• Apple's "New" Product

    Apple has always been known as an innovative company, but there are signs that both the level and pace of actual innovation might be leveling off. Consider the last iPhone introduction, one that was well-panned by Samsung in a very creative, biting advertising campaign. It was obvious that this iteration of the iPhone was not what most would consider an "innovation". Now consider the latest iPad, a device that has twice the memory (128 gigabytes) as the previous model. Is this a true innovation?

    In product development we call this a "continuous innovation", one that involves little no no change in behavior on the part of the customer. The tablet was certainly more of a disruptive, discontinuous innovation, and the original iPhone turned out to be a Blackberry Killer. But since then, we have only seen minor changes with each iteration. In a traditional price skimming strategy, the price would come down with each product introduction so that the product can expand its market share. But this latest iPad is priced between $700 and $929. No price skimming here...

    So, does simply doubling the memory constitute an innovation per se? I think not. I also think that the company deliberately introduced a product with the half the memory first in part to forward the market perception that the company is still innovating at the level we have all come to expect. Do the folks who bought the last iPad feel ripped off that they have half the memory of the new version? Is there a memory upgrade available for the previous version? None of this is clear yet, but I get a funny feeling Apple is starting to struggle in a variety of ways. Can a company stay cooler than every other company forever? I'm fond of saying that people who are operating at the top of their game have nowhere to go but down. Everything and everyone has its life cycle. 

    DDS

  • Self-Regulation Keeps Bad Actors In Check

    The nutritional supplement industry (now well into the tens of millions in annual revenue at the retail level) has been growing at a steady clip for almost 30 years. Prior to the 1994 Dietary Supplement Health and Education Act (DSHEA), product claims could not be made by marketers, and there was little regulation by the FDA. That act of congress established clear rules for what manufacturers and marketers can and cannot do and outlined very clear regulatory powers for the FDA. Since then, the results have been mixed. Most companies do the right thing, but there are all kinds of bad actors. Good Manufacturing Practices are sometimes not followed and unlawful drug claims are made about products that are not approved as drugs. You see, the nutritional supplement category is an intermediate category between a food/beverage (which has a "nutrition facts" panel on the label) and a drug (which has a "drug facts" panel on the label). The "supplement" category allows product claims as long as they do not suggest that the product is intended to treat, prevent, or diagnose a disease. A nutritional supplement that has a claim to treat or prevent a cold or flu, for example, is in violation of this act. The rules also apply to advertising, which is the domain of the FTC, and often marketers are more apt to make claims in marketing communications than they are on the labels.

    In an effort to combat some ethically-challenged players in this highly profitable category, the not-for-profit Natural Products Foundation, in a self-regulatory effort, presented documentation to the FTC highlighting 26 advertisers accused of making drug claims for dietary supplements. The organization is quoted as saying, "NPF is now completing its third full year to rehabilitate industry advertising." The FTC simply doesn't have the resources to police everyone (or so the agency asserts), so these sorts of self-regulatory efforts are necessary in an industry that plays loosely with the rules. In 2012, the NPF mailed 100 letters of warning on the behalf of the industry to companies making drug claims. Let's hope it helps the industry become more credible.

    DDS

  • Carbonated Drinks Losing Fizz

    You may have noticed that, over the past 15 years, there has been a rapid proliferation of alternatives to the traditional "soda", sometimes referred to as a "soft drink". The term soft drink technically refers to anything that doesn't have alcohol in it, but we have come to know it as the stuff Coca Cola, Pepsi, and Dr. Pepper offer. It's also the stuff that has been correlated with obesity.

    For many reasons, U.S. consumption of the fizzy, high fructose corn syrup-laden beverages has declined over the past eight years causing some observers to wonder if the "Age of the Soft Drink" has ended. Certainly social concern about obesity, regulations such as the one recently enacted in New York City, and the availability of a wide variety of substitutes are drivers of this trend. But the real issue is young people. Simply put, soda consumption is slipping primarily because young people increasingly reach for water, coffee, teas, and energy drinks rather than a Coke. Indeed, U.S. consumption has probably peaked if consumer behavior has shifted (and there is every indication that it has). Sodas enjoyed a nice form of oligopoly for a hundred years, and now the players in the beverage industry are many and large. It has become so prolific that the big three soda companies even actively engage in cannibalization, in the name of market share, as they all own multiple beverage lines that are substitutes for their own sugary stuff.

    But don't worry about it too much. The decline is less than one percent annually, and it will take a long time (if ever) before obtaining a Coca Cola is difficult. I predict a major change in the industry as the major players begin to replace the controversial and inexpensive high fructose corn syrup with a more natural sweetener. Not only is this ingredient under fire from numerous stakeholders, but consumers prefer the taste of real sugar four to one in blind taste tests. Also, low calorie naturally-derived sweeteners such as stevia will begin to replace the synthetic sweeteners such as aspartame. These moves may add a much-needed boost to sales, but the tide might be  difficult to turn. Either way, there's just no stopping progress!

    -DDS

  • Shinier Than Thou

    You might have noticed a recent TV ad campaign by Zale Corp., a major national jewelry chain, that touts the superior brightness of its diamonds over those of its competitors. Zale didn't name any names, but a competitor took exception to this exaggeration and sued, objecting to the claims that the Celebration Fire line of diamonds are the "most brilliant diamonds in the world". How can a company make such an outrageous claim? Surely it cannot be proved! And this is exactly the point.

    So what happened? A federal judge in Ohio this week ruled in favor of Zale even after the competitor, Signet Jewelers, presented findings that its own diamonds were just as sparkly as those sold by Zale. Surprised? Don't be. This sort of exaggeration (one that is not disparaging to specific competitors and is so general that it cannot be proved one way of the other) is really a form of what we call "puffery". Just like saying that you have "The World's Tastiest Hamburger", it is not really necessary to prove such a claim unless a competitor can demonstrate that it would suffer irreparable harm from the advertisements. Thus, puffery might not be the classiest of strategies, but it probably isn't illegal.

    DDS

  • Retail Roundup

    After a rather lackluster holiday season, most retailers have retrenched, restocked, and now await the so-called "Hallmark Holidays" (Valentine's Day, Mother's Day, etc.) While a boon to sales, these holidays affect mainly the gift industry, and so the stores that sell non-gifty items must rely on a more evenly distributed plan for growth throughout the year. As such, there are some interesting things going on in the world of retail. Here are just a few:

    Dish has announced that it is closing 300 under-performing Blockbuster stores. First of all, I can't imagine that there are really very many Blockbuster stores that are actually performing, per se, since the distribution channel for movies left this venerable brand in the dust long ago. Indeed I am not only surprised that Dish bought the struggling company in the first place, but also that it still exists at all.

    Walmart is slowly penetrating many of the cities that have shunned the retail giant over the past several decades. First it was a new store in New York City and now one in Boulder, Colorado, and it appears that both of these places have wisened up. These cities, in a failed effort to direct consumer behavior toward smaller "mom and pop" stores are finally tired of losing the Walmart generated tax revenue to other places, since consumers have been willing to travel longer distances from both New York and Boulder to get their household goods on the cheap elsewhere. So much for social engineering...

    Walmart is also toughening up its supply chain in the light of the recent violations of the company's rather stringent global sourcing standards. It appears that the standards have been in place for a while, but that greater enforcement is now necessary. In addition, a new policy has been established that Walmart will immediately cut ties with any contract manufacturer that subcontracts work without the company's knowledge. A good move since retailers are ultimately held responsible for the goods they sell by the court of public opinion.

    Sears, one of the original U.S. retailers, is still keeping its head above water, having refocused on its appliance and home exercise product segments. Ads over the past year or so have focused on the brand's leadership in these areas and so far it has worked. Will it be enough to save the company?

    Kmart, on the other hand, appears to be in its final death throes. Stores continue to underperform, neglect is evident throughout the chain in the form of unclean locations, and the organization still struggles with a brand identity.

    Perhaps 2013 will be the year we finally wave goodbye to Kmart, Blockbuster, and other retailers that have failed to navigate the rough waters of competition and consumer shifts. But, it never ceases to amaze me how long some of these "zombie brands" can survive without providing much value. We shall see.

    DDS

  • Can Chipotle Raise Prices?

    Sourcing ingredients can be a daunting task for both finished goods manufacturers and food service providers alike. In general, once a marketer has incorporated a particular ingredient into a formula or a menu offering, it is not always easy to find suitable substitutes. People get used to the product with the particular ingredient in it (think cane sugar versus high fructose corn syrup). For this reason, many marketers diversify their supply chain and instead of sourcing ingredients exclusively from a particular supplier, they prefer to have a couple of options available. This is very difficult  if the ingredient is at all unique or hard to find, and impossible if your ingredient has been threatened by an act of nature such as droughts or flooding.

    So what happens when the price of fresh ingredients rises across the board? The restaurant can raise the price, but what if you are Chipotle and you are already priced slightly higher than competitor Qdoba? And think about all the smaller players in the "fast casual Mexican food" segment of the industry. Throw in Taco Bell's new "fresh ingredient" positioning at less than half the price of higher end competitors, and what you have are some serious threats to the 20-year-old company's business model. In this case, switching ingredients is not an option because ingredient prices are rising across the board.

    What are Chipotle's options? There are essentially two. The company can raise prices in the hopes that either competitors will follow suit or that enough consumers will recognize that Chipotle's products are worth the money. Or, the company can keep prices the same and allow the increased raw material costs to erode profit margins and therefore stunt shareholder returns. What should Chipotle do? You decide.

    -DDS

  • Three Jeers For POM

    The Federal Trade Commission has finally released its ruling against POM Wonderful, purveyors of a popular pomegranate beverage, in a case that lasted almost three years. Wow! It sure does take a long time to force a company to stop making false and misleading statements about its products. One would think that the agency would have an easier time of it, but the truth of the matter is that the burden of proof is largely on regulators to prove that a marketer is doing something wrong. And clearly, if the marketer happens to be a billionaire as in this case, it may take some time indeed.

    Simply put, POM's claims of "cheating death" and that the juice "can help prevent premature aging, heart disease, stroke, Alzheimer's, even cancer" are patently ridiculous, illegal and against everything the industry is supposed to stand for (if they are indeed true!). We should presume that this magic elixir may also give us the opportunity to live forever or perhaps give us the ability to climb a beanstalk. OK. It's just pomegranate juice, so how can POM make these claims? It can't, actually, and the company knows better. The 1994 Dietary Supplement Health and Education Act (which established a category between food and drugs for what we call "nutritional supplements") was enacted to clear the confusion as to what is a food and what is a drug. The intermediate "supplement category", which includes most of the stuff we buy in pill or powder form, allows for statements of nutritional support that are not reviewed or approved by the FDA, but not for blatant "health claims". If the company is marketing the beverage as a supplement (with a supplement facts panel instead of a nutrition facts panel), then certain statements may be allowed. Instead of preventing heart disease, a marketer could claim that the product "helps maintain healthy cardiovascular function". This is a statement of support, not treatment or prevention which are drug claims. POM has ignored almost 20 years of industry history in an effort to make money by exaggerating the benefits of simple anti-oxidants (which is what POM contains). No magic bullet here. I have been active in the industry since well before the law was enacted.

    Despite knowing better, the very wealthy people behind POM decided to test just how far the FTC will go to protect consumers against false and misleading statements. Curing cancer and preventing disease is exacyly what you CANNOT say about a food or a supplement. These are blatant and misleading  "drug claims" and can only be made for FDA approved drugs. POM should know full well that the product is not a drug, and a company of this size would have attorneys on staff advising on labeling and advertising claims. So what gives?

    The FTC ended up telling POM that, just like a drug, two double-blind, radnomized, controlled clinical studies would have to be conducted before any such claims could be considered legal. Without the studies, the marketers are making claims that cannot be substantiated and are therefore illegal. This is a fairly cut and dried case and it shouldn't have taken three years to make a judgment. It says quite a bit about how companies with deep pockets can affect the regulatory environment. The company probably made many millions in those three years, so any fine would be well worth the effort. The problem here is that it sends a message to other sketchy players in the nutritional supplement/functional foods industry that flouting the law is worth the effort. More of this activity may result in further legislation, which will hamper the ability of the "good guys" to producte legal and ethical products. Consumers are already skeptical of these types of claims, and if this is all true some ethically-challenged executives at POM have managed to take us back 15 years. The bottom line is that, despite the amount of research available, foods and supplements cannot make drug claims without FDA approval. Period.

    If POM is really guilty of this, then let's hope the penalties are heavy so that further flouting of the law can be avoided, and the industry can maintain a modicum of integrity. In the meantime, pomegranate may be delicious and good for you, but you can be assured that it is not a drug and it won't do the things POM says it will do.

    DDS

  • Subway Footlong Comes Up Short

    Five dollar foot long indeed...Subway is facing criticism after a Facebook photo emerged showing a man, a ruler, and a foot-long sandwich that measures out at only eleven inches. So it appears that the well-marketed Subway foot-long sandwich might come up a bit short. The problem? The Federal Trade Commission, which monitors advertising claims, frowns on any communication that may mislead the consumer. An outright lie, on the other hand, is sure to garner regulatory scrutiny. Was the photo an insidious plot by Quizno's to disparage the market leader? Is the eleven inch sandwich an isolated incident? Is it the result of the inconsistency one would expect with hand-cut bread, as the company claims?

     

    These are good questions, and ones that industry observers are currently asking. What is probably most important is whether or not the company actually encourages the practice of "downsizing" the promised product. Such misleading marketing is unethical and probably illegal. The reduction of one inch across millions of sandwiches can make a heck of a difference when it comes to controlling costs. That's a lot of missing cheese, vegetables and mystery meat. The real issue is whether or not there is a widespread problem across the franchised organization and if so, whether or not the downsizing is intentional. The bottom line is that a foot-long sandwich should be 12 inches, not 11, and the company will have to take corrective action if it wishes to escape being singled out by regulators and avoid harm to the brand's reputation.

    DDS

  • Coke Addresses Obesity

    It looks like Coca Cola has fired the latest salvo in the war on obesity, as the company has taken a defensive marketing stance on this important issue. The ad in question, a two minute segment, was aired on the major cable news channels during prime time, so the reach was fairly large. In an attempt to boost its reputation, Coke highlighted its record of offering low calorie beverage options and notes that weight gain is a result of a multitude of factors, not just the consumption of sugary sodas. What a revelation!

    This strategic and creative approach is a form of "institutional advertising" intended not to sell products, but to communicate an entire organization's position on a particular issue. Beer companies advocate responsible drinking in their ads, for example. But this approach is different than a traditional advocacy ad. This one is defensive in nature, and might not go over well in the markeplace. So, you can be sure that every purveyor of sugary products is watching the media, market, and supply chain response to this campaign. Will Coke run this ad during the Super Bowl? Is that an appropriate time to address obesity?

    We can also be certain that this issue is not going to go away, and that most people believe that the marketers of unhealthy products bear at least part of the responsibility for our expanding waistlines. And more legal and regulatory issues are on the horizon. Is this the best way for the market leader to address the issue? You decide.

    -DDS

  • Bona Fide Business Model or Pyramid Scheme?

    Ah, multi-level marketing! This is possibly the most annoying and suspect of all selling activities, as individuals recruit other individuals who, in turn, recruit yet more people to sell products...friends selling to friends in many cases. These independent sellers get paid by selling products directly to consumers as well as a portion of the sales from the people they recruit. Thus, the "multi-level" moniker. Companies like Mary Kay, Avon, Amway, and Herbalife come to mind when we think of this channel strategy, but many people associate this legitimate (albeit invasive and irritating) approach with the illegal "pyramid" or "ponzi" scheme.

    Recently, Herbalife has been accused by certain members of the investment community for being a pyramid scheme wherein the supply of new recruits, rather than the selling of actual products, provides most of the revenue for existing members. Thus the pyramid eventually collapses when the supply of new recruits dries up. So is Herbalife a pyramid scheme? Maybe yes, maybe no, and this is largely a task for regulators to sort out. The truth of the matter is, only a fraction of one percent of Herbalife "distributors" gross over $20,000 annually, which is scarcely enough to live on. The rest? Beer money at best. Mosat people are recruited by friends, asked to attend a "seminar", and exposed to one or more success stories. Hmmmm.

    The real question is whether or not these companies are overrepresenting what they can do for their independent sellers, and what these folks can realistically expect to earn. Anecdotally speaking, I have never met anyone who has made any kind of money selling through this channel. Not a single person. But I do know quite a few who have tried and have made many friends, relatives, and acquantences uncomfortable. Will regulators look more deeply into these operations? Wait and see.

  • Taxes Affect Spending

     

    I'm certain we are all sick and tired of hearing about the "fiscal cliff" and the associated tales of gloom and doom. Unfortunately much of this speculation is warranted, as the nation's government is extremely broke and doesn't seem willing to stop the spending. But what about consumers? Much has been made of increasing taxes on the wealthy and the negative effects such an increase would have on the goods and services they consume. Simply put, if you have less in your wallet there is less to spend.

    This is another one of those inconvenient truths, and marketers are taking note. In addition to an tax increase for folks making over $400,000 a year (many of whom own and operate small businesses), everyone will be seeing a reduction in their paychecks as a result of an increase in payroll taxes. The average American household, starting right now, will have about $1,000 less per year to spend on stuff in an already slow growing economy.

    It is unlikely that sales of big ticket items such as cars, flat screen TV's and computers will suffer from this increase, but purveyors of lower price-point goods and services such as Proctor and Gamble, McDonald's, and JC Penney are revising sales forecasts to account for this reduced spending power. This is yet another example how the legal and political environments can and do affect marketing strategy.

    DDS

  • I-Phones To Come Cheap

    It had to happen eventually. There are now so many players in the hand-held gadget market and the sector is maturing so quickly, that even market leader Apple is forced to offer lower price point products. Why? The tech giant has been losing market share of late, and seems to have lost a bit of its brand mojo. It seems that most of the people who are willing to spend $650 on a phone already have one, and others are opting for lower priced alternatives that deliver similar value.

    So Apple will have to cannibalize its more expensive iPhone, as customers who want an Apple product opt for the lower price option, but such cannibalization is usually OK if it is planned. Believe it or not, the iPod unit at Apple saw the iPhone as a threat to their product line since music can also be stored on mobile devices. But the smartphone industry grew so quickly that iPods became yesterday's news within just a few short years, so it was a good move for Apple. Thus, the new product category attracts customers from the older product category, and the older category eventually dies out, resulting in the "harvesting" of profits while the product is in its decline stage of the product life cycle.

    This is what marketers are forced to do in a dynamically changing industry. Tough decisions must be made. New products replace older products, and this is truly inevitable; but companies can manage this process to a large degree by insuring that they have new technologies in the research and development phase that will replace the old ones when market conditions necessitate such a move. The new Apple phone will likely be a stripped down version of the more expensive phone with a less-expensive body. Hopefully this move won't cheapen Apple's image. Mercedes offered a less expensive vehicle many years ago when they were the parent of Chrysler. The brand still hasn't recovered its original prestige image. I'll be watching this one closely.

    -DDS

  • Web To Cable An Unusual Move

    Al Jazeera, the Qatar-government backed news operation that gained fame from broadcasting those creepy messages from Osama bin Laden, is looking to gain a following in the United States and has subsequently purchased Al Gore-backed and seldom-viewed Current TV. The interesting thing here is not that few people have ever heard of or watched the uber left-leaning Current TV. Indeed for some reason even left-leaning MSNBC suffers from low ratings compared with competitors. What's noteworthy here is that Al Jazeera English must give up its precious global web presence to gain access to the American audience. What's going on here?

    This is yet another illustration of the broader conflict between Pay TV and online streaming that many other TV channels face. After all, the programming is paid for by cable and satellite networks who don't want said programming appearing for free online. A no-brainer, this conflict has resulted in a slowing of the otherwise organic movement of people to consuming TV via the Internet. When it comes to the web, if the content ain't free, people generally won't consume it. And deals with distributors prevent most first run programming from appearing on the web in the first place.

    This is the sort of thing that happens when an industry is in radical transition, as marketers struggle to address changing consumer states and emerging technologies. The shift from one format into another may never be complete, as consumers will likely want video streaming seamlessly across a variety of devices including their televisions. It is unlikely that broadcast television will die out any time soon, if ever, but as long as cable and satellite operators remain independent from the Internet, the fight will continue. The loser? You guessed it. The consumer.

    DDS 

  • E-Reader Revolution Over

    In the world of gadgets, it seems that just when we all get used to using a product in a new category, the concept of "creative destruction" changes everything. New products and new technologies, if they are disruptive enough, can destroy (creatively) older products and product categories. In the 1990's CD's replaced records and cassette tapes, and more recently, digital media has replaced the CD creatively destroying the CD business. You get the idea, I'm sure.

    Today, it looks like the growing market for tablets is creatively destroying the e-reader business. Sales of e-readers peaked in 2011 at 23 million units shipped, and dropped to less than 15 million units in 2012. That's a steep drop, and projections for 2013 are under 9 million units. This my friends is a rapidly declining product category. And it appears that tablets aren't yet "laptop killers" (although more recent iterations are intended to replace the laptop), but they are certainly "e-reader killers".

    What does this mean for the consumer? Tablets have already addressed the innovators, early adopters, and some of the early majority of consumers. The rest of the early majority and the late majority, who won't jump at the chance to purchase a new gadget without darn good reason, will only begin to adopt tablets when the devices clearly replace the ones these folks already have (i.e., e-readers and laptops). Thus, the logical conclusion is that the e-reader market will go the way of the cassette tape, and that it will take a few more years for the majority of laptop users to make the switch. Let's see what happens.

    -DDS

     

  • 357 Channels And Nothin's On

    While the Internet continues to attract disgruntled former users of pay TV, the major cable and satellite providers continue to raise prices and add new channels to address the needs of an increasingly cash-strapped consumer. Bruce Springsteen's 1980's song "57 Channels and Nothing On" is now several hundred channels depending on the package, and the idea that these providers are actually addressing needs is questionable at best . The one thing is that is certain in the Pay TV industry is that it will have to change. And soon.

    Typically, operators like Time Warner, Cablevision, Charter Communications, Dish Network, and Direct TV pay fees to content providers in return for the rights to air programming. Sometimes these negotiations go bad, and unable to reach an agreement, the operator simply drops the channel (the the Dish and AMC dispute, for example). What is becoming increasingly clear, however, is that no one has actually asked all of these channels (as evidenced by ratings), and as prices continue to rise and more consumers migrate onto the web, operators will be forced to pare down their offerings and eschew showing networks that hardly anyone watches. On notice are Hallmark, IFC, WE TV, Current TV, and other rarely-viewed channels. Why do we have these channels in the first place? Content providers such as Viacom, AMC and Disney essentially "bundle" the more obscure channels with the channels that operators and consumers really want, creating a situation where the operators are forced to carry channels they don't want to carry.

    This is not a sustainable business model, and a paring down of channels is an obvious imminent outcome, as content providers begin to lose influence in the industry. Content is everywhere, and the most creative and entertaining stuff is increasingly found on the Internet. Lousy first run programming combined with hundreds of channels airing reruns for a huge price is not an ideal formula for future success. The industry will continue to evolve, but the consumer is the ultimate decision-maker and advertisers won't place ads during programming that no one watches. It's really that simple.