CONSUMER STRATEGIES REPORT May 20 2003

al berrios & co. CONSUMER STRATEGIES REPORT 05.20.03: Proposal on Determining Consumer Reaction to Your Marketing

THIS WEEK'S CONTENTS ARE:
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[1] UPDATES: New Sections
[2] MARKETING: Proposal on Determining Consumer Reaction to Your Marketing
[3] OPINION: Experience is Wasted on the Old
[4] TRADE EVENT: BS Global Transport, Logistics and Airlines Conference 2003
[5] PREDICTION: "The Matrix: Reloaded" - Another Cultural Shift

QUOTATION OF THE WEEK
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"You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want it to be something people are willing to hold." - Treasury Secretary John Snow redefining U.S. policy on how the value of dollar will be gauged in the Bush administration.

[1] UPDATES
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Good morning execs,

With regards to the changes in this REPORT, here's how it's going to work: I write about too many different topics without helping you understand why. I've covered planes, trains, and automobiles because I find them interesting, yes, but also because if you maintain yourself exposed to the same ideas all the time, how do you ever expect to grow?

Nothing is irrelevant. Everything is related. Last week, I discussed game theory with a risk analyst from Merrill Lynch and I attended a wonderful logistics conference at Bear Stearns where I had a lengthy discussion with the Intel's Transportation Manager. Fun, right? Surely, what relevance do either of these areas have to my business, developing strategy for consumer businesses? I was able to extract something incredibly valuable - fresh ideas that can be used to understand the consumer. Today's report reviews my thoughts.

In addition, I will be sending just one section via email, hopefully permitting you more time to read it and make it more valuable to your business. Additional sections, including Opinions, Predictions, and Trade Events will continue to be published online at www.alberrios.com.

Enjoy your report!

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[2] MARKETING
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Predicting the Unpredictable: Proposal on Determining Consumer Reaction to Your Marketing

The quote above about U.S. dollar policy is fascinating. Imagine, what you think about the economy is the basis for determining the value of the buck. And yet, our sentiments change so fast, while it's considered almost impossible to measure what we think until we make some sort of transaction.

Have you ever heard of game theory? It attempts to predict the decision you'd make as part of a group when competing directly with another person or group. Assuming you'd only make the most rational decision to maximize your reward, including reallocating your resources, there's actually a way to determine what you'd do. This concept is used today to determine political, economic, and even terrorist strategy. The movie "A Beautiful Mind" about the life of John Forbes Nash Jr. introduced it to the masses. And more recently, "Matrix: Reloaded" explores human irrationality.

In a quest to predict consumer reaction, I've been evaluating applying game theory. However, 1) as companies trying to sell consumers stuff, we are not competing with them, only other companies, 2) companies evaluate their decisions rationally with the goal of maximizing profits as a group, whereas consumers evaluate their decisions as individuals with the goal of maximizing their personal satisfaction, 3) game theory assumes consumers would make rational decisions, but as we all know, feelings often disrupt our rational decision-making processes, often resulting in irrational choices that we perceive as satisfying.

So how can we predict consumer reaction to something like our marketing efforts, when consumer decisions are not absolutely based on logic? As it is, we need to identify some sort of constant on which we can base our predictions, given a set of pre-determined reactions.

Since creativity isn't a constant from which an outcome can easily be predicted using historical examples, let us use share of mind as our primary constant. (Share of mind is the total number of people in a fixed population that are aware of our marketing message.)

Share of mind is achievable through an appropriate media mix. Since media reaches a fixed number of consumers, it then becomes a matter of what reaction they will have once they are aware.

Therefore, in order to predict how consumers will react to a message, we must correlate behavior with share of mind.

To clarify, sales are not a good indicator of consumer reaction, because we're interested in predicting the level of sales resulting from marketing. Also, based on strong sales, most media mixes attempt to replicate prior results, but as we all know, similar media mixes for similar products do not yield similar results.

There are two constants: the message (which is describing a product/service attribute. Since the product doesn't change, the message remains constant) and share of mind.

There is only one variable: consumer reaction. In order to simplify consumer reaction, let us define our pre-determined reactions as either favorably or unfavorably. If favorable, this leads to an increase in share of mind, share of mind remains constant, or share of mind decreases. If unfavorable, share of mind increases, share of mind remains constant, or share of mind decreases.

A favorable increase in share of mind leads to such a positive shift in the way your brand is perceived by consumers, that your brand stands to become a cultural phenomenon. A favorable constant share leads to a reinforcement of your brand's identify with consumers, a reminder to buy you whenever they get a chance. A favorable decrease in share leads to your brand becoming a cult brand.

An unfavorable increase in share of mind leads to boycotting of your brand by core consumers. An unfavorable constant in share leads to a disquiet among all consumers, where you may be asked to change something. An unfavorable decrease in share leads to your brand being relegated to unmemorable status, where it is near irrelevancy to consumers.

Weighting to determine most likely outcome of either a favorable or unfavorable reaction would come from abstract market data such as societal trends, economic trends, political trends, and technological trends. Placing these outcomes as numbers on a scale or index would facilitate grading any number of likely variants. You'd be able to plan strategy based on your own consumer risk tolerance, since each outcome yields a likely sales figure.

So how does this gibber gab translate into the real world: In a recent d!ck-swinging contest, Foot Locker decided to cut their Nike orders to extract greater fee flexibility from Nike. But rather than cave in, Nike decided to cut a greater percentage of their products to Foot Locker than Foot Locker originally threatened to cut. Prior to making its decision, Foot Locker, as the distributor or the media through which share of mind is achieved in this case, was focused on a mass-market strategy based on massive discounting and volume sales. This strategy threatened to detrimentally affect consumer reaction to Nike's pricing strategy and products.

Nike understood that as the part of a larger media mix, Foot Locker was replaceable and Nike, as the content that consumers demanded, was able to accurately predict that consumer reaction would remain favorable as long as the share of mind was altered. In addition to altering their mix (they got new retailers), they prudently followed societal trends to favorably decrease share of mind and increase the likelihood of favorable consumer reaction, resulting in a refined and more profitable consumer base. Ultimately, Foot Locker sales have decreased substantially since this incident, while Nike has returned to growth mode.

In other words, Nike determined that their consumer risk in this scenario was less than that of Foot Locker's. Foot Locker failed to understand their role as a distribution vehicle (or their function as Nike's non-media based asset), as well as the true nature of their relationship with shoppers (which cannot be considered Foot Locker consumers, but Nike consumers). Market clout is clearly irrelevant as both are leaders in their categories, and consumers have the power to seek out their favorite products on their terms in this excess-supply economy.

This also brings up a fascinating aspect of branding: the effects of bad publicity. Remember, Nike has been continuously hounded by activists for its use of cheap labor overseas, however, based on their sales, this hasn't appeared to detrimentally impact its brand with consumers. Why?

Share of mind isn't simply for brands, but for corporations, institutions, etc. Although consumers are aware of Nike's corporate practices, Nike corporate has been relegated to an unfavorable decrease in share of mind, and thus, an unmemorable speck in the whole of the company.

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[3] OPINION
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Experience is Wasted on the Old

The recent ails of the New York Times and their former national reporter Jayson Blair once again raises the problem that the old think is inherent in their younger counterparts - that their inexperience will always prevent them from being as good or qualified as them. If you don't already know, Jayson was a 27-year old rising star at the Times, who was recently dismissed for fabricating the details of many important national stories throughout his 8-year career as a reporter. Although many claim that the Times protected Jayson because he was black, others believe that he hadn't been given enough time to learn journalistic ethics prior to his ascension to a staff reporter of the Times. To the former, one question: Do you honestly believe that hiring, promoting, and coddling a black person is going to make you appear to care for diversity in journalism? (Editorial: This is the same problem that the Television Advertising Bureau has when it comes to dealing with minorities who are interested in pursuing careers in broadcast.)

It's the latter I have the most problem with. If learning how to be ethical were a matter of experience (and supposedly age), then how do you explain Enron (that Ken Lay used to rob 4000 employees of all their money), Tyco (that Kozlowski used to evade taxes on art), Smith Barney (that Grubman used as a front to sell crappy stock to trusting investors), Healthsouth (that Richard Scrushy used to enrich himself and his friends while robbing the government and patients of hundreds of millions) American Airlines (that Donald Carty had fire lots of employees and got the rest to reduce their own wages while his and his execs' salaries remained safe and sound), and most notably, Andersen (who forever shook the faith investors placed on corporate accountants)?

Larry Johnston, the CEO of Albertons supermarkets was a star executive at GE, a conglomerate that could do no wrong. Since his arrival at Albertons, the company hasn't performed as anticipated and its stock has suffered. What's Larry's excuse? Stupid underlings and a lazy culture. The reality, the man had no retail experience and didn't understand consumers, since he worked selling medical systems to hospitals at GE, so he's had to learn the whole game from scratch.

The fact of the matter is that experience isn't necessary. With the wealth of information available today, anyone that is able to think and formulate an opinion, can become an expert. Case in point: historians. These guys spend their careers investigating what happened way before they were even born. Since they didn't live during the periods they studied, does that mean they're not authorities of that period? Well, what's the difference between an historian and a young professional that investigates the mistakes of his elders so he won't repeat them? Aren't we living in an age where young people simply know more than older people did at their age?

Yes, I'm familiar with the concept of paying dues and seniority. But if you really had the best interest of your companies in mind (and yourself for that matter), you'd encourage collaboration between generations and appreciation for all perspectives, not perpetuate a sentiment that'll create obstacles for future generations. "So one concludes that good counsel, from wherever it comes, must arise from the prudence of the prince, and not the prudence of the prince from good counsel," says Niccolo Machiavelli.

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[4] TRADE EVENT
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Bear Stearns Global Transport, Logistics and Airlines Conference 2003

Global Transport, Logistics and Airlines? Who the heck would want to attend anything as dry & boring as that? As firm representative at this event, (held at Bear Stearns great facilities at 383 Madison Avenue in NYC) I felt unusually happy to be amongst what were essentially guys who get excited at penny decreases in costs, seconds shaved from trips, and ounces added to weight. But logistics is interesting because according to Intel's Transportation Director, Reed Carr, "logistics is a service". It's the service of hauling cargo, passengers, and information from those who supply it to those who demand it. And in this day and age, information is actually equally (if not more) valuable than the actual cargo.

If you remember, this REPORT has covered the subject of public mass transit ("Analysis of Public Mass Transit in Urban Areas"), and in trying to develop strategy for this service, we arrived at the conclusion that consumers aren't necessarily interested in traveling, but rather their destination. Public transit merely provides the service of getting us to our destinations, and as long as that service is cheap and works via any mode, the only factor left to address is the quality of the service.

As hauling becomes a commodity, which can pretty much be calculated to decimal points, a major differentiator is service. This differentiator is no longer the added value, but often of crucial value to clients. And as I'm learning the challenges and issues of the logistics industry, I see how I can import ideas for my clients, because, ultimately, all industries are interdependent on each other. Frankly, I don't see how not learning about non-consumer industries isn't relevant to us delivering value to the end-user, the consumer.

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[5] PREDICTION
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"The Matrix: Reloaded" - Another Cultural Shift

So, how does an "R" rated movie, "The Matrix: Reloaded", make $135 million in one weekend? Wide availability or parents just not caring that their kids see nudity, sex, extreme violence, and church-defying philosophy anymore? "50% of the audience that went to 'Reloaded' was under 25 years old," said Dan Fellman, president of domestic theatrical distribution for Warner Brothers. Many mark "Gone With The Wind" when Clark Gable proclaimed, "Frankly my dear, I don't give a damn", as a major cultural shift with the content consumers were willing to accept. Matrix is another: "For an R-rated film, this is mainstream," says Paul Degarabedian, president of box-office tracking firm Exhibitor Relations, Co. What does this mean? Expect television programming to finally cross the line they've always hesitated to cross as Americans learn to accept sexuality and religion as personal lifestyles, not blunt instruments they can use to pound their views into everyone else's skulls.

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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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