CONSUMER STRATEGIES REPORT June 3 2003

al berrios & co. CONSUMER STRATEGIES REPORT 06.03.03: The Optimal Structure for Corporate Marketing Departments

THIS WEEK'S CONTENTS ARE:
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[1] UPDATES: Redesign, summary, and the FCC
[2] MANAGEMENT: The Optimal Structure for Corporate Marketing Departments
[3] INDUSTRY: Is Kmart for Sale?

QUOTATION OF THE WEEK
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"The FCC has been flooded with nearly 500,000 cards and letters opposing deregulation, but the nation's broadcasters have been able to press their views personally in over 70 face-to-face meetings with FCC officials since September, according to a new study by the Center for Public Integrity; officials saw public-interest groups five times in same period." - Mark Wigfield for Dow Jones Newswires in "Bear Stearns Analyst Helps FCC Reshape Ownership Rules" published June 2, 2003

[1] UPDATES
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Good morning execs,

This week, the homepage has been slightly redesigned for an easier read, and our CONSUMER STRATEGIES PORTAL has been cleaned up and re-organized to help you find the information you need immediately.

This week, I review for you over 4000 e-newsletters to deliver to you the most critical issues facing consumer businesses today, the optimal structure of your marketing department, how to use media, and what the future of Kmart holds.

The FCC has relaxed rules! Deal flurry? Yes, regardless of the financial state of media companies. No one is going to let an opportunity like this sit around for a competitor to take advantage of. Read last week's review of the FCC here.

Enjoy your report!

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[2] MANAGEMENT
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The Optimal Structure for Corporate Marketing Departments

> What Is Marketing?
> Retail As Media
> Prediction on the Future of Retailing
> Media as Retailing
> How To Use Your Marketing Department

Face the truth, chief executives will never regard their marketing staff as highly as their sales staff until drastic changes are made to the function of the marketing department. Sure, sophisticated executives consider both roles one and the same, but we already know that chief executives still believe their marketers don't have a clue how to contribute to their bottom line. We see evidence of this as purchasing managers enter the negotiations with marketing services vendors, as marketing services vendor struggle to find metrics on which to be held more accountable for their work, and as the cost of using tried and true media (television) has shot up this year.

What Is Marketing?

Marketing is the function of delivering a message to a consumer, customer, client, investor, employee enough times via a mix of media. This reach and frequency creates awareness necessary to make it easier for a sales team to sell. As a result, marketing's metric shouldn't be sales, but the nature of the relationship established with the recipient of the message, and with how many individuals does that relationship exist with. Yes, this is a difficult thing to gauge, but as you know by now, necessary to do.

The only way to tie a marketing function with the revenue generated by the recipient of the message is to gauge the relationship the recipient has with the brand or company. Whether in degrees or levels, this relationship is directly related to the amount of money that recipient will spend with your brand or company. As a result, marketing's function is not just delivering the message, to generate awareness, and initiate a relationship, but it's also to manage a relationship post-transaction, so that the recipient increasingly spends more on the company or brand.

I recently walked through the incontinence aisle of regional pharmacy chain, Duane Reade, where I noticed every major facial care brand selling the same facial cloth product for everyday cleansing. I had noticed one or two before, but recently, there are so many. Even Duane Reade had their in-house version. The challenge in marketing is that consumers don't live in a vacuum, and are exposed to marketing efforts of all sorts from all brands. So the main responsibility of the marketer becomes diluted and a matter of regurgitating any idea that worked a first time. Too many billions are spent on trying to identify logical behavior in consumers, and yet because consumers are a perpetually changing variable that operate irrationally, few marketers get it right, while the rest spend their time case studying, then copying anything that worked before.

The marketer shouldn't be left with the duty of being creative. What I am proposing is a return to the marketer's primary function of managing a relationship. No, not customer relationship management (CRM), since that connotates an increased dependence on technology to justify actions, but rather a role more suited to being a consumer's proponent within the company, rather than the company's proponent to the consumer. As a marketing professional, your primarily responsibility should be in understanding why consumers don't do what they're supposed to do. Why you can't predict results when you repeat something exactly like you did it before. When your sole responsibility is being the consumer's director at the board of directors, then yours ceases to be the first budget cut during a downturn.

The billions you spend on understanding consumers is wasted on observational, post-transaction garbage, based on economic, choiceless models. Not only do consumers have media choices that are objective from what you can afford or prefer, but today, they seldom repeat those choices as consistently as you'd expect. Why?

Retail As Media

Let's look at retailing as if it were media. Can retailers develop relationships with consumers, when it's the brands (content) they carry that drives the traffic? Two weeks ago, we profiled the case of Nike vs. Foot Locker, where Foot Locker lost. More recently, we read about retailers like Wal-Mart that spend very little on brand marketing, because they have an industry reach equivalent to a broadcast network. As a result, a marketer's role includes using non-traditional media, such as retail partners, to reach consumers. Yes, I am referring to in-store POPs, circulars, coupons, product sampling, store-owned television networks, and even those infamous slotting fees paid for eye-level shelf-space exposure. However, as a marketer your objective isn't to drive consumers into the store and sell at them every time they turn their heads. Your objective is to understand why American shopping patterns differ from Japanese, and see if there's anything you can do change their behavior. If you can't change their behavior, why not? If you can, how? Perhaps the consumer that will generate the most profit for the company is one that seeks no coupons, doesn't own a car, and doesn't use the media you advertise on the most, so how do you develop a relationship with that consumer.

A marketer should be the person at the organization that identifies patterns in irrational behavior amongst a group of consumers, so that they are able to predict responses or keep customers happy, rather than react to whatever consumers do. Obviously, there's inherent consumer risk in this approach, however, that's the point of understanding consumers and managing a relationship with them, as opposed to assuming an increase in sales or ratings means something positive, so you'd yell at them to keep doing it.

To answer the question above, retailers can have a relationship with consumers because they provide the environment in which consumers want to shop in. They provide a sense of exclusivity with their circulars and discount programs. However, that relationship should not be considered more than it is - a display place for content. Just like media, many consumers don't have a choice but to go to the largest retailer (whether grocer, department store, or even mall) if they'd like selection. But ultimately, it's about the content, because without offering consumers a choice, they would not spend as much. It's the major reason more than one major retailer doesn't really exist in too many markets. As long as the retailer offers selection and the service of price checks and courtesy, competition wouldn't make strategic sense. Or does it?

Many companies claim their strategic decisions on delivering to their consumers are independent of the competition's, meaning, a Shoprite and PathMark can exist in the same market, because, just like media, there are consumers for two of the same because they appreciate choice. As Wal-Mart-ization reaches saturation levels, and the only way many retailers can survive is through niche differentiation, consumers are trending away from the one-stop-big-box-shopping model. Some are so big, it takes too long to navigate. And in the hunt for (price, style, etc.) differentiation, choice also suffers. Legislation has even started in Contra Costa County, California to prevent Wal-Mart-style retailing in their market.

Prediction On The Future of Retailing

With 5 to 10 years, we will see up to three of the same retailers in the same market, leading all large and mid-sized retailers retailers/grocers/c-stores to increase their product mix with their own in-house brands to compete with other retailers.

This would then lead to branded products funding their own retail partners, including online, and ultimately increasing their marketing efforts to finally attempt to alter shopping habits to convince consumers to demand their products over in-house brands. Aside from innovating at comparatively similarly lower prices, what else could a marketer do at this point?

Media As Retailing

Five years ago, would you have ever imagined using an internet website, Ebay, to reach 62 million consumers? In an ironic twist of fate, Ebay's audience is so large, that marketers often seek to develop a relationship with them via auction promotions. How about a fortune cookie network that reaches 38 million diners in over 5 major metropolitan markets? In light of the wide array of ways to reach consumers today, how can media companies continue to attract consumers for marketers? As we learned from our al berrios & co. Executive Media Marketing Panel, the key will always be quality content. The more niche, varied, educational, entertaining, the greater your chances of keeping consumers happy. And in much the same way retailers like Aeropostale, Abercrombie, and Tommy Hilfiger can all exist in the same mall, so too can Lifetime, WE: Women's Entertainment, and Oxygen also exist.

Because marketers' roles have been diluted, and they are increasingly more accountable for how they spend their budgets, they have made buying media the major focus of their accountability, since hits can be guaranteed as a metric of value. As a result, an unfortunate trend has been to suddenly change marketing and media strategy in response to some suddenly identified consumer response. Advertising Age magazine Editor Scott Donaton calls it "just-in-time" media buying (releasing plans and budgets at the last minute) and doesn't like it either because it makes it difficult for media companies to forecast financial performance. However, this is the sort of reactionary tendency that has deteriorated the value of marketing to the company - by not allowing an investment in media to follow through, not only does marketing fail to develop profitable relationships with consumers, since media is a critical component of that relationship, you also increase your own consumer risk, by either not effectively addressing that consumer response or changing the subject, which in any conversation is suspicious.

According to Monday's (June 2, 2003) Jack Myers Report, GM, the worlds largest media spender, decided to not participate as strongly in this years wildly successful upfront market, where marketers negotiate with television media sellers as far out as the following year for ad time. Do they know something others don't? Yes. Aside from the absurd increases in CPM rates which GM wasn't willing to pay for, GM understands that being locked into media an entire year ahead of time without being able to predict consumer response no longer makes sense in this media environment.

How To Use Your Marketing Department

Marketing is a function that you can attach a monetary value to, it's just a matter of adjusting the thing that has the value - not the CPM, but the relationship level.

Marketing isn't simply an effort to deliver a sales pitch. It is the effort of managing a relationship with a consumer so that relationship becomes profitable. It is not profitably managing a relationship. This relationship is managed primarily by understanding why the consumer wants something, not just what they want. By understanding why, we can ultimately predict the often-irrational decisions they make.

Marketing is more important to your organization than finance and operations, because as the function responsible for being the consumer's director, they must have a strong role in business management decisions. This includes everything from new retail or media concept development to products or content being sold. To clarify, marketing executives shouldn't have any direct responsibility for new product development, just in delivering the feedback to help develop and improve it.

For all those who believe that consumers don't know what they want, I say you're wrong. Consumers all know what they want - it's just the questions we ask to make a determination or the way in which we sell it that yields such inaccurate perceptions of consumers. We often sell dramas as comedies or cell phones as cameras, without realizing that perhaps by selling dramas as dramas, we'd have more success at selling. Further, the goal of marketers isn't to gauge post-transaction results to answer the "how", it's to maintain a constant conversation to know "why" and make increasingly accurate predictions as you understand your audience better.

Because marketing is all these things, your department would be optimally divided primarily along consumer segments (i.e. tastes, gender, age, lifestyle) and secondarily by marketing function (i.e. advertising, public relations, event marketing). This strategy will facilitate the dialogue necessary to initiate and manage a relationship so that marketing will play a complimentary role to your sales efforts, which should be divided by brand, by dept., by division, or by geographic region. Brand management as a discipline of marketing is dead, as evident by the ongoing marketing department restructuring by Chrysler and more recently, Procter & Gamble's. Although P&G's goal was to retain seasoned executives longer, the change, as P&G's overall strategy, is to understand why consumers do things, not just market brands in hopes of consumer acceptance.

READ MORE:
> My Big Fat Big-Box Store, If the Aisles Grow Much Larger, Shoppers May Reach Their Limit
> Sears Launches In-Store HDTV Broadcast Platform
> Reaching America Through EBay
> RISE OF A FORTUNE COOKIE ADVERTISING MOGUL
> Donaton, Scott, "'Just-in-time' media buying a headache that's here to stay", Advertising Age, March 24, 2003, p. 28
> P&G makes career-path adjustments, Up-or-out not only choice

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[3] INDUSTRY
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Is Kmart for Sale? Hedging Strategies All Over The Place

This is quite an amazing story - during its decline, Ed Lampert bought Kmart debt on the open market. He followed it right into bankruptcy, buying out other debt-holders. He promised to bail it out with another investor, but got kidnapped and escaped 30 hours later, during the whole negotiation process. In the meantime, one of his investors made a move, he resumed negotiations like nothing happened, played a decisive role that closed hundreds of stores, got rid of all remnants of previous management, also suing them for compensation Kmart paid them he felt they didn't deserve, and ultimately in helping the mass retailer set a strategy to help them get out of bankruptcy.

Ed Lampert is a hedge fund manager with $5 billion under management. He owns his company, ESL Investments, and is already known for turning dying companies around. He's a pretty young guy who's accustomed to taking huge risks and is clearly an excellent manager to have moved this massive company along as he has. In order to make sure he doesn't lose the 50% stake he bought on the cheap for Kmart, he had himself installed as Chairman recently. And as he's engaged in the Kmart situation, few noticed he also purchased a massive 9% of Sears stock, to the point he became its second largest shareholder.

It's no secret that Sears and Kmart once spoke about getting together. However, is Kmart for sale and is Sears the buyer? Well, Sears is clearly in an acquisition mode after last year's Land's End purchase. They're also bulking up on appliances as Lowe's and Home Depot are eroding their leading market share. And although their credit card operations haven't been stellar, they're making efforts to seek a point of differentiation with their customers. Kmart, without a niche, is doing the same. But their larger formats, valuable leases, and dependence on exclusive, branded products are juicy morsels for Sears, who's Craftman and Kenmore lines are excellent Sears businesses.

If you're Ed Lampert, a career investor, who's just fought tooth and nail to invest almost $500 million into a company, wouldn't your first move be to fix it up for a sale, so you can make your money back? And having a relationship with another major retailer, who you've just happened to become the second largest shareholder of, so if they don't end up making you an offer, you can either become active in changing management until you get what you want, wouldn't they make the logical choice to buy you out?

Naturally, it's never that easy. Ed may not be interested in selling out just yet (never mind the fact that he can actually make a ridiculous return right away without too much fixing up if he did), since just a rumor of a takeover can drive the price of the takeover target's stock higher, giving Ed the necessary lift he needs in Kmart stock to help him finance some more moves. Particularly, his interest in Sears, and vice versa, simply strengthens the position I took last month, where I suggested that a radical solution for Kmart would be competing within the specialty home retail market instead of mass retailing targeting minorities with the same type of offerings as Wal-Mart. Ed, if you're reading this, remember the consumer. Everyone is offering them the same things and one-stop-shopping isn't what it used to be. Leverage what you and Sears have, a significant presence in urban markets, and established "for-the-home" businesses that urbanites sorely need. You don't need to have IKEA-sized show rooms to be an effective competitor.

In addition, I also believe there are substantial opportunities for a multi-pronged strategy for Kmart. For example, department stores, including Wal-Mart, offer consumers alternatives in the retail environments they visit, such as higher priced, mid-priced, and lower priced (i.e. Wal-Mart, Sam's Club, Banana Republic, Gap, Old Navy). In the case of Abercrombie + Fitch, they divide their retail environments by lifestyle and gender. A quick analysis of mass retailers reveals a major reason why Kmart hasn't been able to beat Wal-Mart or Target - they offer alternative retail shopping experiences for their consumers, while Kmart doesn't. If Kmart introduced another concept to their current format, they would improve sales. Why let customers go elsewhere? Just like audience members, shoppers need choice. And choice is most obvious when it takes you to another store, not keeps you in the same place, wasting your time unable to navigate for the products you want because employees aren't helpful and maps aren't clearly available.

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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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