CONSUMER STRATEGIES REPORT April 29 2003

al berrios & co. CONSUMER STRATEGIES REPORT 04.29.03: "Americans don't speak English, they speak American"

This week, we're launching a redesign of our home page at www.alberrios.com. It'll be the same easy to navigate links, but now will also feature special sections like firm updates, and later, reader feedback. So if you've got any, please send it to be featured on the site.

May 18th, I will be participating in the GMHC AIDS WALK. If you or your company don't have any immediate affiliations that you'd be obligated to walk for, you're more than welcome to join me to walk with my firm in the name of AIDS research, prevention, and curing. In all the hullabaloo about SARS, we've forgotten our own very important battles here. I'm not asking for donations, just your presence.

[2] BRANDSTRATEGY
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An Overview of Chrysler and Their Dealerships

You already know that profit recently fell at DaimlerChrysler, but with a management turnaround in full swing, a crippling price war, and Celine Dion on the payroll (at $12 million) to star in their ads, it's a miracle this American legacy is still around. Like all auto manufacturers, Chrysler is in the midst of a cost restructuring, trying to squeeze more costs from their systems, while still providing quality. They've done this by streamlining processes, integrating procurement specialists into their marketing decision-making, minimizing risks all over their operations, but most interesting, working closer with their dealers to consolidate markets from a current 4200 to 4000. Their goal is none other than to bring three of their top brands - Chrysler, Dodge, and Jeep - together under one dealer roof, and hopefully increasing efficiencies and profits by an estimated 25%.

This project, dubbed Project Alpha, is mainly for 1st and 2nd tier markets, (i.e. NYC, Boston), with 3rd and 4th tier being those with significantly lower populations and income. Since many dealers that are relatively close to each other are already selling all three brands, it was just a matter of introducing them to each other and letting them work out their own mergers or acquisitions deals (without financial assistance from Chrysler in financing nor marketing).

Dealers, surprisingly, don't have to be the most educated people. They're fiercely competitive and usually don't implement marketing intelligence in talking to prospects. This leads to generally negative experiences for consumers, with future visits not as highly anticipated as auto manufacturers would like. As consumers, buying a car is a major decision in our lives. Marketers all know this. This is a high-involvement product. Yet 17 million cars are still sold through dealers that aren't trained to handle this decision effectively, relegating consumers to quotas. Why isn't training and event marketing given a larger share of the marketing budget than newspapers or television ads, when it's the experience in the car and with the dealers that convinces 16% of consumers who come to the show floor to buy?

GM says that consumers consult newspapers during the last phase of their decision-making. As a result, newspapers currently get 53.1% of dealer association ad dollars, while radio gets 13.6%, television, 14.5%, direct mail, 6.1% and event marketing, internet, and other, 12.7% according to the National Automobile Dealers Association annual report on the industry.

Looking through dealerships and their executives, you'll quickly notice that almost 85% are owned by the person or families that started them. Auto dealerships are the ultimate in entrepreneurial businesses, and as a result have evolved without the need for degrees or any formal training, just to know what to say to sell. Consequently, only an average of 0.96% of total dealer's sales are dedicated to advertising. This represented $6.6 billion in 2001. Chrysler group spends around $1.7 billion in advertising.

With typical blue-chip arrogance, the auto industry doesn't expect their dealers to master consumer behavior just to talk to consumers, because consumers are expected buy regardless of the customer service, (never mind the fact that there are alternative means of travel that also compete for consumer's money). And since, in the case of Chrysler, dealers are left to their own financial wherewithal, they are not terribly loyal to any particular manufacturer, often having a hodgepodge of manufacturers poorly displayed on their show floors, contributing to the poor experience many consumers have when visiting dealers.

Based on my visit to the NY International Auto Show, it's apparent that events do work in driving traffic to a show floor. Effective local marketing works in getting attention for the show floor. And creative displays, with little interaction from salespeople, moves cars. Yes, Chrysler did present some amazing quality products (that left even someone as objective as me drooling), but these are not the times to be solely dependent on product.

Based on our research of sales-level HR practices, it's also obvious that Chrysler isn't offering their dealers the support they need in training their sales forces. Again, too much is relied on the quality of the product, without any consideration to whether quality or price are the only things consumers value during their shopping experience. Based on an informal al berrios & co. analysis, local dealers could increase their sales by at least 10% per year by spending 0.50% of sales more on training.

[3] CONSUMERFOCUS
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American Marketing Association Author Series: "Buzz: Harness the Power of Influence and Create Demand" Featuring Marian Salzman

I didn't even know that there was a Lincoln Building, so upon glancing at the directions, and arriving at the Lincoln Center on 68th and Broadway, I was thinking the American Marketing Association was a pretty important group to have their HQ here. I had been to AMA meetings (1, 2) before, but they had never been at their corporate HQ, so I didn't think twice about it. And as I'm double-checking the directions for the room number, the address read Lincoln Building on 42nd street. My shock and anger were interrupted by the realization that it was my own fault for not checking the direction sooner, (especially after so many meetings). Anyway, the Lincoln building has a great old fashion lobby. But the AMA meeting room was like a miscellaneous meeting area that can be reserved by anyone and was small and intimate enough for this 8am group of execs, but not indicative of any stature I placed on the AMA earlier that morning. The room was cramped, windowless, and sleep-inducing, but because Marian was so interesting, no one noticed. Ms. Salzman brought out "bigger dawgs", and that made this meeting already better.

Marian Salzman - I've been keeping track of her career since November '01, when I made one of my first sales calls to her. It was crude, unimaginative, and in retrospect, with clear signs of my inexperience in talking to agencies. Marian is the Chief Strategy Officer at Euro RSCG Worldwide, a very large ad agency. She's just completed a book called "Buzz" which combines her deep knowledge of consumers and culture and how marketers can use this knowledge to create the most powerful marketing force known today (buzz, in case you missed it.) Back when I was pitching her, she was just the Global Director of Strategic Planning, and according to her, still a little green behind the ears (in her 30s) when it came to the way the world really is. But thanks to her bosses forcing her to travel and see how things are everywhere else, she's become wiser and appreciative of other cultures. I attended this lecture/book signing to see what Marian was all about. Although most of what Marian had to say wasn't new (except the proprietary research she'd done for clients), her anecdotes kept the discussion lively and interesting. And with permanent smile on face, she convinced the entire audience as though she was having a personal discussion with each of them individually - a great quality.

According to Marian, the ground zero of buzz was the Apple "1984" spot on the Super Bowl which changed the nature of the game to an industry within an industry. The Super Bowl became the place to launch or kill careers based on an advertiser's ability to create buzz. So what is buzz and how does it become buzz? Marian says buzz is the latest thing adopted by a group of active consumers called "prosumers". This group is lead by a smaller anti-social group within it called "Alphas", who's only real skill is experimentation and having info on latest trends first. Since everyone wants to be like them, they don't like sharing info, since that'll decrease their value to society. However, they are the pioneers and with their close network of select friends, are able to spread info through to another set of prosumers, the "Bees".

The Bees love to share the latest info, they're part of their communities, they're the Alpha's translator and make it ok for everyone else to try new things. There are obviously more Bees than Alphas, but if you want to start your own buzz, you're outta luck because in order for it to become buzz, you can't own it. In other words, buzz is owned by the prosumer, not the marketer. So don't try and pay a celebrity to create buzz for you. I asked why not? Particularly after having analyzed celeb endorsements on various occasions. Buzz must come from an objective source of cool and tell others, and you can't pay for it. Marian replied, "Celebrity buzz is suspect" because it's not authentic and the prosumer will know it. And in case you missed our last REPORT, reality shows are so popular because prosumers love to see "one person making a difference". "Credibility for real people is unblemished", says Marian.

As a society, "Americans don't have an identity" according to Donny Deutsch and Marian reinforced this by observing that "Americans vote with their Mastercards". She meant that as a culture, we care less about the world around us than we do about ourselves individually. "Americans don't speak English, they speak American" and if no one else understands our values, then we have a problem with that person (or country). Not only do Americans learn narrowly, they also don't realize that everything they learn is part of a larger puzzle, never connecting the pieces. This tendency also hinders our problem solving abilities since we're trained to start with the conclusion and work our way up, whereas other cultures solves things more linearly, with logic, top-bottom. Our collective ignorance is mind-boggling in spite of living in an ultra-connected world. And that increasingly makes it more difficult for marketers to reach us.

One of the trends Marian expects to become the next huge thing in marketing is wireless texting, a huge phenomenon around the rest of the world, but barely making a dent in the U.S. Based on its success overseas, Marian, along with the rest of the industry, is predicting this to be the next killer app. (No, wireless technology is in fact, not going to be like the internet boom. See PREDICTION.)

By now, you all must be aware of this trend, however, due to the research we've done in education, I was curious to the effects of an entire generation of consumers being raised on texting. Marian believes that illiteracy was going to be the biggest problem in 10-15 years. As most of the world has adopted English, expect the "butchered version of English becoming the global language".

I'll conclude this review with something Marian has observed that shouldn't be new to this REPORT's readers: the advertising industry has suffered a huge brain drain and unless this can be reversed, the industry will become obsolete. Although a lack of good HR at many agencies is to blame, it's also due to many capable MBAs gravitating towards finance or consulting because their ability to innovate with processes has never been appreciated in the industry. Now, advertising creativity has noticeably stopped being valuable to many clients, as procurement specialists have been introduced into the marketing decision making process to minimize the risks of advertising. And unless ad agencies begin to manage their assets (a.k.a. employees) better, the death of the traditional advertising agency as a business model won't be far behind. You think Marian was wrong? Just look at IPGs problems.

[4] MEDIA
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Caution vs. Commerce, How SARS Influence States

By now you've heard that severe acute respiratory syndrome originated in China in November 2002, but wasn't officially admitted until February 2003, which by then had been too late, causing the infection of thousands and the deaths of too many. Most recently, the World Health Organization, the ones who've been spearheading a cure and have stirred up the loudest commotion in medical and consumer circles about this infection, announced to travelers a list of cities they should stay away from. Among the list, Toronto, Canada, prompting anti-WHO reactions from Canadian officials. Here's where things become interesting.

Canada, having experienced the only other major outbreak of this not-too-deadly infection outside of China, feels that it has the epidemic under control, but with this warning to travelers, fears its tourism economy in danger. In the last ten years, Canada has attracted 5 million more tourists, giving it a 16% share in the North American tourism market vs. the U.S.'s 40% share, and giving it an $11 billion dollar boost to their economy (according to the World Tourism Organization [pdf file]). Today, their streets are deserted and few stores open. It's just as bad in Hong Kong and mainland China, who's combined $24 billion in tourism money has virtually halted. Travelers are clearly weighing their risks and have reconsidered in favor of not traveling to these two destinations.

Now, imagine you're in charge of these two countries - how would you feel if some outside group tells your customers not to patronage your business? As public entities in existence for the public good, these governments are stuck between a rock and a hard place: weighing the health risks of their citizens and visitors vs. keeping that income coming in. Obviously, both countries chose keeping their incomes coming in since neither wanted to admit their country's problems completely. And now, Canada has pressured the WHO so much, they're reconsidering Canada's alert warning.

Do consumers care? Clearly, yes. Traveling for leisure is not as important as being infected with an unknown germ that may kill you because everyone knows there isn't a cure. However, statistically, you're more likely to die from a car crash than SARS, so why the big scare?

We live in a society that invents, packages, and sells risk, and consumers always buy. After 100 years of risk reduction in our daily lives, including extending our lives with advanced medicines, unemployment benefits, and weather forecasting, we're unaccustomed to dealing with the life's curve balls. And because media needs to sell, and scientists need fame, the more risks they come up with, the more attention (and money) they can get. And once human nature takes over, irrational perceptions, fed by media bias, dictate over reason and syncing (or mass hysteria) occurs, which subsequently launches governments' and marketers' attempts to control human nature with little to no success.

Hysteria doesn't last long. It's a temporary, yet powerful burst of emotion. For governments and businesses attempting to deal with consequences of irrational public hysteria, whether chemical attacks, diseases, or other human-invented risks, the only strategy is to let things blow over and pick up the pieces afterwards. There's no point in trying to divert attention to other risks or news, since that may increase attention to whatever's harming your business or society. And because we live in an age where information is rapidly exchanged, the only logical solution would be to come clean every time. By being transparent with your problems, solutions are discovered quicker and trust is maintained. (A lesson American corporations learn daily nowadays.)

[5] MANAGEMENT
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NYU STERN Lecture Series: John Steele Gordon on "The Great Game: The Emergence of Wall Street as a World Power" and "The Thread Across the Ocean"

This event was definitely less interesting than the Niall Ferguson lecture. Hosted at a smaller room, with less comfortable seats, at NYU, the lecturer also didn't employ wit as effectively as Niall. The lecture was similar in attendance as Niall's with regards to group demographics, however, this was a smaller, die-hard group of finance geeks. (Yes, I'm a finance geek, too).

The lecturer, John Steele Gordon, gave an exhaustive account of the history of Wall Street and telecommunications, which, due to the way it all happened, was actually funny. However, at the conclusion, although you learned lots of great history, it was slightly more difficult to learn anything new, making the Q&A one of the toughest I'd ever participated in.

My question: "With all of the information and data available at our fingertips, why does perception still play a role in the value of a stock or company?" Mr. Gordon replied, that humans will always be quirky and getting carried away is a quirk. This is great for me since humans will always need to be studied by firms like mine. But he failed to answer my question effectively. I was hoping he would have discovered some sort of pattern during the last two or three hundred years of overvaluation in trading stocks that future investors can use to examine current markets to determine similar events. So, when I approached him after his lecture to continue our discussion, he failed to identify any such patterns. Ultimately, Mr. Gordon's lecture was worth the time, however, not much in the way of insights.

Although I haven't spent the time learning about financial history that Mr. Gordon has, based on what I've read and my own experiences during "the Internet Bubble", signs of an overvalued market are:

Although it sounds cliché, there really aren't any triggers of excess valuation other than technology. And as unfortunate as it sounds, even the internet facilitated processes, (along with almost every other technology revolution) which explains the huge surge in investor interest in things that innovate on processes.

This is why wireless isn't going to be the next "internet" - barriers to entry are pretty high since corporate America saw this coming a mile away, there hasn't been any massive job creation, or increased optimism by non-financial investors, and there isn't a general optimism permeating the markets. But most importantly, wireless technology isn't a new technology that facilitates a process, but rather an existing technology that has been enhanced and made more affordable, that extends the value of other technologies and makes those other technologies more convenient.

Although al berrios & co. has done extensive analysis into human nature, (i.e. how they learn, think, and what they value), I cannot accept that human nature is solely responsible for creating overvalued markets, particularly with so much information at our fingertips. Although it plays a role, there are clearly events such as the ones described here that are signs of an impending overvalued market. But there's an inherent flaw in describing a market unaffected by human nature overvalued, since that would insinuate a lack of proper gauging. But no, it is possible to have a market that's overvalued because there's more demand than supply, which drives up prices, not because there's a perception that a stock or company is just really good.

Just imagine what the next bubble will be like since we do have more information available.

[6] PREDICTION
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The next major bubble could occur in 20 to 25 years and will be in technology that allows regular consumers to be more time-efficient in their lives. This will include tech that allows them to create, organize, search, reference, and make more valuable to them, any information, on any medium. Tech that will allow them to learn, read, and think faster without major surgery to the brain. Tech that will reduce faster time. As information grows exponentially, (demonstrated most recently by the amount of information available during the war in Iraq) it will become increasingly difficult for consumers to keep track of it cost effectively and time efficiently, however, this doesn't mean that they don't want to. Companies like SAP and TiVo that do this already are popular. The next level for QSR chains is speeding up transaction time, because fast food just isn't fast enough. RIM's Blackberry, or Motorola's two-way reduce the amount of time someone had to read and respond to email. All these concepts caught on because they are time-efficient. Think about high-speed traveling. As we've recommended before, that's what the airline industry should be focused on, rather than amenities. These technologies are obviously in different industries and in fact, time-efficiency is a concept, not a tangible thing exclusive to any industry. However, it fits with our analysis of overvalued markets (see MANAGEMENT section), and has the potential to affect everyone, not just consumers with specific needs.

I'm not suggesting time traveling, or high-speed living. I am suggesting personalized, mobile, voice-activated search engines, the size of key chains. I am suggesting a cash-less society. I am suggesting the conquering of gravity and friction by regular consumers. I am suggesting shorter time-frames for infections. Wrapped as time-efficient technologies, new and established companies will burst onto the market to create more time for us to use more of their products. This will cause industries such as marketing, food processing, and even banking to develop new and faster ways for us to do everything else, too. This won't create a society that is not able to "stop and smell the roses". But in fact, may create a society that learns to appreciate living more than being pinpong'd around by marketers.

[7] EVENT REPORT
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NYU's Berkley Center for Entrepreneurial Studies Maximum Exposure Business Plan Competition 2003

Too often we get distracted by big corporate brand names and what they have to offer us, and don't spend enough time supporting the small business owner. In my recruiting experience, unless your name is IBM or some bank, it's hard to get qualified people interested. That's why last week's Business Plan Competition was so interesting. With a cornucopia of amazing ideas, the atmosphere was electric. Although visitors weren't allowed to sit through all 16 entrepreneurs' presentations (one of which I dedicated time to personally mentor), we were allowed to sit in on the presentations of the four finalists. As a graduate level event, the ideas were all well thought out with precise financial projections. The differentiator was, of course, whether or not it was an innovation in process. Although the second prize of $15,000 went to a new retail concept, the grand prize winner of $35,000 went to a pharma consultant startup that planned to function as a contract researcher, significantly reducing the cost of new drug discovery using an outsourcing process they developed. (Pfizer's CFO was a judge.)

The competition was hosted in two of NYU's many rooms within the STERN facilities, which although weren't comfortable, made networking pretty easy. Although I didn't intend to network, it turned out to be an extremely valuable opportunity. I've never really put much stock in alma maters, however, a very wise man that specializes in finding large gifts for the university said to me "never underestimate the power of being an alum network", since that will always open doors for you. Although nepotism reared its ugly head yet again, even I cannot deny that it's the way the world works.

Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

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