a Wal*Mart World” (McGraw-Hill, 2007). It is an excellent book and I highly recommend it. He does cover some of the issues that Wal*Mart faces today and he does not duck the criticisms they often receive. What he does is paint the clearest picture that I have seen as to why they have been successful. He goes on to add that we now live in a Wal*Mart world and the secret to success for many companies is not to take Wal*Mart head on but rather to use their techniques to survive.

Boiling it down, he says it all comes down to what he calls “The Productivity Loop.” He describes it as follows: “The loop is an endless cycle—reduce costs, invest savings in lower prices, use lower prices to boost sales and generate higher profits to invest in reducing costs further”. When the loop is finished, Wal*Mart starts it all over again and he gives many good examples of the loop in action.

Wal*Mart staffers are relentless and continue to cut costs for shipping, communication, warehousing, handling, distribution, stocking, merchandising, labor schedules, and serving their customers. Their cutting edge work in RFID (Radio Frequency Identification) has slashed out of stocks and replacement costs.

Also, their corporate mantra is first to work out what NOT to do. Then they decide what to do and they try to solve problems one store at a time.

A big driver in their business is Everyday Low Pricing often called EDLP. Research has shown that it is the prime reason that people shop super-centers for groceries. EDLP allows them to run fewer ads (boo!), spend less on labor to change prices on shelves, less time on stock outs, and a great deal less time entering prices on company computers. This is especially important when you have 100,000 different products in a super-center.

Despite this, some consumers find EDLP boring so Wal*Mart still offers “rollbacks”. This helps blunt the “Hi-Lo Retailing” tactics that K-Mart, Albertson’s, Target (to a degree) and J.C. Penney use. These are simply gimmicks to generate store traffic such as big promotions, great sales, and lots of printed coupons.

By constantly going back to the productivity loop, Wal*Mart has changed the rules of the global economy. They have combined a new level of convenience, discount pricing, and above all, efficiency.

As we finally come out of this Great Recession (although terrific challenges lie ahead), we can learn a great deal from the Wal*Mart approach. Management at many firms still look to save almost exclusively by cutting people when times are tough and then are late to hire as things improve. I have never worked anywhere where waste was not dramatic in expenses, supplies, travel, or personal perks for senior staffers. Put the hammer down on expenses and you get the benefits normally associated with a nice spike in business. And, you can control it which is something that you cannot do with your customers!

Wal*Mart has its flaws to be sure. But, if we all acted Wal*Smart, our productivity would soar.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Friday, January 21, 2011

Groupon, Google, and The Future

In early December, I was surprised that on-line and media giant Google had made a $6 billion bid for Groupon. The daily deal site, Groupon, struck a lot of us as an excellent coupon site but not something that was or could be transformational such as Google itself, Netflix, You Tube, or Facebook.

A few days after the big bid, Groupon turned it down. The chatter was widely scattered—1) they should have taken the money and run, 2) they will soon be making $1 billion per year so why sell out for six times earnings?, 3)Google was crazy to offer way too much for it, to 4) this is nothing but an on-line version of Valpak and is not worth much.

In recent days, Goldman Sachs has announced that they would like to handle an Initial Public Offering (IPO) for Groupon.

Facts are fragmentary as Groupon is private but let us look at this as dispassionately as possible.

The companies like Google and Facebook really changed things in our lives. They are revolutionary. Their technologies are unique and not easy to replicate although many will try. Also, they grew almost on their own after the initial set up. Interestingly, it is the users who now do the heavy lifting for Google and Facebook. For example, a few thousand of you will read this blog this week. Google gave us the framework and you and I do the rest.

Don’t get me wrong. Groupon is every inch a real company. Their localized daily deals are tapping into the more than $130 billion per year in LOCAL advertising which has been a bit of an Achilles heel for Google to crack among others. Groupon, however, is very labor intensive. Today, Facebook has a half billion users and just under two thousand employees at last count. Now that is incredible scale! Groupon, with over 40 million subscribers has some three thousand employees. And, if they want to keep growing, they will have to add many more. To me, what separates them from other coupon options is that they have professional copywriters putting together their offers. They will need far more if they want to maintain high quality and add many more markets with DAILY offers. So, as they grow, they will have to add a lot more people, get bureaucratic and margins could stay flat.

Competitive threats abound. Living Social is an on-line alternative to Groupon that is getting some traction and more are starting or waiting in the wings. Because Groupon is not unique, they have no “moat around the franchise” as Warren Buffett likes to describe his favorite businesses.

To me, Groupon is also different. Thousands of on-line businesses were started a dozen years ago, and most failed quickly and miserably. Others like Google, EBay, Facebook have been huge successes. Groupon is somewhere in the middle. They use the new technology to deliver a homely and old service but they do it very, very well. They can be solidly profitable for sure but they do not strike me as being the next Google, Amazon, or Facebook.

One thing nags at me. Is this a mini-bubble all over again? In late 1999 and early 2000, dozens of internet companies had IPO’s and were pursued recklessly by many retail investors. The high water mark came in the 2000 Super Bowl where several new companies without any sales (!) advertised on the top rated broadcast at over $2 million for 30 seconds. Many were out of business within the year. With Goldman Sachs helping Facebook with a private placement and now Groupon possibly doing their own IPO, things may be getting a bit frothy again. Maybe we have a social media bubble developing.

Groupon is a solid operation but will face serious competition in the future. They are not the silver bullet that Google wants or needs to put a new spike in their growth beyond search. And, they will not be a transformational company that changes our lives in a big way.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Wednesday, January 12, 2011

TV--An Adult Conversation

These days we hear a lot from Washington about the need for adult conversations. Sometimes, the topic is Social Security, Medicaid/Medicare, the budget deficit, or the ongoing wars in Iraq and Afghanistan. To date, with few exceptions, I have yet to see much in the way of what I would categorize as an “adult conversation.”

Today, Media Realism is going to attempt to have such a discussion on the current state and future of television as an advertising medium in this country. The issue is multi-faceted and complex. Lots of people discuss one part of it but few try to look at it as a whole. Hence this post.

Basically, I see the following as key issues interwoven into the discussion:

1) Commercial avoidance
2) Free TV vs. Paid TV
3) Copy Lengths
4) The Future of TV in a digital world


1) Commercial Avoidance—this is the big one that does not get nearly as much attention as it truly merits. In December, we “crossed the Rubicon” where it now appears that 40% of American households have a DVR (time shifting device). This is a bombshell issue that I referred to as “The Elephant is All Our Offices” (see Media Realism, January 6, 2009). If people are taping shows, the odds are overwhelming that they are zipping through commercial breaks when they re-play them. Some studies indicate that the majority of DVR owners dutifully watch the whole two minute commercial break during playback. C’mon, get real.

Nielsen now provides primetime numbers based on live telecast plus three days and live telecast plus seven days. And, many top rated shows are heavily taped and re-played later. For a few decades, top rated shows have always been premium priced relative to lower rated fare on a cost per rating point basis. Now, with 40% of homes owning a DVR, I would be careful not to chase programming that is taped heavily. The premium that you pay may be much higher than you realize. Also, as the average rating of all programs have declined, is it worth it to pay a 200% premium for a show on a cost per eyeball basis? When programs delivered a 20-30 rating, absolutely. Today, however, the top rated shows do not deliver the unduplicated reach that they once did. On top of that, maybe 70% or more of the audience is deleting your commercials when they play it back.

I have monitored this closely for years. It is not just the DVR that has increased commercial avoidance. While remotes have been around since the late 1950’s, people became grazers across the landscape during commercial breaks when they had 100 plus cable channels or satellite options. Now, people hit a dozen channels or more during a break. During football and basketball season, millions watch two or three games at once as they surf for action during breaks. What I have noticed and can quantify is a direct correlation between DVR penetration and TV performance. Ten years ago, a four week TV buy for an established brand with 1100 rating points behind it could deliver a fairly predictable bump in sales. With each passing year, using the same daypart mix, you needed more weight to trigger sales to move up. Now, in many categories, that 1100 point buy of 2000 needs 1500 points in the brave new world of the 2010- 2011 season. Yes, there are other factors such as competition and a weak economy but target persons simply not seeing your commercials is a large part of it. And, it will only get worse with each passing year as DVR penetration rises and TV options grow.


2) Free TV vs. Paid TV—the press still harps on those people who “ditch the dish” or “cut the cable cord.” They brag about how they get by with rabbit ears or an antenna. Others often have no TV but rather rely on some combination of Netflix, Hulu, You Tube, a Roku Box, Apple, Amazon, or Crackle. After spending a lot of time researching this, most of these people tend to be young, very well educated types who lead hyper active lives. They are technically quite sophisticated and have no problem searching for 2-3 minutes to find something to watch. In an earlier post, I have mentioned that cable had an ace in the whole with sports. If you love sports, you need cable to get your weekly fix. Well, a few young readers angrily notified me that with P2P streams, they get all the sports that they want for free (do you know what P2P is? Better check it out).

My best estimate is that the number of domiciles giving up cable or satellite totally is about 70,000 households per month. If the trend grows to let’s say 200,000 per month, watch for some swift action by cable and satellite providers.

All of this raises an issue that I still have trouble understanding. Every day I continue to be amazed at how much is available online. Weeks can go by when all my series viewing is done via Netflix or Hulu.com. With Hulu, I may see 40% of the commercial load that I would see if I watched a program live. When will the networks and cable players, who are the content kings, start to block their programming to certain on line entities? I noticed with great interest that the major networks are not allowing Google TV to carry much of their programming. Clearly, Google could buy anyone out with their free cash flow. So, they fear Google. Yet, a danger does exist with these smaller players that continue to chip away at the advertiser supported audience. Every person who watches something on Netflix or something smaller and more exotic, hurts commercial TV and cable. As we look back years from now, part of TV’s decline may be death by a thousand small cuts.

By 2013, SNL Kagan projects that 46.3% of U.S. households will have at least one TV with a broadband connection and some 7% will depend on the web instead of some form of pay TV. That is only two years away!

3) Copy lengths—TV spots are getting shorter. Today, some 34% of the commercial load is 15 second commercials. With DVR activity plus the inevitable itchy trigger figure on the remote, fewer commercials are getting seen. I know of three professionals, whom I do not think know each other, who are running lots of five second commercials. The issue is simple for one—“if I run more spots, period, I have a better chance of being seen. And, if people are channel hopping, they may see my entire message.” Another pro says that, to him, TV spots are video billboards so five second announcements work really well. They all use TV successfully but they seem to be adapting more imaginatively than most to the developing trend of commercial avoidance. Interestingly, one is about 30, the second 50, and the third around 70 years old. Being smart spans all generations! Also, this trend would tend to really favor established brands and retailers where TV advertising can be used as a reminder. A new player needs longer copy to establish who they are to consumers.
4) TV Potential—20 years ago, everyone was buzzing about the potential of interactive TV. You would watch a political debate and phone in your preference or buy a product on-line immediately. More of this is coming and it will make TV far more dynamic medium that it is now. For example, sports fans will be able to connect with fellow zealots in real time across the country. This could be a great tie-in with mobile advertising and far more interesting than Twitter. Cable has lots of new products in the pipeline and Google TV should be able to provide some remarkably granular data on audience attentiveness that will be invaluable to advertisers going forward.

Does TV still work as ad medium? Of course it does! Not as well as it once did given fragmentation and new technology but it is still, for the moment, king. The average household now has access to 130 channels. No one watches them all but most Americans like TV and they REALLY like their current viewing habits. With an aging population, many will never “cut the cord” or “ditch the dish.” They are content with the status quo.

TV is still very much viable. Dismiss as nonsense those who say that they are going 100% digital in a year or two. Unless they have a boutique product, sales will tank and they will be jobless. At the same time, realize what is going on with television advertising and more importantly, the speed of it all. We are not in “revolution now” mode. The evolution, however, is steady and relentless and each of us needs to shift gears each year as the new reality unfolds.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Sunday, January 2, 2011

2011 Media Forecasts

Happy 2011! This promises to be an interesting, even watershed year in several media types so I decided to publish an annual forecast. Here goes:

The Economy

American consumers appear to be making a sincere effort to clean up their personal balance sheets. Christmas sales were surprisingly good but interestingly credit card balances did not soar. Few people seemed to be spending what they did not have. So it appears that our tepid and very fragile economic recovery will continue. Autos and finance seem to be recovering some which will help advertising. Housing remains quite sick and six major markets hit new lows Vis a Vis the 2006 high water mark for home values. Foreclosures continue to rise and may continue throughout the year.

What can go wrong? Inflation! Insanely, the U.S. government Consumer Price Index no longer includes food and fuel as components. With oil at $91 as we write $100+ plus per barrel is definitely in sight for 2011. If gas at the pump jumps to $4 per gallon, the economy could tank quickly. Grain and beef prices are rising as well. So, if food and fuel rise, other parts of the economy will suffer. We won’t stop going to work if gasoline is $4 per gallon and Americans surely will not stop eating. Every dollar that goes to those two items will be diverted from much retail activity and, sadly, much of the gasoline money will go overseas. So, while it looks positive, the 2011 economy may not grow as much as we hope.

Network TV

Each year, some pundit or two says that “this will be the last year of the obsolete network TV upfront marketplace.” And, each year, the upfront sets a new record (the upfront is when major advertisers buy up to 80-85% of the available network TV inventory in spring for the season that begins in September). Last year, I believe it was about $8.3 billion. Well, 2011 will be no exception. Expect a 5-6% increase even though the audiences are getting smaller, commercial avoidance is growing, and new alternatives abound. Why? The big players need it as a security blanket. They honestly do not know where to deploy the funds. Importantly, for all the attacks that it gets, network TV still raises awareness and pulls through sales better than anything else for many advertisers.

Cable TV

Should do even better than network TV! The choices are huge and a clever media team can put together a package of cable channels that can deliver excellent reach and minimize target waste. The promotional aspects of cable remain strong as well.



Spot TV

This local medium should have their best showing in several years even with virtually no political advertising. Auto and financials will lead the way in many markets. In 2008, many people postponed buying a new car due to job loss or fear of job loss. Now, the old clunker just has to be replaced. Local TV stations will benefit mightily here. Do not be surprised if billing is up 6% nationally.

The up trend will not be consistent, however. Some states and many municipalities are broke. Politicians are out of smoke and mirrors in some areas. They will have to fire government workers. California will be the place to watch. Once again, the inimitable Jerry Brown is governor of our most populous state. He was governor way back in 1975-83. Despite his quirky reputation in the press, he was an authentic fiscal hawk. When he left office California had a $5 billion surplus. Today, he inherits a mess. At 72, Brown knows this is his last hurrah. I think that he will do the right thing. To right the ship, he is going to have to cut the size of government in California significantly and, to do that, he will have to lay off thousands of state employees and have some kind of serious pension reform (translation=lowering benefits). The Sacramento TV market could suffer while a San Diego may not be affected much under this scenario. Watch the states, carefully. New York, Illinois, Rhode Island, and Arizona face similar challenges but I bet that Brown will be the most candid and act the fastest.

Local Cable

This medium has even better prospects than spot TV. Selling by zone, new networks, plus nice promotional support add up to a fine year as long as gasoline prices does not upset the applecart and hurt local retailer spending.

Spot Radio

This aging medium will have a decent year (+4%). Some markets will do better than others due to the local economy and aggressiveness of the sales teams. I must say that I admire the many local stations that have brought in many new advertisers to radio over the last two and a half years. They knew they had to scramble and many did.

Outdoor

The last mass medium should have a banner year. We would not be surprised if advertisers bid up the price 7-8% here nationally. Many traditional players who cut back some on TV may move to outdoor this year rather than on line options.

Magazines

This will be another year of challenge for many titles. Ad revenue will likely not increase for many so they will have to raise subscription prices some or go to non traditional sources of income with new applications. Some will succeed; many will not.

Newspaper

The last two years have been horrible for this industry. Double digit billing declines and sharp circulation losses were in evidence for many papers. Incredibly, in 1999, ad revenues for the industry were over $46 billion. Now they are roughly half that if 2011 projections hold.

All eyes are on the New York Times. Sometime early this year, they will launch their “metered pay wall” where they will charge on line readers for their product. That is not where my attention will be. The Times is an iconic institution and many readers (some in my own household!) will cheerfully pay something for it. What I will be hovering over are the dozens of other papers across the country that are also going to be experimenting with pay walls in 2011. Can pay walls work in Dayton or Missoula? To me, that will be the test. Also, can micro-payments be worked out from those who want to only read a columnist or two? Monetization of online readership may take many forms.

Others say the future of newspapers lie with the Kindle, IPad or other devices. Time will tell. This year we will learn a great deal. Also, can they ever get young adults back? Few that I survey have any interest in newspapers.

Mobile

This area should have the most explosive growth but it is starting from a very low base. Mobile advertising is much bigger in Europe and Asia than it is here in the U.S. Applications are growing and are increasingly sophisticated. There will be lots of testing here but percents of budgets will likely remain under 2% for most advertisers. This is a great long term play. Agencies need to learn all they can about mobile now.

Internet

Continued solid double digit growth here is a slam dunk. Google will keep expanding and search dollars should grow nicely.

Social Media

This area has all the sizzle and some of it is deserved. Facebook had a stunning 151 million unique visitors in October. And, nearly one in four page views took place on Facebook.com. This was nearly 4 times what You Tube delivered over the same period. So, Facebook is primed for another explosive year of growth.

This may be only a straw in the wind but I see a possible shakeout coming across social media that could hit this year. My reasons are pretty straightforward:

1) A lot of people are there only because they think it is the thing to do. Mid-sized agencies are often on Facebook because they want to appear sophisticated to their clients and the clients, not wanting to appear out of it, invariably go along.
2) In many cases, the wrong people are doing it. All too many set up a Facebook account for a client and then ignore it. This is deadly. Set it and forget it cannot work in social media. Experienced hands need to monitor activity, answer complaints, and keep the material fresh. It stuns me how many obsolete coupons are still up on sites. Or weeks go by with no commentary on consumer actions.
3) Facebook is almost in a bubble. It reminds me of the dot.com craze in the stock market in late 1999 and early 2000. Expectations are so juiced up that it almost has to end badly for some people. I have heard more than one alleged professional say “forget TV and database management. Facebook will bail you out.” We are heading for a train wreck which is sad as social media has a brilliant future for brands and also in B to B action. Lots of people are going to get burned here. Make sure that you are in experienced hands and that you work the social media of all types very aggressively. If you are not going to be hands on, don’t do it!
4) Some candid friends at agencies have told me that they cannot prove that social media is working at all for their clients. Others say that they have no idea how much it contributes to sales. The whole concept of creating a relationship rather than direct selling is confusing to mature marketers. Some may pull the plug unless a direct link between their social media activity and sales can be determined.

Ad Agencies

For the first time in several years, agencies should have a decent year if the economy holds together reasonably well. The big international holding companies should have a nice year as global billing should be up at least 6%. And, if autos and finance rebound domestically the mid-sized players and small fry should see some daylight as well. Raising fees will still be dicey and if you work at an agency, don’t expect much of a raise (again). One bright spot is that some larger companies are unbundling projects and new media to smaller specialty firms rather than getting the slow service and high costs of their major agencies. If you TRULY have a specialty here, you may do well.

On balance, 2011 will be a pretty good year if the economy keeps creeping along.

I wish all of you a prosperous 2011.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com