Darrin C. Duber-Smith
Darrin C. Duber-Smith, MS, MBA, is president of Green Marketing, Inc., and senior lecturer at the Metropolitan State University of Denver’s College of Business. He has almost 30 years of specialized expertise in the marketing and management profession including extensive experience in working with natural, organic, and green/sustainable products and services. He was a co-founder of the Lifestyles of Health and Sustainability (LOHAS, c. 1999) market/industry model and was leader of the first U.S. industry task force that helped frame the Natural Products Association’s definition of natural (c. 2005). He has published over 80 articles in trade publications and has presented at over 50 executive-level events during the past 15 years. A frequent media contributor and recipient of The Wall Street Journal’s In-Education Distinguished Professor Award in 2009 and WSJ’s Top 125 Professors Award in 2014, Mr. Duber-Smith is author of Cengage Learning’s “KnowNow! Marketing” blog at http://community.cengage.com/GECResource2/info/b/marketing/. He can be reached at DuberSmith@GreenMarketing.net or firstname.lastname@example.org.
As of January 2nd, 2018 KnowNow! Marketing will migrate to the Cengage Higher Ed Faculty Community See you there!
In Sweden only 20% of all transactions in the country are conducted in cash, but in the United States? No such luck. We, as a nation, are still struggling with using the chip card machine, which was about 10 years overdue, and soon we will have to grapple with having to input a pin number every time we use our credit card. I'm certain that this will take another 10 years. In some ways, Europe is ahead of the curve; but Americans are a more individually-oriented bunch, and as such are notoriously a bit slower than our friends in Europe in widespread adoption of new behaviors. But what about the idea of taking cash out of the equation? Is this really happening to any meaningful degree?
The U.S. Federal Reserve reported that non-cash transactions have increased by over 5% each year since 2012, so the trend is clearly moving away from cash and towards credit. Surely at larger retailers, cash is no longer king, but many smaller retailers still encourage the use of cash instead of credit so that they can avoid paying the 3% surcharge and make more money on each transaction. Some of these retailers believe that raising the price point of merchandise by 3%, an obvious solution, would make them less competitive. Is this an archaic way of thinking? We here at KnowNow! Marketing say yes. Indeed some small businesses in "progressive" places like New York City and Boulder are dispensing with the cash altogether in favor of providing more efficient customer service. But can refusing to accept cash payments improve customer service?
Visa thinks so. The company claimed in a recent report that businesses in NYC could save more than 186 million hours of labor and generate an additional $6.8 billion in revenue by refusing to process cash transactions. If this is even partly true, then it won't be long before marketers of all shapes and sizes begin to embrace a more efficient business model. Of course, the percentage of the buying public that is considered "un-banked" would be excluded by such a move, and so some marketers that wish to serve a lower-income population would have difficulty making such a shift. But with preference for cash most prevalent among the over 55 crowd, it looks like a largely cashless future is indeed on the horizon. It seems to be only a matter of how quickly it happens.
Discussion: How often do you use cash? Would a refusal to accept cash stop you from patronizing a certain retailer? Do you think this strategy is a good idea? Why or why not?
Tipping for food service isn't unique to the United States, but overall, the practice of shifting most of the cost of labor onto the customer in the form of a "gratuity" (expected, but not mandatory) is something that most people around the world don't quite understand. Why not just pay servers and bartenders a "living wage" or at least a realistic market price for their services rather than an artificially low "tipped wage" that relies on gratuity to round out the compensation package? But if you ask almost any server in America he/she will tell you that they like it that way. They like to earn tips. And many servers make more money than many people with college degrees. Is this all about to change?
The U.S. Labor Department has proposed a "tip-pooling" rule which requires that employees who receive tips share them with those not fortunate, skilled or legal enough to work at the point of purchase. It certainly seems fair that all of those workers involved in delivering the service should share in its spoils, but servers and bartenders have long enjoyed far better wages than cooks, bussing staff, greeters, etc. Do they really add that much more value? More than the people actually making the product?Servers do commonly "tip out" staff, but the allocations aren't exactly what most folks would consider "equitable".
The proposed rule is something that restaurant owners generally support because the staff who don't interact with customers will get an immediate raise across the board from the shared tips (but yet so will servers who will have to make the minimum wage rather than the lower "tipped wage"). Since there are far more support staff than front-line staff in the typical format, the regulation will remove some wage pressure on the business. And of course for the severs and bartenders themselves, the proposed rule does have much larger implications for those among them who believe that waiting tables and serving drinks should be a viable, long-term middle-class career. I have met these people. In short, serving and bartending, excepting the few high-end positions at the swankiest of locales, will no longer seem as attractive or be as lucrative as it once was.
And huzzah for that! It's a thankless job, for the most part, even for the young and patient, but as these semi-skilled and unskilled workers age into their 30's and 40's, gainful employment at high tipping places becomes increasingly difficult to find. Some young people don't want to hear this because the lure of accessing quick, relatively easy and abundant cash is difficult to pass up, and young folks can make good money while working relatively few hours. But a short shelf life is the nature of food and beverage service and everyone over 40 in "the industry" knows it. So if this regulatory action, iterations of which already exist in some states, does occur on a federal level, what are the long-term implications for customers?
While the net effect on the quality of customer service is likely to be nil (expected tips don't affect the level of service provided by staff very much), owners would have to pay higher wages to servers, but could probably afford to pay lower wages to support staff since these folks would be getting shared tips from the servers and bartenders. The threat that many might overlook, however, looms in the fact that the practice of tipping might eventually begin to wane and, if that happens, restaurants might have to pay higher wages over the long run to compensate for the lack of tipping. Or perhaps labor-reducing, cost-saving automation will be ushered in at a faster pace. If there is less tipping, a possible result might be higher menu prices for consumers, but with less tipping, the net effect on prices would also be nil. Of course this is all educated speculation, but the Law of Unintended Consequences (not really a law) always comes into play. One thing is for sure. This is a massive industry with tens of millions of employees, and any regulation is likely to have all kinds of effects, some positive and some negative. But first, let's see if this regulation becomes a reality.
Discussion: What effects do you think this regulation will have? As a customer, would you rather tip or pay higher menu prices? Does it matter to you? As a server or a more skilled bartender (almost half of whom are college graduates), would such a regulation make the industry less attractive to you as a career?
Although the holiday buying season isn't yet finished, the bulk of the shopping has been done. And it looks like the economic gains of 2017 (combined with the fact that Americans are saving less than in previous years) have enabled the best Christmas in recent memory for a beleaguered retail sector.
Consumer holiday spending is up almost 6% from last year, far above any of the estimates, and even department stores are doing well this holiday season, with a 3.6% increase in revenue over last year. And unlike 2016 when retailers were stuck with too much leftover stuff , brick-and-mortar operators are doing a much better job at managing inventories this year, which means fewer items offered at steeply-reduced prices.
All of this is very good news for relatively healthy retailers like Kohl's and Macy's, but it's really good news for the likes of Sears, J.C. Penney's and other brands that many observers believe might soon be dead. The healthy brick-and-mortar survivors will be the stores that successfully and seamlessly integrate online and in-store merchandising, offer the right mix of products to the right market segments, and provide superior sensory experiences for their customers. Many experts believe that the U.S. has far too many retail locations for its population and that at least 25% of the current retail space will likely be gone in 10 years or so; but e-commerce is still only 11% of total retail sales, which suggests that brick-and-mortar and e-commerce will eventually achieve a healthy balance. And an economy that continues to improve? That certainly helps too.
Discussion: Are you surprised that e-commerce is still only 11% of total retail sales? Are you spending more this holiday season?
It was just a matter of time before direct-to-consumer delivery reached the fueling industry, and with the widespread adoption of apps among the buying public, it appears that consumers will soon have the ability to order up just about anything.
Gasoline delivery, although not a new idea, is one of the latest perks for Americans with marketers using what one startup calls an "unstationed" distribution model. That is, we now have app-based fuel delivery services such as Filld and InstaFuel so that consumers don't have to be bothered with stopping at a filling station. Certainly, re-charging services for electric cars can't be too far behind.
Some regulators are concerned about the safety of having so many flammable materials being driven about (especially when it comes to delivery in residential neighborhoods) and so, like many new product ideas, legal issues must be sorted out. But they will be sorted out as they are right now with ride sharing services. The concept is really catching on at privately-owned corporate campuses across the country where any issues regarding safety can be more controlled and companies can assume liability. And of course, we are quite used to the idea of having propane delivered, which is also a highly flammable material, so safety concerns aren't likely to destroy the business model. Nothing can stop consumer-driven progress, and gasoline is just the latest product that convenience-minded drivers can pay a little extra to have delivered to them.
Discussion: What other market segments might want this delivery service? What other goods and services might be slated for delivery in the near future?
In the movie Field of Dreams, the protagonist puts a baseball field in the middle of a corn field and attracts a bunch of ghosts to play one final game. The famous line "If you build it, they will come" seems especially appropriate when it comes to arenas and stadiums for professional sports teams. But as we found in the case of the Sprint Center in Kansas City, simply building a facility is no guarantee that a professional franchise will relocate there.
This notwithstanding, the Sprint Center is profitable even without a franchise, and the people of Seattle are still angry about the guy with the big hat who bought the Supersonics and moved them to Oklahoma City several years back. But they weren't angry enough to fund a new facility to replace the aging Key Arena with tax dollars, and so it's taken a few years for a group of private investors to step forward with $660 million to re-develop an existing facility that is currently home to a WNBA team.
But will it be enough to encourage an existing franchise to move away from a less-than-desirable situation and towards a sunny future in a cloudy city? In the NBA a league that already has 32 teams, Memphis, Milwaukee, and other cities currently play host to struggling teams that seem likely candidates for relocation. And the same goes for the NHL and its warm-weather cities whose teams consistently under-perform and fail to attract enough fans. The NHL, which recently expanded to 31 teams, needs one more to reach an even 32, if that matters at all. And even if the league doesn't expand, a move to growing Seattle by a struggling franchise might be very realistic indeed.
Discussion: Can the new facility generate enough revenue to be profitable without attracting a major franchise? How can it do so?
After a decade of trying to sell lots of items outside of the "books" category, Barnes and Noble has decided to "unclutter" its stores to make room for what it considers to be an excellent opportunity for future revenue growth. For Barnes and Noble shoppers, games and gifts soon will be increasingly hard to find. Simply put, marketers intend to sell more books.
E-books have largely failed to achieve widespread adoption among consumers. Indeed only a handful of my students purchase e-textbooks, and most observers believe that sales in the difficult-to-measure e-books category are falling. And new CEO Demos Parneros believes that his stores have "too much stuff" in them. Thus, a strategic re-focus on good, old-fashioned books (a sizable sector with flat growth but with far fewer retailers serving it these days) seems like a good idea.
New stores will be built much smaller than in the past, and some current locations, at 26,000 square feet, will be remodeled and downsized to half their original size. Gone will be most of the educational toys, games and gift items to make room for a broader array of titles on fewer shelves. This is a major change in strategy, but it's often a good idea to focus on what you do best, especially when revenues aren't what you want them to be. It will be interesting to see what happens.
Discussion: Is this strategic shift a good idea? Why or why not? How can Barnes and Noble compete with Amazon?
Raw materials. They are used in the products we buy, and when demand outstrips supply, they get to become very expensive. But most business-to-business goods are inelastic, and thus when the price goes up demand tends to stay the same. Let's take cobalt, a key component in batteries used in electric vehicles, as an example.
We don't think too much about cobalt, an element that sits between iron and nickel on the periodic table, but if you are making electric car batteries, the availability and price of this element is always on your mind. And as you may have guessed, there is currently a shortage of the metal, which could affect the price and availability of the electric batteries that are dependent on it. How big of a problem is this?
It's becoming a very big problem as an increasing number of companies commit to making electric vehicles. And it doesn't help matters that the vast majority of output is concentrated in the highly-unstable and ironically-named Democratic Republic of Congo while the refining is done by China. Ack! This political environment is not favorable to U.S. marketers, and probably the supply chain will eventually have to find a substitute for this environmentally-unfriendly and difficult-to-obtain metal. But the current technological environment doesn't allow for such a substitute. So for now, marketers are very worried about meeting demand.
There is a bright spot here. There hasn't really been very much demand for electric vehicles over the past decades, as consumers have been reticent to adopt the technology despite massive government subsidies and incentives. the demand that does exist is instead being driven largely by legal/regulatory and political considerations. And so if we don't have enough cobalt people will still be able to drive cars, albeit not as many of the electric ones that some politicians and consumers prefer. Indeed the supply chain will have to work around this long-term problem if it wants to offer meaningful volumes of electric vehicles for mass consumption.
The obvious solution lies in finding additional sources for cobalt beyond having to deal with a historically unstable region and China; or, better yet, finding one or more substitutes for cobalt that will make the industry rest a little easier. It doesn't appear that the electric car is going away, and so a solution must be found.
Discussion: Do you think that consumer desire for electric vehicles will increase? What are some of the barriers to adoption? Solutions?
When we talk about marketing, it is almost always about companies that operate further downstream in the supply chain suchas retailers and branded product manufacturers.These are the cool companies to talk about since we see them every day. Indeed the suppliers of components and ingredients, packaging companies and others the "supply side" of the equation get very little respect from the media.
But it's these sorts of companies that make the stuff that goes into the products we buy, and we here at KnowNow! Marketing endeavor to cover these entities at least somehow. Even less celebrated are the logistics companies that make efficient supply chain management possible, and these are happy times indeed for those moving things from A to Z in the industrial sector. Whether it be moving industrial goods on land, over water, or through the air shipping is gaining steam at a rocket pace not seen in many years.
Why is this happening? A simple matter of gross domestic product, our highly-flawed but best available measure of an economy's overall well being. The U.S. economy grew 3.3% last quarter, which means that this year will be the best we've had since before the Great Recession. And more consumer spending at the very bottom of the supply chain works its way up the chain, all the way to the suppliers, a concept called "derived demand". Demand for supply side goods and services increases when consumer demand increased and therefore is derived from that end-user demand.
Some ports are breaking records for cargo volume, and ground freight carriers have raised prices by over 5% to reflect rising demand for trucked and rail freight. This is great news for everyone, and most economists would agree that a healthy economy combined with lower business taxes will likely stimulate income growth and hiring even more than it has already this year. And this news is particularly good for 2017-2018 graduates who are facing the healthiest job market in over a decade. Gainfully employed graduates will spend more. And so it goes until the next recession happens, which is unpredictable, but nevertheless inevitable.
Discussion: Can you name any business-to-business shipping companies? They do tend to be rather obscure. Have you noticed any visible positive changes in the economy over the past two years? Discuss a few of these.
Now that long lines at retail stores are becoming a thing of the past, one would think that holiday shoppers would be a much happier bunch, but smart marketers know that is always something for customers to complain about. And to a smart marketer, an identified problem is also an opportunity to improve critical "touch point" functions like customer service and one-to-one marketing communications.
Believe it or not, email communications in the early days of e-commerce used to be very effective. But as it became ubiquitous, we grew weary of non-targeted e-communications, and most email is now largely ignored. But some marketers have improved their technique since then, and with behavioral targeting the new normal in digital advertising, it is easier to predict what people might want to see as far as marketing messaging goes. But as for traditional retailers, in addition to having trouble with their brick-and-mortar operations, many are also struggling with e-communications.
According to the folks over at Forrester Research, 90% of organizations say that they are focused on personalizing customer experiences, but only 40% of shoppers say that what the messages they get from marketers is relevant to them. That's quite a knowledge gap! What is actually going on is probably more like "mass customization", a business concept from the early age of digital (the mid-90's) that described where marketers basically offered a modular approach to goods and services so that the end product could be "customized". Think "Build-A-Bear". These marketers are assuming that a shopper who buys boots might also want to see promotions about dresses, a concept called cross-selling that we have been teaching in marketing classes for decades. But perhaps things are changing. Perhaps in this age of "true customization", where behavioral tracking leads to behavioral targeting, consumers who are used to the idea of being followed now want messaging to be hyper-targeted based on their purchasing and web browsing behavior. And to think that only 10 years ago, privacy was a prevailing issue. Attitudes have clearly changed.
Discussion: Should consumers be concerned about the issue of privacy in behavioral tracking and targeting? Are you concerned? Why or why not? Do you like to receive highly targeted communications or do you think it's kind of creepy?
Holiday spending is expected in increase by almost 5% this year, which is a rather robust rate, and this is certainly great news for retailers. But almost all of that growth is expected to be online, and so brick-and-mortar brands have been busily building their online platforms over the past few years. The ones who haven't done so might not survive to see the next Christmas. But now that the biggest shopping weekend of the year (loosely known as "Black Friday") has come and gone, how do things look for holiday retail sales so far?
More than 70% of U.S. adults shopped over the holiday weekend--increasingly online rather than in-person--which is 174 million people. Wow. This is a staggering number, and now that most sales promotions are spread out over several days in some cases weeks, the sense of urgency as well as the unruly crowds are largely becoming things of the past. Even more staggering is the fact that the average shopper spent a whopping $335, suggesting that people are still doing a significant amount of their holiday shopping on this important weekend despite the fact that promotions happen throughout the months of October, November, and December. Indeed "CyberMonday" was the single largest internet shopping day in American history with $6.6 billion spent online. The economy is firing on all cylinders right now with strong GDP and low unemployment, and so online retailers are giving thanks for last weekend and have every reason to expect that they will enjoy a very merry Christmas indeed. Sears and JC Penney's? Not so much.
Discussion: Do you think this holiday spending trend will continue and the revenue projection will be reached? Defend your assertions.
What do World War One and Christmas have in common? Gift wrapping was invented back in 1917, but back then it was called " gift dressing", which actually makes a whole bunch of sense. Kansas City-based Hallmark Cards Inc., a brand that is still a major player in the gift market as well as a niche player in television content and distribution (the Hallmark Channel), takes credit for launching the American trend as an attractive alternative to using brown packaging paper or newspapers as wrapping, which was a common practice back in the The Day. Using newspaper was also common practice for me when I was in college, much to my mother's disapproval.
Hallmark and other retailers at the time already sold green, red, and white tissue paper, and some of this paper even sported wreath and holly designs, but in 1917 the company ran out of tissue paper right before Christmas Day. As a result, the marketing-minded older brother of Hallmark founder Joyce Hall had the idea of selling colored envelope liners for a dime each. They sold out.
The company then began manufacturing and selling its own gift wrap products, which represented Hallmark's first brand extension beyond the highly successful greeting card line. The 1930's and the Great Depression saw ribbon on store shelves for the first time and later on bows. Hallmark began offering gift wrapping workshops in the 1950's and 60's as the trend became a tradition, and they even produced instructional videos. Traditional holiday colors made room for bright non-traditional holiday colors in the 1960's. Gift bags were added as recently as 1987 and then shortly after that, a pocket was added for the card, which was getting lost in the bag itself. There is a subtle genius in all of this simple marketing, isn't there? Since e-cards basically stink overall (nothing says you don't care quite like an e-card can), we here at KnowNow! Marketing wonder what will be next?
Discussion: What do you think the future holds for gift wrapping and for brands like Hallmark? How much of a threat has the Internet posed to the traditional greeting card market over the past several years? What can Hallmark and others do to remain relevant to a new generation of gift givers?
Although the Great Recession has been over for many years now, some aftereffects can still be felt in certain industries. Let's take Christmas trees as an example. Apparently there is a shortage this year, but what does that have to do with the recession? Indeed the economic environment is an extremely important variable for marketers to consider when making Marketing Mix decisions. The economy affects spending in many ways, but it also affects what happens further up the supply chain.
It takes about 10 years to grow a ready-for-market tree in the Pacific Northwest, an important region as far as the overall supply of Christmas trees is concerned. At the height of the recession, retailers were paying just $12 for a tree that cost farmers $16 to grow. This is how desperate companies were to sell their inventories. But this year, retailers are paying as much as $40 for a premium tree, which has resulted great margins for growers, but also bidding wars among retailers to get the best quality trees for resale. All of this means somewhat higher prices for consumers, but it also means that smaller retailers are less able to compete with the larger retailers who can afford to absorb lower profit margins on the trees. It's a bit of a mess.
But smart marketers can plan for this sort of thing. A drought, for example, eventually affects the price of all kinds of crops as well as livestock that need feed, and farmers know how these cycles work. In this particular case, both growers and retailers knew that supply was falling during the recession, and they also know how long it takes to grow a tree. This is pretty much all the information one would need to adjust strategy to meet new conditions in the external marketing environment. Of course sales forecasting is predicated on having information like this, and as long as demand remains relatively predictable, figuring out the supply side should not be too much of an issue. But in this case, some small retailers were caught by surprise, and so in the spirit of this, KnowNow! Marketing would like to remind everyone that marketers must make contingency plans for fluctuations in the supply of raw materials. And this particular case really shouldn't have been much of a surprise.
Amazon is ready for the holidays. And as it stands today, the company has been both naughty and nice. It has been naughty to its competitors who are finding it increasingly hard to compete and it has been nice to its consumers who can now shop Amazon through multiple channels.
Indeed the massive retailer has been busy opening up brick-and-mortar retail locations across the country, giving marketers even more opportunities to sell its Kindle e-readers, tablets and other ubiquitous gadgets. The Amazon Books format sells toys, electronics, gifts and other products. Amazon now sells gadgets in more than 100 Whole Foods Markets. Kohl's has allocated "store-within-a-store" space in 10 of its department stores and there may be more on the way. And Amazon now has small mall-format shops in several regional malls. This is all in addition to its Amazon Go stores which are opening up across the nation.
What is interesting is that Amazon is increasing its physical presence in a big way amidst a massive shift of consumer spending towards e-commerce. This suggests that brick-and-mortar retail, after a culling of perhaps 20% of existing locations (there are far too many stores), will be alive and well in the future. The most successful stores will offer seamless e-commerce and in-store experiences, with Amazon and Wal-Mart leading the way. There will always be plenty of room for boutique and specialty retailers, and surviving malls will have to be true destination spots rather than bland collections of the same old stores. The economy is performing better than it has in the past decade, and consumer spending has been brisk this year. Indeed there are a number of "zombie retailers" still stumbling about, and these brands will eventually cease to exist. But for the healthier retailers, this should be a very good holiday season.
Discussion: How do you feel about the future of retail? What other brands might emerge to challenge Amazon and Wal-Mart?
Facebook and Google handle about 80% of the advertising that exists online, and this duopoly certainly isn't good news for online advertisers. And Facebook became even more dominant this year with a 79% leap in third quarter profit. That's quite a revenue model Mr. Zuckerberg has developed and kudos to him for doing so much in so little time.
But after much ballyhoo about hacking, Russians buying political ads, fake ad traffic, questions about ad effectiveness, complaints about the company's power and influence, as well as other issues that have culminated in a Congressional investigation, the company has decided to improve its image by saying that it will forgo a modicum of future growth and profits in the name of improving the security and safety of its product.
And three cheers for that. The fix involves hiring thousands of security specialists to re-engineer certain functions as well as constructing new artificial intelligence systems to weed out "bad actors". Mr. Zuckerberg has said that he is "dead serious" about these efforts, and this is all certain to generate some positive publicity for Facebook among its many stakeholders. It does appear that marketers there are facing some new facts regarding the political and regulatory environment, and they are smartly adjusting strategy to meet these external threats.
Discussion: Are you concerned about Facebook's power and influence? In what ways, if any, should the government intervene?
As the oldest Millennials settle into middle age, growth in the $24 billion "club" industry has begun to slow down. And while most clubs are focusing on the youngest Millennials and the emerging age cohort just now entering college, some savvy marketers have discovered that there is considerable opportunity among an older, albeit smaller demographic--Generation X.
The 45-54 age group spends more on entertainment than anyone and, as such, comprise the biggest share of consumers at bars and nightclubs that serve food. Smaller spaces, bottle service, unique cocktails, and 70's/80's dance music are on the menu at many places across the country. In some cases, marketers attract these older customers with dinner and try to keep them in the venue throughout the night, which for many of us in this age-group is probably around 11. It appears that opportunities abound in this and other industries to position products and target yet another generation that is redefining what it means to age gracefully.
Discussion: What other industries might be overlooking the middle-aged Generation X age cohort (ages 37-53)?
In previous posts, we have established that the market for coffee retailers is absolutely saturated and that smaller stores are now experiencing declines while even the growth rate at Starbucks has slowed considerably. But even when there are too many shops, most can be supported by a growing market, and so it begs the question, "How is coffee doing these days?"
On a global level, tea is still the dominant beverage by volume, with drinkers consuming 1.7 trillion cups of the stuff last year versus 984 billion cups of coffee. That's a significant difference. But these tea numbers are juiced by the presence of heavy tea drinkers in China and India, where a hefty percentage of the world's population resides, and where the tea is fairly inexpensive. In the U.S., the number of cups of tea consumed has climbed by 6.5% since 2012 and at the same time tea sales have increased by almost 10%. This means that Americans are drinking pricier tea despite the demise of Teavana, a high end Starbucks concept that failed this year. Perhaps that concept was a bit ahead of its time. But globally, coffee makers and retailers have performed surprisingly better than have the tea people. The coffee industry represents $79 billion in sales compared with $42.7 billion for tea, which means that consumers have been drinking some pretty expensive coffee.
Tea makers, for their part, have been ramping up marketing efforts to make the tea bag a bit more appealing to consumers by adding specialty ingredients and premium packaging. But some marketers, believing that the tea bag itself might be a barrier to consumer adoption, are offering alternatives to the traditional bag with European consumer products giant, Unilever, offering tea products in capsule form. And retailers such as Peet's, with its Matcha Green Tea and Dirty Chai lattes, are now offering more coffee-esque tea drinks in hopes that they can diversify their product offerings and be on the forefront of an emerging trend. Will consumers pay more for tea as they have done for coffee over the past 50 years? Indeed it remains to be seen just how much of this is wishful marketing and how much of it reflects changing consumer attitudes.
Discussion: Do you think that specialty tea can overtake coffee in terms revenue? How are "substitutes" such as energy drinks affecting the coffee and tea industries at the present time?
For marketers, young shoppers have always been a coveted demographic, and since this generation is the largest in history, targeting and attracting those in their 20's and 30's has become the key to the survival of many brands. According to an article in the Wall Street Journal, the biggest single age cohort at the present time is 26 years of age (24, 25, and 27 are not far behind); and so, one might expect that all sorts of marketing messages would be targeted to this group.
This 26 age cohort numbers almost 5 million people, and although many of these young adults have been voting for a couple of election cycles, a significant number still live at home with parents and therefore still aren't making many of the major purchasing decision most of us would consider to be milestones of adulthood. In fact, parents are now able to keep their kids on their insurance through age 26. But now, many of these folks are on the verge of very important life decisions including those involving skills attainment, industry/profession selection, geographic preference, personal relationship building, having kids, buying homes, etc. And so marketers are addressing this market segment with much enthusiasm.
They had better move quickly because this group is aging, and the next generation of U.S. consumers after the Millennials (currently known as Generation Z or "iGen") are the children of the much smaller Generation X and therefore comprise a smaller cohort. Indeed young people today are making what most would consider to be "adult" decisions a bit later in life than did their predecessors, and so marketers have had to take this into consideration over the past 10 years. For many people in their mid-20's, parents are still making most purchasing decisions in the household. But this bunch is finally getting too old to live at home, and so marketers are excited at the prospect of penetrating this massive group of budding consumers. It will certainly be interesting to see how these marketers intend to address this important market.
A quick look around any downtown area will tell you that coffee retailers, led by the far-too-ubiquitous Starbucks, have saturated the market with their shops. To say this market isn't crowded is to ignore the fact that "specialty coffee" can now be found not only at McDonald's, but also at many gas stations. It's everywhere, and that means that the industry is due for a shakeout.
There are now almost 33,000 coffee shops in the U.S., which is a 16% increase from only five years ago, a time when the market appeared to be rather saturated already. Traffic growth at large chains like Starbucks has been slowing (but still growing), while traffic in the mid-size and smaller stores is actually declining. But prices have not really declined as much as they usually do in a hypercompetitive marketplace. In fact, Starbucks, which controls over 40% of the shops in the U.S. has been busily raising its prices while also trying to find new ways to sell non-coffee related goods to its customers. But marketers there know quite well that the industry has matured.
Readers of KnowNOW! Marketing realize that retail is already a crowded sector overall, and we have been calling for a reckoning (which has still eluded us) for quite some time now. Solid economic growth has helped some of these "zombie retailers" like Sears and Radio Shack remain ambulatory, but soon another great culling of the weaker players should commence. Profit margins are thinning as industry prices begin to fall, but smaller retailers are unable to generate adequate velocity to compensate for these lower margins, and some of these players will begin to close shop. Perhaps even Starbucks will eventually have to lower its prices. Much depends on the consumer demand for coffee, which will be the subject of a future post.
Discussion: Can you name four major competitors to Starbucks (without looking on the Internet)? Now look on the Internet and find four competitors. Which of these brands is best positioned for the future? Which has the weakest position. Defend your answers.
The age of the enclosed regional mall has long been over with construction peaking in the late 1980's, a trend that began well before the age of e-commerce. This is not to say that they will disappear altogether, but only six large malls were built in the U.S. between 2006 and 2015. By comparison, a total of 54 were built during the previous decade, which means that the trajectory is clearly trending towards extinction. But has the impending the death of the shopping mall been greatly exaggerated?
Methinks, yes. Places that consolidate different retailer brands (malls) will always be around, and new construction will always be favored over old facilities. And despite the fact that only one major mall is currently under construction in the U.S., it is highly unlikely that the "mall" concept will die out entirely. Rather, many smaller, multi-use developments continue to open, especially in areas undergoing gentrification. New shopping centers are still emerging, and old locations continue to be demolished to make way for the new. It does appear that the mega-mall's final days are indeed upon us, but smaller format retail projects are still alive and well. For certain, there are far too many brick-and-mortar locations right now, and several struggling brands will disappear over the next few years. But a quick look at Amazon's recent foray into opening physical locations tells us all we need to know. Brick and mortar is alive and well.
Discussion: What percentage of retail sales are e-commerce versus brick-and-mortar? What is the e-commerce growth rate? Why do you think Amazon is opening physical locations?
Saving less and spending more appears to be the preferred state of being for the average U.S. consumer in 2017, and this could be a large reason why recent economic growth has been better than in recent years. Big ticket items like automobiles and household appliances appear to be driving the trend, possibly due to some pent up demand for these sorts of items, but since income growth has been modest at best, one wonders where all the money is coming from. And now we know.
The savings rate fell to a 10-year low of 3.1%, down significantly from as high as 6.3% in late 2015. While this is great for marketers in the short run, eventually the savings rate will have to rise again, and without growth in GDP and income, these same consumers will eventually have to pull back. This means that marketers have only a short window to take advantage of this short-term shopping spree, but take advantage of it they can.
The good news is that a pending reduction in the business tax rate (currently the highest in the entire developed world) will give companies more flexibility to hire and give pay raises, which should raise GDP. Higher economic growth means that when consumers do raise their rate of saving, they would have more money to spend due to higher GDP, and so they could continue spending.
Of course without a reduction in the size of government, our national debt will rise as tax rates fall despite GDP growth, but that is another problem altogether. The point here is that economic growth and spending are closely related, and that lower taxes rates combined with higher incomes mean that both businesses and consumers will have more money to spend. If tax rates remain the same or for some reason increase, it is highly unlikely that we will be able achieve the economic growth necessary to overcome the effect of consumers scaling back their spending and increasing their rate of saving. Marketers should be rooting for lower taxes. And right now, the political environment is heating up on this very subject. Let's see what happens.
Discussion: In what other ways can the economic environment influence marketing decisions? What can government do (or not do) to help foster a healthier economic environment?
In my Sports Marketing class, we often have a brief debate as to what and what should not constitute a "sport". To what degree should competition be a factor? If it is a factor then what about Jogging? Should physical exertion be a factor? How much physical exertion? Does Curling or Auto Racing count? Why does ESPN broadcast Spelling Bees and Hot Dog Eating Contests?
Of course, this discussion is brief because it merely serves to illustrate the lack of agreement as to what "sport" really is, which is why it was so interesting to see the card game, Bridge, at the center of the controversy in Europe. Indeed it is a game of strategy and skill, one that few people (almost none of them under 50) even know how to play. Tournaments are held every year around the world. People are serious about this game. But is it really a sport?
Last week, a European Court of Justice ruled that competitive Bridge couldn't be considered a sport because it lacks a "significant physical element". The whole thing arose from a tax dispute exemption that people over there get for engaging in activities that promote physical and mental well-being, with bridge ultimately failing to qualify for the exemption. The decision makes it clear that activities that promote only mental well-being do not count as "sports", which is academic to those of us in my classroom, but a very important distinction when money is involved. And so sport must be physical, but the word "significant" is still rather open to interpretation, so don't expect the overall argument as to what is and what is not a "sport" to be settled any time soon.
Continued From Part Two
By now, the point of this three-part article should be abundantly clear. We in industry have overused the term “innovation”, and are therefore somewhat desensitized to technological and product developments. Consumers barely even notice most of what we accomplish due to the continuous nature of our innovations. Here is the rub.
New product development in our sector is really driven by needs and wants in the marketplace, not technology. This is known as the “Marketing Concept”, the dominant strategic approach in contemporary marketing, wherein marketers identify a need in the marketplace and deliver a bundle of features and benefits (a product) that addresses that need. Technological advancements are fine, but generally result in barely noticeable, incremental innovation. This means that product development is primarily under the purview of marketers since these professionals are responsible for assessing consumer needs. Research and development then follows the lead of marketing to insure that what those folks are developing has a relevant market application and is something consumers actually want. Many firms learn this simple lesson too late and expend massive resources pushing something that doesn’t resonate in the marketplace.
Unfortunately, this is often lost on most industry people who have never taken business classes, but it is very basic science to those of us who have. We learn that new products (which fail 80-90% of the time) should be need-driven in almost all cases (excepting the area of needs consumers didn’t know they had in the first place, which is rare). The firm’s job is to address, and in many cases exceed, expectations in meeting the market need while differentiating their offerings from competitive and substitute products. This attempt at differentiation generally results in a whole heck of a lot of non-innovation, some continuous innovation, and an occasional dynamically continuous innovation, but rarely does it result in something that disrupts the industry.
Nevertheless marketers and media alike will continue to push “the next big thing” as manufacturers look for the next big ingredient and retailers tailor their product mix to meet the demands of their customer base. I will take the road less traveled and remind everyone that new market applications are what spawns innovation in the personal care world, and not necessarily a new ingredient that meets an existing need. So let’s dispense with the hype and begin talking about ingredients and products in terms of how consumers view them rather than “innovations” that do not matter to the marketplace. Indeed market applications are crucial to justifying the use of certain ingredients as well as the development and commercialization of the products themselves. May The Marketing Concept Be With You.
Discussion: How do you use the term "innovation"? Does Apple have some products that are "more innovative" than other? Explain.
Natural ingredients come from everywhere, and many of them have multiple applications that meet a broad assortment of consumer needs. Every year there are a handful of popular ingredients that dominate new product development, and each year the list changes slightly. Natural ingredients are rather like fashion, and as they say on TV’s Project Runway, one day you are in and the next you are out. A Google search of the “New Natural Personal Care Ingredients” revealed a bunch of patented and branded ingredient combinations addressing existing needs as well as lists of ingredients to avoid, and the most popular ingredients. When the word “new” was replaced by “innovative” the list was largely the same.
But just because some of these ingredients are relatively new, does that make them “innovative”? It seems that this word has been thrown around quite a bit and has lost much of its meaning, similar to the way that social media, and Facebook in particular, has somewhat diluted the word “friend”. And this begs the question, “Are ingredients truly innovative or is this just a bedtime story that product developers tell themselves so that they have a better reason to rise and shine in the morning?” It may very well be true that just because a new botanical or ingredient blend is new or popular, this doesn’t necessarily mean that it is innovative in any real sense. Let us explore this rather controversial assertion further.
The term “innovation” has been used to describe all kinds of underwhelming product developments, and the colloquial understanding of the term is that it means “new”. I think we can all agree that the telegraph, automobile, light bulb, radio, television, computer and smartphone were all ground-breaking innovations, but what about each iteration of the iPhone? Is a new emollient truly innovative? A new natural preservative? A new, naturally-derived active ingredient? What do you think?
To Be Continued in "Part Two"
Continued from Part One
Product Development is one of my favorite university courses to teach, and this important class we learn that there are three forms of innovation.
In most cases, it’s not really the ingredients that are innovative, but the finished product. And in every case, it is always the degree of consumer behavioral change required, and not the ingredient/product itself, that determines the type of innovation. It may sound academic, but what happens is that people in general become desensitized to words that they hear all the time such as “innovative, and when they are underwhelmed by what they see, it serves to further numb the target market to the marketing message. And I think we can all agree now that the vast majority of new products are continuous innovations. The real ground-breaking product, featuring an entirely new ingredient with an entirely new application, can only be introduced once. After that, successive products will be dynamically continuous or continuous innovations. As such, in almost all cases, “hot” ingredients are merely popular, and not really innovative.
Now let’s look at the patent process. In order to qualify for a patent in the U.S., an invention must be novel, involve an inventive step not obvious to a skilled person, and have an industrial application. If approved, the patent is exclusive for 20 years. Patents are awarded in personal care all of the time, mostly in the form of process and composition of matter inventions, but the vast majority of these do not require changes in consumer behavior, and so they cannot be considered innovations in any respect, and in too many cases the changes are things the consumer doesn’t even notice.
To Be Continued in Part Three