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GP18Sep: Going Upmarket in Stormy Weather Sunshine Boys and Girls. All through the booming 1990s, we heard doomsday prophets rant on about the imminent end of the world and the financial implosion that was only 2 days away. Now it’s just the opposite. The contrarians and semi-balmy are going on about the resilience of our heartland economy and the power of low interest rates that are already igniting a rebound we’d see if we were only more perceptive. For instance, if you read the Sept. 24 New York Times, “Against All Odds: A Couple of Bulls,” you will learn about James Smith of the University of North Carolina and Nancy Lazar of the International Strategy and Investment Group. They envision 4% growth by year’s end. Just like the songsters in the old feel-good Broadway musicals, they see, at the end of a storm, a golden sky and the sweet silver song of a lark. And The Rains Still Came. But Saturday also brought in the mail the Herman Miller 2002 Annual Report. It has a bad weather map on the cover, plaintively announces the company is “Coming Through the Storm Stronger for the Future,” and offers upfront an actual poncho to help you get through these stormy times. We will be calling Herman Miller (NASDAQ:MLHR; www.hermanmiller.com) to ask for a gross of ponchos to cover us during the many downpours ahead. Should you need a cold dose of reality to deal with the better-times-are-coming people, simply examine Miller, which lost $56 million last year, having earned $141 million the year before. It’s as good a way as any to learn that we are in just the second dip of this recession. Miller, incidentally, makes very slick, high-end furniture for the office, but this very good company does need a substantial rethink, since corporate purchasing agents are in a threadbare state of mind, and it needs to find whole new markets. In Bad Times, Good Goods. What America did during the first leg of the downturn last year was to go cheap. We cut all sorts of costs out of business, fired a whole bunch of people, put too little inventory on the shelf, killed customer service, cheapened our product offerings, raised cash, and more or less completed the orgy of cost reduction that got its start way back in 1990. In many ways, a host of companies have simply been eviscerating themselves. Everybody in their own way hoped to become a Southwest Airlines (NYSE:LUV; www.southwest.com), the Greyhound of the Skies, by offering no amenities and laughing about their low-rent atmospherics, hoping that their equivalent of $150 fares would garner big revenues, even if the product was just like cattle-car transportation. In 2001, this worked for many, as huge discounters in every industry took market share and profits. Now, in the second leg of this recession, sales are beginning to erode at Wal-Mart (NYSE:WMT; www.walmartstores.com) and the discounters. Consumers are either saturated, or they’re simply running out of money. The cut-rate marketplace is just beginning to look a little tired. A Paradox Is Upon Us. As time goes by, it pays to go upmarket, not down. You will find less competition up there, since others have rushed into the commodity, stripped-down arena. And there are still some upmarket buyers standing, with dollar bills in their billfolds, whereas other consumers have fallen by the wayside. The Bad Times, Good Goods Paradox is that for some, deep, long recessions are a good time to go high end. And a corollary is that product quality will often get substantially better in a slump, since the selective buyers who are left won’t go for shoddy fare. In the developed markets of the world, we can argue that you should swim upstream, pulling free of the crowd that is bobbing along with the current downstream. Bangkok Airways. Lest you think every airline is trying to be a Southwest or JetBlue (NASDAQ:JBLU; www.jetblue.com), you should read about Bangkok Airways (www.bangkokair.com), which splurges on passengers and has more than quadrupled its customers in the last decade, with profits up to $2.7 million in 2001. (See the Economist, September 7, 2002, P. 58.) It has focused on tourists, not Thais, and its route structure avoids the hub cities of the majors in order to get passengers directly to their favored destinations. Even its terminals are pleasant places to roost, with good views and lots of comforts. This airline is heading successfully into the winds, offering more, not less. Grey Power. Even when this long recession finally ends somewhere in this decade, an upmarket strategy will still make lots of sense. All sorts of demographic things are happening in developed nations that should point companies in new directions. People over 60 now comprise 20% of the market in advanced nations, and this will swell to one-third by 2050, and even 40% in Japan. (See the Economist, August 10, 2002, pp.51-52.) The mature can and will pay for more, if products and services match their requirements. This, of course, implies a revolution in the world of marketing, where everything has been blindly focused on younger people. Ironically, for instance, the TV networks focus on the young, yet the seniors have the wealth and available time to make them fat, empty nest targets for clever salesmen. Rainbow Tastes. On the Global Province, you will now find a Best of Spices section (www.globalprovince.com/bestspices.htm). This signals that America is steering away from bland, standardized food—as well as other faceless, mass-market offerings. Surely spices form the dividing line between numbness and enriched experience. The growing interest in quality spices clearly shows us that Little Calcutta is being grafted onto Middletown. That is, ethnic diversity is leading to diverse tastes that are infecting the whole of America. People want sushi to go with their skim milk lattes. All these micro-food markets have let the air out of the tires at McDonald’s and Burger King. In other words, differentiating consumers don’t want one size fits all. We have found, for instance, 6 or 7 special table salts—and a like number of peppers—that people will go out of their way to get. The Rise of the Creative Class. Richard Florida’s The Rise of the Creative Class: And How It’s Transforming Work, Leisure, Community and Everyday Life implicitly suggests another reason for going upmarket. In short, he theorizes that the people (i.e. creative technologists and the like) who will build the next economy flock to regions with an interesting infrastructure. It’s not enough to offer well-funded universities, decent highways, and ample golf courses. The new creative knowledge class wants galleries, top restaurants, a cosmopolitan population, theater, and a host of other urban delights. Development has become more dependent on talent than capital. But the talent will only migrate if good goods are available. This has been a problem for state development agencies whose tactics have primarily focused on importing manufacturing jobs instead of capturing entrepreneurs who start businesses in a garage and collectively create a critical creative mass. These agencies don’t try to put in place the little things that mean a lot to knowledge workers. The creatives want communities with texture. Quality of Life Channels. Nowhere is the value of an upmarket strategy more apparent than in the media business. We would point particularly to E.W. Scripps (NYSE:SSP; www.scripps.com), which has been doing well even in what could be called the worse advertising market since the 1930s. While its newspapers and its broadcast units are relatively flat, its Scripps Network unit soars ahead, with a 19-percent increase in revenues in the 2d quarter. At this rate, it will probably becomes the company’s largest unit in 8 to 12 quarters. What Scripps Networks does is author content that is distributed through cable television. So far this consists of House and Garden TV, the Food Network, Do It Yourself, and Fine Living. What’s produced is often of very high quality. We call these networks Quality-of-Life Channels. Scripps is profiting handsomely by dealing with life improvement, doing well while doing good. Scripps, and certain of the other regional media companies, are doing well, even as AOL Time Warner and other mass market media goliaths falter in interactive space. You’re the Tops. The media world is a microcosm of what is happening in business across the board in this knowledge economy. Smaller companies threaten to topple larger companies by upgrading their brands and ministering to selective tastes, since they are not leashed to huge volume requirements and mass market thinking. In the industrialized, developed markets of the world, now caught in enduring recession, we expect new top companies to emerge because they have decided to be top-grade producers, not because they are low-cost, low-price, low-imagination machines totally dependent on scale to be a force in their marketplaces. As Cole Porter would have it, they’re the tops because they act the part. They’re the tops because they’re realistic enough to do something very different when the economy is in a ditch, singin’ in the rain instead of runnin’ for cover. |
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