Tesco’s Downfall Is a Warning to Data-Driven Retailers

Tesco’s chairman has resigned in disgrace. The company's market value has more than halved to an 11-year low as it acknowledged overstating profits by hundreds of millions of dollars. And a humbled Warren Buffett, after opportunistically raising his stake in the company after a surprise profit warning, confessed to CNBC: “I made a mistake on Tesco. That was a huge mistake by me.”Indeed. Britain’s biggest supermarket chain has not only seen its fortunes erode but its reputation for competitiveness, creativity and integrity collapse. Even before its accounting travails, a former chairman hadsharply criticized former CEO Sir Terry Leahy, who had led Tesco to market dominance and worldwide admiration, for leaving a shambles of a legacy. Leahy’s immediate successor resigned in July; his successor from Unilever now confronts more of a turnaround than he had ever expected.What the heck happened to Tesco?Many analysts and unhappy investors point to Tesco’s ill-fated Fresh & Easy convenience store foray in America just as the global financial crisis kicked in. The failed expansion effort ultimately led to write-downs topping $3 billion. At the same time, dramatically increased price competition by discounters such as Aldi severely undercut Tesco’s "every little helps" value proposition. The company still declines to say whether its systemic supplier-related accounting misstatements better reflect malpractice or malfeasance. Regardless, Tesco’s collective failures feel operational, organizational and cultural. This isn’t simply bad luck.But beyond the business cliches of "big bets gone bad" and "not keeping one’s eye on the ball" is the disconcerting fact that the core competencies that made Tesco a marketing juggernaut and analytics icon appear almost irrelevant to its unhappy narrative of erosion and decay. More than any other retailer of scale, Tesco had committed to customer research, analytics, and loyalty as its marketing and operational edge. For example, the supermarket ingeniously succeeded at Internet-enabled grocery shopping in ways that Webvan-remember them?-could not. Tesco was digital before digital was cool. Tesco’s Clubcard loyalty program was launched under Leahy in 1995 and redefined both the company and the industry. As the Telegraph recently observed, “Tesco was transformed into the market leader in the UK-with more than 30pc market share-by being able to respond to the demands of its customers.”American supermarkets-notably Kroger-admired and sought to emulate Tesco’s success. Even Walmart-overwhelmingly focused on optimizing its everyday low-pricing supply chain logistics-took Tesco’s command of customer analytics seriously. Practically every retail Big Data and analytics case study over the past decade explicitly referenced Tesco as "best practice." With the notable exception of, say, an Amazon, no global store chain was thought to have demonstrably keener data-driven insight into customer loyalty and behavior.But the harsh numbers suggest that all this data, all this analytics, all the assiduous segmentation, customization and promotion have done little for Tesco’s domestic competitiveness since Leahy’s celebrated departure. As the Telegraph story further observed, “…judging by correspondence from Telegraph readers and disillusioned shoppers, one of the reasons that consumers are turning to [discounters] Aldi and Lidl is that they feel they are simple and free of gimmicks. Shoppers are questioning whether loyalty cards, such as Clubcard, are more helpful to the supermarket than they are to the shopper.”How damning; how daunting; how disturbing for any and every serious data-driven enterprise and marketer.  If true, Tesco’s decline present a clear and unambiguous warning that even rich and data-rich loyalty programs and analytics capabilities can’t stave off the competitive advantage of slightly lower prices and a simpler shopping experience. Better insights, loyalty and promotion may not be worthless, but they are demonstrably worth less in this retail environment.A harsher alternative interpretation is that, despite its depth of data and experience, today’s Tesco simply lacks the innovation and insight chops to craft promotions, campaigns and offers that allow it to even preserve share, let alone grow it. What a damming indictment of Tesco’s people, processes and customer programs that would be. In less than a decade, the driver and determinant of Tesco’s success has devolved into an analytic albatross. Knowledge goes from power to impotence.There’s nothing new or unusual in a one-time business strength turning into an organizational weakness or an industrial irrelevance. But when we’re talking about customer data, insight, loyalty and all the ingredients that-supposedly-go into giving digital enterprises their information edge, then it’s time to get nervous and ask hard questions.Is Tesco’s fall from grace a typical tale of shambolic succession and enterprise lassitude as times turned tougher? Or is it a market signal that Big Data, predictive analytics, and customer insight aren’t the sustainable competitive weaponry they’re cracked up to be? The schadenfreude gang may be counting on the former; but datanauts who referenced Tesco to sell their bosses on analytic investments would be wise to consider the latter possibility. Or is it probability?Michael Schrage, a research fellow at MIT Sloan School’s Center for Digital Business, is the author of Serious Play, Who Do You Want Your Customers to Become? (HBR Press), and The Innovator's Hypothesis (MIT Press). Michael Schrage

Turnaround Story of Netflix

Netflix leadership has shown a penchant for having the right strategy to remain a market leader – even when harshly criticized for taking fast action to deal with market shifts. Specifically, choosing to rapidly cannibalize its own DVD business by aggressively promoting streaming – even at lower margins – meant Netflix chose growth over defensiveness. Wild Ride for CEO Hastings in the press In 2011 CEO Reed Hastings was given “CEO of the Year 2010″ honors by Fortune magazine. But in 2011, as he split Netflix into 2 businesses – DVD and streaming – and allowed them to price independently and compete with each other for customer business he was trounced as the “dunce” of tech CEOs. His actions led to a price increase of 60% for anyone who decided to buy both Netflix products, and many customers chose to drop one. Analysts predicted this to be the end of Netflix. Milk the installed base to invest in growth markets But in retrospect we can see the brilliance of this decision. CEO Hastings actually did what textbooks tell us to do – he began milking the installed, but outdated, DVD business. He did not kill it, but he began pulling profits and cash out of it to pay for building the faster growing, but lower margin, streaming business. This allowed Netflix to actually grow revenue, and grow profits, while making the market transition from one platform (DVD) to another (streaming.) Almost no company pulls off this kind of transition. Most companies try to defend and extend the company’s “core” product far too long, missing the market transition. But now Netflix is adding around 2 million new streaming customers/quarter, while losing 400,000 DVD subscribers. And with the price changes, this has allowed the company to add content and expand internationally — and increase profits!! Marketwatch headlined that “Naysayers Must Feel Foolish.” But truthfully, they were just looking at the wrong numbers. They were fixated on the shrinking installed base of DVD subscribers. But by pushing these customers to make a fast decision, Netflix was able to convert most of them to its new streaming business before they bought the service from a competitor. Don’t fear cannibalization Aggressive cannibalization actually was the BEST strategy given how fast tablet and smartphone sales were growing and driving up demand for streaming entertainment. Capturing the growth market was far, far more valuable than trying to defend the business destined for obsolescence. Netflix simply did its planning looking out the windshield, at what the market was going to look like in 3 years, rather than trying to protect what it saw in the rear view mirror. The market was going to change – really fast. Faster than most people expected. Competitors like Hulu and Amazon and even Comcast wanted to grab those customers. The Netflix goal had to be to go headlong into the cold, but fast moving, water of the new streaming market as aggressively as possible. Or it would end up like Blockbuster that tried renting DVDs from its stores too long – and wound up in bankruptcy court. Understand the competition There are people who still doubt that Netflix can compete against other streaming players. And this has been the knock on Netflix since 2005. That Amazon, Walmart or Comcast would crush the smaller company. But what these analysts missed was that Amazon and Walmart are in a war for the future of retail – not entertainment – and their efforts in streaming were more to protect a flank in their retail strategy, not win in streaming entertainment. Likewise, Comcast and its brethren are out to defend cable TV, not really win at anytime, anywhere streaming entertainment. Their defensive behavior would never allow them to lead in a fast-growing new marketplace. Thus the market was left for Netflix to capture – if it had the courage to rapidly cannibalize its base and commit to the new marketplace. Hulu and Redbox are also competitors. And they very likely will do very well for several years. Because the market is growing very fast and can support multiple players. But Netflix benefits from being first, and being biggest. It has the most cash flow to invest in additional growth. It has the largest subscriber base to attract content providers earlier, and offer them the most money. By maintaining its #1 position – even by cannibalizing itself to do so – Netflix is able to keep the other competitors at bay; reinforcing its leadership position. There are some good lessons here for everyone: Think long-term, not short-term. A king can become a goat only to become a king again if he has the right strategy. You probably aren’t as good as the press says when they like you, nor as bad as they say when hated. Don’t let yourself be goaded into giving up the long-term win for short-term benefits. Growth covers a multitude of sins! The way Netflix launched its 2-division campaign in 2011 was a disaster. But when a market is growing at 100%+ you can rapidly recover. Netflix grew its streaming user base by more than 50% last year – and that fixes a lot of mistakes. Anytime you have a choice, go for the fast growing market!! Follow the trend! Never fight the trend! Tablet sales were growing at an amazing clip, while DVD players had no sales gains. With tablet and smartphone sales eclipsing DVD player sales, the smart move was to go where the trend was headed. Being first on the trend has high payoff. Moving slowly is death. Kodak failed to aggressively convert film camera customers to its own digital cameras, and it filed bankruptcy in 2012. Dont’ forget to be profitable! Even if it means raising prices on dated solutions that will eventually become obsolete – to customer howls. You must maximize the profits of an outdated product line as fast as possible. Don’t try to defend and extend it. Those tactics use up cash and resources rather than contributing to future success. Cannibalizing your installed base is smart when markets shift. Regardless the margin concerns. Newspapers said they could not replace “print ad dollars” with “on-line ad dimes” so many went bankrupt defending the paper as the market shifted. Move fast. Force the cannibalization early so you can convert existing customers to your solution, and keep them, before they go to an emerging competitor. When you need to move into a new market set up a new division to attack it. And give them permission to do whatever it takes. Even if their actions aggravate existing customers and industry participants. Push them to learn fast, and grow fast – and even to attack old sacred cows (like bundled pricing.) There were a lot of people who thought my call that Netflix would be the turnaround tech story of 2012 was simply bizarre. But they didn’t realize the implications of the massive trend to tablets and smartphones. The impact is far-reaching – affecting not only computer companies but television, content delivery and content creation. Netflix positioned itself to be a winner, and implemented the tactics to make that strategy work despite widespread skepticism. Hats off to Netflix leadership. A rare breed. That’s why long-term investors should own the stock. Source : Forbes

Domino's CEO talks turnaround success

Not every CEO is willing to admit the product he or she is responsible for just flat out isn’t good. But Patrick Doyle, president and chief executive of Domino’s Pizza (DPZ) wasn’t just willing to admit it, he was more than happy to tell consumers himself that he agreed with them. It’s been a turnaround story that, for Doyle, has been years in the making, and has paid huge rewards for the company. Hourly-Wage Earner Turned Big Cheese Doyle’s career at Domino’s began about 17 years ago in the marketing department, and he’s been with the pizza chain for more than half of his career. While he wasn’t exactly slinging pizzas at the start, he said his depth of experience with the company has certainly been an advantage. “I’m a finance guy, and way back when I ran our international business,” he said. “I ran our corporate stores. I got an opportunity to really do and see most everything you can do within Domino's before I became CEO. Hopefully I’ll do as good a job getting (the next) experts ready.” For Doyle, working with his predecessor was never something he dreaded. Instead, he welcomed criticism and opportunities to grow and learn as he progressed with the brand. Even after taking the helm a little more than four years ago, Doyle said he still has a solid relationship with Dave Brandon, Domino’s former CEO who now serves as the chain’s non-executive chairman. “He’s been my mentor and continues to be. It works out beautifully,” Doyle said. “It doesn’t always work that way for people. Sometimes having the previous CEO still there isn’t great. But in this situation, it’s perfect. He knows the business, we know each other well. He’s someone I can always go to for counsel and he knows what I’m dealing with.” It wasn’t long after Doyle took the reins from Brandon that he launched the brand into a major turnaround effort. The focus for Domino’s had always been on time and efficiency, not necessarily on the quality of the product customers received. Dedicated to his pitch for feedback, Doyle even went straight to your living room, asking for photos of your Domino’s pizzas, and suggestions for how he and the brand he represented could do it better. “We were the 30-minute guys. We were the delivery guys who were going to get a pizza to you that’s going to be OK, but we’re going to get it to you quickly. And that just stopped working at one point,” he said. “We realized there was no conflict between delivering pizza quickly to people and making it great." So the chain dumped its pizza recipe, and started from scratch…literally. It completely re-did the recipe, a strategy that more than paid off. In the four years since, the chain’s stock price has catapulted from $12 per share to more than $75 in recent trade. What’s more, Doyle launched the turnaround at the start of an economic recovery that had consumers pocketing every extra dollar they had, hitting many discretionary spending companies hard. “Some of our problems were probably self-inflicted because the pizza wasn’t as good as it could be,” Doyle said. “But the fact the economy was bad made it easier to go to our franchisees … (to say) look, we have to do something. We have to take a little bit of a risk here, but we need to do this.” Doyle said in that kind of environment, it’s good to be bold and really rework the business model, especially if it’s not performing. Partners for Life Though the turnaround effort he launched is a pride point for his career, Doyle said one of the things he’s most proud of is the 90% of hourly workers who turn their jobs into full-time franchise opportunities. You read it right: 90%. “People come in and the opportunity (for them) is here,” he said. “They get excited about the business. At some point they decide they want to be a manager, they can do that pretty quickly, and if they’re a successful manager, they can always raise their hand and come to us and say, ‘I’d like to be an owner,’ and we’ll find them an opportunity to be an owner and run their own business.” In fact, Tom Peterson, the franchise owner who let FOX Business film in his brand new store in Jersey City, New Jersey, has a success story of his own with Domino’s. And he’s an example Doyle points to when he talks about the franchising opportunities within the company. Peterson has been with the company for nearly 24 years, starting as a delivery driver as he worked his way through community college. “I had never heard of Domino’s,” Peterson said. “I applied for the job and was hired as the store’s first delivery driver. The owner of that store was 21-years old. And once I understood the company, I thought maybe I didn’t need the degree (I was working toward), so I went through the steps to own my own franchise.” Now, he owns two stores, the newly opened Pizza Theater in Jersey City, which is a new open-concept store design from Domino’s. Peterson’s original store in Hoboken allowed him to open his second location after it became a top 30 store out of 5,000 domestic locations last year. It’s an accomplishment Peterson is extremely proud of, and one he’s worked his entire career to achieve. “I wasn’t born with a silver spoon in my mouth,” he said. “But Domino’s was loaning money to potential franchisees so we took the money…I got scared and backed out for a while and went back to working for my franchise in Pennsylvania. But I didn’t want to continue making pizzas for another guy my whole life, so I told myself I have to make this happen. In 1987, I built my first store and have been doing it for 27 years.” It’s stories like Peterson’s that make Doyle proud of the company he’s leading from the top. “Ultimately, it’s what’s allowing people to connect with the brand,” he said. “The approach we take with consumers is who we really are as a brand, and that’s the approach we take with investors: We’re never trying to overstate the case for who we are as a company. And that’s the same approach we take to the relationships with our franchisees.” It’s that philosophy Domino’s is really taking to the bank. One of the final stages of Doyle’s turnaround strategy is to completely open-up the kitchens and let customers see the production process themselves in all locations by 2017. And the proof really is in the pudding, er, pizza. “High-end restaurants have been totally opening up kitchens for a long time now. We finally caught up and realized, wait, there’s a reason they do that…so we’re breaking down the walls, opening up the kitchens and letting people see where their food comes from.” Peterson said his Jersey City store has already seen double the sales his Hoboken location has seen, and he believes it’s all thanks to the new concept. “I’m very proud of my new pizza theater store…People walk in and they’re enamored by the place. The new concept of the store is amazing,” he said. Though Doyle has his hands full with the brand revitalization efforts, he still manages to sit down every once in a while and enjoy a slice or two. And, sorry Chicagoans, in case you were wondering, without hesitation, Doyle said the best way to enjoy a slice of Domino’s pizza starts with an old fashioned New York-style fold. Source : Fox Business