Retail Therapy

As I listened to the blog post "Amazon and the future of retail" on Yahoo finance, https://itunes.apple.com/us/podcast/yahoo-finance-presents/id1241417570?mt=2,  I started to think.

Back in 2009 General Growth properties declared bankruptcy. It was all about the debt that financed mall development. Success in retailing comes from marketing but profitability comes from real estate smarts. Now, with Amazon and Ali Baba and Internet retailing for every product that you might want to buy, what is being taken out in the business model is real estate. Of course, Walmart saw this in its own way starting in the 70s. And the retailing innovations went ahead: warehouse club Costco and category killer Best Buy in the 80s.

For marketers the good news about Internet retailing is a greater emphasis on marketing from a business point of view. Know your customer is more relevant than ever. Enter analytics. But there's always a catch. Profitability still requires doing things that others can't. And analytics is probably a leveler. Something you have to do but it may not get you ahead of your competitor. Can there be a winning response to Amazon like Costco to Walmart?

Everyone has heard of Amazon wanting to buy Whole Foods. And everyone that wears glasses knows about Warby Parker. And my daughter likes Opening Ceremony, like so many young people now wanting to live in cities rather than suburbs. And then also our country will have more and more older people. There is a nice Harvard Business School case titled Ito Yokado. Japan from a few decades ago can teach us something about how (not) to make retailing a profitable venture. 

And if you are asking yourself: is there anything left for Amazon to improve on, just wait for a link to my new paper with my student Ye Qiu. Yes, there is retail therapy.

J C Penney Pursues Re-positioning

If you read the news reports or what J C Penney’s new CEO Ron Johnson said at a recent interview and you came away saying to yourself “WOW, the retailer is adopting a whole new pricing strategy, the every day low pricing”, you could not be faulted. But you would have missed the real story. JCP is in trouble because fewer customers are coming to its stores, and when they come their purchases are smaller. That is the story of many retailers during this recession and now slow economic recovery. But JCP has not participated in the recovery as well as some of its competitors. Meaning it isn’t just the poor economy but rather some other things have changed and the retailer needs to adapt.

Retailers must bring people to stores first and then have them buy at the store. Prices are absolutely crucial for the customer to spend her dollars at the store. Too high a price relative to competitors and the customer walks out faster than she came in. And that is why JCP insists that its prices now will be 40% lower than what “regular” prices were in the past. So, the customer will pay close to what they paid in the past when the stores ran sales or promotions. Will it be lower than all competitors? Probably not, but then once you are in the store you might decide not to walk out unless the price was so high that a trip to another store would be worth the trouble. But will the new price be attractive enough to get customers to JCP in the first place?

And here is where Mr. Johnson is hoping to score one by going for “something old, something new, something borrowed…”. He is borrowing from his tenure as Senior VP of Retail Operations at Apple. People are attracted to Apple stores not because of low prices but because of an experience that is unique.* And Mr. Johnson hopes to create a unique experience with his Town Square and specialty shops. This is smart because it gets away from using price as the main tool to drive store traffic. And competitors can’t match quickly or completely. But will customers value this experience? Don’t know. We have to see the concept at work and see the execution. So it remains a challenge for JCP management but one that will pay off big if done right. I say that because not only must customers value the experience but also JCP must create it at a cost that makes it more profitable than periodic sales to attract customers. Yes, it is new to JCP. But as an idea it is old. Professor Lal of Harvard Business School and I made the point back in 1997 that Every Day Low Pricing (EDLP) can be a smart positioning strategy. JCP’s is a positioning strategy because just as customer experience at Apple stores makes them unique and different from competitors the new format of JCP is meant to show it in a different, and more exciting light, than competition. That should drive store traffic. I think Mr. Johnson’s action carries some risk but one that I deem worth taking and whose outcome I will watch with anticipation.

* See my blog on Apple Stores

Will Starbucks be a pub soon?

Here is what I think happened. Starbucks had someone research the eating and drinking habits of its customers. They found that many Starbucks customers also drink wine and a good fraction drinks beer. So why can’t you also sell these drinks to them? Well, it would work if the customers would come back at a different time, on a different occasion that is. May be that will happen. And if it did I would still like to think of the same customer on different occasions as a different customer because the experience that they seek is different. I sort of imagine a cup of coffee at Starbucks, when it is not to go, as being an occasion for a little quiet computing or reading, or an informal business meeting. An occasion with wine brings other things to mind. It is also possible that the new menu brings in customers new to Starbucks. That will require some managing because they may or may not like to drink wine where coffee is the main event, so to speak. And then there are issues of space and whether audible conversations are good or bad. When I was at Starbucks in downtown Sydney what struck me was the two-storey layout that had oodles of space and possibilities for quiet corners. I can see that wine and beer would work well in such places not the least because of the tourist traffic. But for my neighborhood Starbucks in Dallas the bigger worry should be not that there will be no takers for wine or beer but how that will affect the brand meaning for customers: a place to get coffee and a little work done or a place for a drink with buddies. The challenge for Starbucks is no different from what it is for other companies – how to sell more – but in that quest now the casualty might well be what the brand means to its customers.

Apple in Target Stores

Anyone that has been to an Apple store knows exactly what the store ambience is. Lots of people, mostly young, mostly dressed in clothes that anyone over 35 would feel uncomfortable in and mostly people who look like they have known computers and video games all their lives. And yes, they probably have.

There is plenty of help from store employees who resemble the clientele I just described. Some offer advice and others just sell, and they wear T-shirts of different colors. They don’t all look like geeks but in the store it is easy to feel that way. A trip to the store is meant to be an experience not a purchase occasion. You might have gone there half a dozen times or even more but the next time you are in the neighborhood you can’t help but go there to get your fix: of the latest whatever. The motto of the store is “Come to shop. Return to learn.” Well, learn what is the question.

So why have a mini store in Target now as in Best Buy earlier? Surely, with no offense meant to either Best Buy or Target, the experience cannot be why people will go to the mini store. But that is precisely the point. You go to Target to buy diapers for your baby or towels for the home and you are not the type that seeks the experience at the Apple store. But Apple wants you. So they are coming to you via Target. Yes, soon they may even come to a bookstore, if those are around long enough. But Apple has you in its sights. And that is a good thing, I think.

Spence on, what else , jobs

There were the usual questions like "Why do we act as though globalization is inevitable?" and "Do we tell young people that we need engineers rather than psychologists?" from the largely undergraduate student audience at "A Conversation with Nobel Laureate Prof. Michael Spence & The Economist's Matthew Bishop" an event at the Stern School of Business of New York University. And what were the answers from Spence and Bishop? Both agreed that protective tariffs don't help but Spence was the more convincing especially when he pulled out the statistic that cars in Canada used to cost 87% more than international prices under a now abandoned tariff regime. On the need for psychologists Bishop made a huge faux pas suggesting that theater majors were redundant, spoken here at NYU the place to study theater! Spence was diplomatic and thought that the market would sort that out, or at least that seemed to be thrust of what he said.

Spence started off the conversation with the observation that in the US employment growth in the tradeable sector of the economy was almost zero over the last 20 years while there was good growth in the non-tradeable sector and of-course this could not be sustained over the long run. So, the question was how to increase employment opportunities in the tradeable sector. Opening up trade in services, changes in education to develop broad capabilities needed in a rapidly changing technology environment and skill development for those moving out of previously tradeable sectors. Bishop was more general in his observations and out of the blue chose to display the colonial baggage he still carries by saying that India had no world class universities, a non-sequitur if there was one.

There was of-course the urgency to the conversation that comes with the on-going jobless recovery here in the US. One of the issues that came up was potential social consequences of the adjustments in the labor market, particularly the gross inequality in returns to skills in the tradeable sector due to globalization. The skills of an auto worker face continuing downward shift in returns while the skills of a computer programmer may see the opposite. Spence made the point that Germany seems to have avoided the decline of the tradeable sector by paying the price of lower incomes. There was some talk of philanthro-capitalism from Bishop but the most important point that was made related to the American dream. As Spence put it hard work was sufficient guarantee of good returns in a world of unlimited opportunities but in a globalized world opportunity may less universal here in the US. He did not say this but I think it illustrates the point: the best place to be for a top basketball player now is the US but in a globalizing world of sports that may change. The bigger consequence in my mind is the idea of hope. I think that in a poor country like India where most will have an OK life there is still the widely-felt hope that you can accomplish something if you really want to, and that is what keeps the young people going. And there is ample evidence for it in the neighborhood. This is also what the American dream is about, and I think as the recession recedes it will return.

Can't end without a question hinting at politics. "Will low corporate taxes really create jobs?" Both panelists agreed that the corporate tax rate is high in the US but also there are too many loopholes and so on. But they also felt that whether relaxing EPA rules will increase jobs does not find an unequivocal answer. Nice evening, and a lively conversation enjoyed by all who could make it to there.

NETFLIX: dual branding or pricing problem?

Qwikster is for movies on DVD and Netflix is for streaming video content. This is quite different from Toyota and Lexus or Honda and Accura. It is more like Walmart and Sam's warehouse club. When Toyota decided to have the Lexus brand, the customers for each brand were different and the two brands prevented any confusion in the segmented market. Walmart and Sam's often serve the same customer on different occasions or different types of shopping trips. But at the heart to of this segmentation strategy is the fact that on any one occasion the customer visits only one store and so both assortment and pricing can be different at the stores.

Now let us turn to Netflix. The customer orders DVDs and streaming content on the internet and prefers a single website with a single sign in. She may even order both at the same time. The real problem for Netflix has been the flat price strategy. Adding streaming content to DVD's without rethinking pricing has landed the company in trouble. And what is more, it has lost control of its value proposition. Ideally, each time a person goes in for the streaming they should be charged a variable price. Or like the cell phone companies there could be tiered pricing with various options. There really does not seem to be any need for two brands. Netflix should learn from i-tunes which used to have a 99 cent a song pricing strategy and then changed it, for good and for better. A couple of years ago I discussed a paper at the QME conference and the question of uniform price for all songs was the topic. Of-course such a strategy is not a good one.

Why grocery stores worldwide are dropping double coupons

Tesco in the United Kingdom joins by discontinuing double points on their Club Card. Back in April Kroger stopped doubling and tripling manufacturer coupons at its Houston area stores. What is going on? One reason manufacturers drop copons is so they can charge lower price to price sensitive customers. Retailers have been piggybacking on this instead of incurring the cost of dropping their own store coupons. They identify price sensitive customers and attract them to their stores by doubling and tripling coupons.

But now they seem to be having second thoughts. Why? It is because of the recession. During a recession, especially one as long and severe as the current one, there are too many price sensitive customers. A better strategy is to lower price to ALL customers then. That is what is going on now. And it has the advantage of not yielding control over pricing to manufacturers. This is a problem that is well known as my research with Krishnan demonstrated in the nineties.

Why Red or Blue might matter to marketing researchers

Now there is a research finding reported today on NPR, soon to appear in Nature, which says that it matters whether the color is red or blue when you are working, or for that matter watching an ad or shopping. Apparently, quantitative marketing researchers, who presumably are engaged in logic and other mind bending details, should work with computer screens that are red. I know most of my colleagues will see red just at this thought. At the other end, the color blue is associated with improvement in tasks that can only be termed creative. All this begs the question why IBM has for so long been Big Blue and Coke, you know, Coke Red. I recall reading back in July that Coke went about decking Beijing in red just before the Olympics. Like the Chinese really appreciate the Red times.

Anyway, it occurs to me that these new findings, if they are really new, might open up lots of opportunities for research in marketing. I imagine there'll be several experiments although it would be important to screen the undergraduates for color blindness. In the meantime, you might want to look at some of the nay saying comments that are already streaming in based on the news report. Good luck with finding out whether the next new product should be packaged in red or blue or possibly red, blue and white!

Twenty-five Years and going

A distinguished colleague at UTD once said that research is fascinating because you never know where it will take you. I can say the same about my years at UTD. When I first came here I could hardly have imagined the ways in which UTD has grown, changed and become an even more exciting place. The annual service awards function this year was preceded by a lunch for me and several of my colleagues who have been here for 25 years or longer. A couple of them have been here longer than even the university has been, because they started at the predecessor institution, the Institute for Advanced Research. One of these is the renowned mathematician and relativist Professor Istvan Ozsvath, seen in the picture with his wife Zsuzsanna, known to all as Zsuzsi who is also a distinguished professor at UTD though she joined the university later. At twenty-five years, I am the new kid on the block.

After lunch there was the award ceremony. The master of ceremonies read out what each of the twenty-five year veterans had specially written for the occasion. Each one had penned something unique and heart warming, and even funny at times. I particularly liked Judi Hensley's account of the recruiting efforts for the first freshman class and Abby Kratz's exciting but futile venture on icy Dallas roads undertaken just so she could be with Polykarp Kusch for dinner. We did receive our awards, mine is a watch that I chose at my children's suggestion. It will come later. In the meantime I left thinking that may be like Istvan I too should stay on for that thirty-five year award, a flat screen TV for now but who can imagine what it will be in ten years' time. And oh, here is what I wrote about my UTD memories.

I recall, as if I heard it only yesterday, what Uri Dothan told me after we had lunch at the Kebab N Kurry restaurant in my first month in Dallas. We had just pulled out of the Classic BMW dealership and Uri Dothan turned to me and said “You see the blue sky here, you won’t see that anywhere else in America, certainly not in Chicago.” I had just moved from Chicago. Uri was headed to Minnesota in a couple of months, and he really was not so positive about UTD, but still he wanted me to know I had not chosen badly by moving to Dallas. Out of the window of my first office in Johnsson I got a clear view of downtown Dallas most days, and when Frank Bass and I took our walks after lunch at Founders north, I always marveled at the expansive skies. It often occurred to me that UTD was set in an open space not just physically but in the way things happened. A less kind way of saying that would be that not much happened; you could go for days not coming across any students! All that has changed now, but for me it changed when Frank and I put out our first, and UTD’s first marketing, doctoral student, who went to Auburn. This fall he accepted a full professor position at Northwestern University. I got busy and had Frank collaborating with me even as he cheered me on. That too has changed, he left us two years ago. Now when I take a walk after lunch it is so nice to see all these bright undergraduate students stepping in and out of our new management and engineering buildings, and the activity center. Still, what I miss is the even larger open spaces we had and especially the fireworks on July 4th just south of where the conference center is. My wife, Kalpana, and I would bring along our children for a delightful evening and a minor picnic she carefully assembled to go with the fireworks.

The paper that caught my attention at QME Conference in New York

The annual QME conference is getting more popular. They even closed the registration this year. Despite the undercurrent of gloom in New York that everyone talked about at least briefly, the sessions were full of the curiosity and open debate that has come to mark this conference. The hosts, New York University Stern School of Business made it all go smooth under the leadership of Tulin Erdem and Russ Winer. I found all the sessions interesting but was struck most by one. This was on Saturday just before lunch: 11:30 - 12:30 pm Session 3 
A Simple Nonparametric Estimator for the Distribution of Random Coefficients in Discrete Choice Models 
Patrick Bajari (Minnesota), Jeremy T. Fox (Chicago), Kyoo il Kim (Minnesota), and Stephen Ryan (MIT) discussant: Andres Musalem (Duke).


This paper is all about empirical methodology, and in my research I don’t normally spend a lot of time on that kind of thing. But then, once in a way comes along an idea that makes us all sit up because it is so clever, and so obvious in hindsight, and in a word so beautiful. This paper has such an idea. I will let you find out for yourself what it is. I had perused the paper before I got to New York, and was curious to find out if my initial reaction to the paper was justified. The speaker, Jeremy Fox, soon confirmed my assessment with a presentation that was as informative and disarming as it was definitive. The participants’ comments, especially on the validity of the idea’s simplicity claim were it to be compared to Bayesian methods, and of the exact applications where its full force would be present were just as interesting. It occurs to me that this idea will soon find a place in the estimation toolbox of most marketing scholars. What may need to be sorted out is for which models it would be most beneficial to exploit the idea. I am not an expert in this area, but I will watch this with interest.

Every year I look forward to the SICS conference in Berkeley in the summer, and now after attending the last two years, I will add QME to my calendar. SICS with its emphasis on analytical modeling happens to be more central to my research but QME is also a well organized and stimulating conference and there is much to gain from its emphasis on empirical methodologies and to a lesser extent on substantive findings. Perhaps QME will return to the more freewheeling discussion of past meetings that is also an essential feature of SICS. And finally, I should put in a word for UTD-FORMS conference which will take place in February 2009, and that will be the third year in a row. With its format similar to SICS and QME, and emphasis on substantive issues in marketing this conference could well be seen as the third leg of a tripod bringing current research in marketing to everyone. Not coincidentally, I was a discussant in all three conferences in 2008. And I really enjoyed them all.