Retail innovation

The last “big thing” is retailing was the big box shop – taken to its logical point by Wal-Mart. But economies of scale were not their only competitive edge. Wal-Mart’s logistical system (supply chain management) was what made it all possible. One of the other rules of thumb in retailing has been differentiation: either you go cheap (Wal-Mart) or upscale (Whole Foods). Supermarkets caught in the middle run the risk of being roadkill.
Now, according to a report in the latest Economist (Fresh, but far from easy), America should be prepared for a new British invasion that will change that American icon, the supermarket. The British company Tesco will soon be opening stores here under the brand Fresh & Easy. The company has a twist on the normal differentiation and big box story:

Tesco’s offering in America will swim against this tide. It is aiming Fresh & Easy squarely at the middle market. The firm is hoping to repeat its success in attracting shoppers from all the main social groups in Britain, where social class until recently played at least as big a role in determining where people shopped as price and convenience did. Tesco will also be a pioneer in two other important ways: the size of its stores and their range of goods.
Most Fresh & Easy outlets will be relatively small, at about 10,000 square feet. Although about the same sales-floor size as the average Walgreen’s, a chain of drugstores, most food retailers in America are either much bigger (six Fresh & Easy’s would fit into a typical supermarket and ten into the average Wal-Mart), or much smaller (each is about three times the size of a 7-Eleven convenience store).
Does size matter? In America’s lightly regulated supermarket industry, most shoppers in all but the deepest backwoods live just a few minutes’ drive from a large supermarket. The chances are the store has acres of parking, is open all night and has a good selection of whatever you might need: prescription medicines, dog food and piping-hot meals that have been cooked in the store.
Convenience, however, has many dimensions. Tesco is betting that there is demand for smaller stores closer to home with fewer products, making it easier to find things. People in too much of a rush to stop at a supermarket use tiny outlets such as 7-Eleven, of which there are close to 1,200 in California alone. But their range is limited. Retail Forward, an American consultancy, reckons nearly 40% of convenience sales come from cigarettes and tobacco, followed closely by beer and wine. As for nutrition, most offer little more than snacks and frozen pizza. “The typical American convenience-store consumer would be Homer Simpson,” says Ira Kalish, a retailing expert at Deloitte, an accounting firm. “No one has done convenience and quality food together.”
As for products, Tesco’s second innovation will be a range of preservative-free “ready meals” that are familiar to British consumers yet barely exist in large parts of America. “There’s a big hole in the American market,” says Rajiv Lal, of Harvard Business School. “American supermarkets have not been innovative with prepared foods. You can’t eat them more than three days in the week without eating the same stuff. But I suspect there are people in Britain who live off prepared meals from Marks & Spencer for three weeks on end.”

Key to making this work is supply chain management:

Whereas American stores are good at moving goods hundreds of miles and keeping them cheap, British retailers specialise in regular, frequent deliveries to heaving city-centre stores. Their supply chains are more sophisticated because they have to be. Stores can be so small that they have to switch from selling sandwiches at lunchtime to selling ready-made suppers in the afternoon.
Expensive labour and a shortage of space have encouraged British retailers to seek economies of scale from centralised food preparation. Rather than cooking on site, they make a wide range of meals that can last for a couple of days. These are not just staples such as macaroni cheese or lasagne. A typical London supermarket now stocks more than 50 different meals, including treats such as organic beef in wine, Keralan prawn curry and Asian noodles with vegetables.

And this system is also flexible, allowing for micro-differentiation:

But Tesco’s biggest innovation has been in the way it collects and uses customer data from its Clubcard, a loyalty programme. Many retailers use clubs to provide nothing more sophisticated than a discount to customers as they pay for their goods. Because rivals can easily match this, it reduces profit margins for all, says Deloitte’s Mr Kalish.
The Tesco scheme mails discount vouchers to customers to encourage them to return. More importantly, it tracks every purchase to build one of the world’s largest databases. This finds correlations between purchases, allowing Tesco to finely tune the product range in each store. Sales of pickled vegetables, for instance, may suggest Polish immigrants have moved in, prompting it to stock barszcz, meatballs and sauerkraut.
As a result, its stores in Asian areas of Britain offer Bollywood movies, curry spices and large sacks of rice and flour. Its stores in London’s wealthiest parts, meanwhile, are stocked with ripe organic avocados, dainty packs of mange tout and steaks in fancy sauces.

It is unclear whether Tesco will be able to pull this off. As the story points out, the US market has its own characteristics. But the smaller, urban market that is bigger and better than a convenience store is an idea that just may catch on. As the story also points out, Warren Buffet has become one of Tesco’s largest shareholders. That is a pretty good endorsement.

Immigration update

As the Senate resumes debate on the immigration bill, keep an eye on two amendments, according to a story in today’s New York Times (High-Tech Titans Strike Out on Immigration Bill). A Kyl-Cantwell amendment would increase the number of green cards for “immigrants of extraordinary ability, outstanding professors and researchers and certain managers and executives of multinational corporations.” The tech companies have been pushing this. The other is a Durbin-Grassley proposal that gives priority to American workers over H-1-B visas and specifies the wages that must be paid to workers who have H-1B visas. Needless to say, the tech companies oppose this.

More on “experience”

Last week, I posted a story on moving from a technology strategy to an experience strategy. Now comes this story in Business Week — Experience Is the Product:

At some point, product categories require a quantum evolution—beyond technology and features—to the satisfaction of a customer experience. The VCR begat the DVR, and TiVo, the leading DVR brand, is successful because they began with an experience mindset, and developed the product to suit that.
In some ways, it’s unfair to compare TiVo with earlier VCRs, because the underlying technology is fundamentally different. But, like George Eastman did with his roll film, TiVo took a new technology (hard drive-based digital video recording) and didn’t simply copy prior models, but applied an experience mindset that lead to a fundamental rethinking of people’s relationship to television.
. . .
At best, most product organizations have a list of requirements to meet, and, more typically, they simply have a set of features to develop. Designing and developing to requirements and feature lists leads to unsatisfactory experiences, because you’re no longer oriented to the perspective of the user. As you make decisions along the way, your concerns for features, data, and technology trumps serving the customer. This is in large part because you have those requirements and feature lists in front of you, but nothing to represent the experiential point of view.
This is where experience strategy comes into play. As my colleague Jesse James Garrett has commented, experience strategy serves as “a star to sail your ship by.” An experience strategy is a clearly articulated touchstone that influences all the decisions made about technology, features, and interfaces. Whether in the initial design process, or as the product is being developed, such a strategy guides the team and ensures that the customer’s perspective is maintained throughout.
An experience strategy can take many forms. At heart it is a vision, an expression of the experience you hope customers will have. The ur-experience strategy is George Eastman’s slogan for Kodak, “You press the button, we do the rest.” As a description of the desired experience, it’s not particularly soulful or nuanced—nothing poetic about capturing memories. But it oriented Eastman’s delivery for an entire photographic system that supported this simple experiential goal.

Very good advice for succeeding in the I-Cubed Economy.

On tax cuts

From the Christian Science Monitor, Commentary — Still waiting for the tax-cut boost:

Economist Paul Kasriel is still twiddling his thumbs, waiting for the predicted good results in the economy from the major tax cuts of 2001 and 2003.
In an analysis a month ago for his bank, Northern Trust Co. in Chicago, he referred to the famous Samuel Beckett play, “Waiting for Godot,” in which Godot never shows up.
Last week, Mr. Kasriel said he still can’t detect the promised big boost in national output, investment, and savings from what economists call “supply side” tax cuts made by a GOP-led Congress and approved by President Bush.
“The data don’t seem to support the hypothesis,” he said in an interview.
Kasriel will be watching Friday’s gross domestic product (GDP) report to see if the nation’s output of goods and services in the first quarter is revised upward. In May, the Commerce Department reported that GDP rose at an annual rate of 0.6 percent after inflation, the worst three-month showing in more than four years.
With a recession under way at the start of this decade, the Republican leadership cut taxes in an attempt to get the economy moving ahead. The cuts were structured to lower marginal tax rates (the rate on the last dollars earned) on wage and salary income, and especially the tax rates on capital income, including capital gains and dividends.
“I don’t think you could have ever seen a more scripted supply-side tax cut than under the Bush administration,” says Kasriel.
Maybe, he adds, the economy would have performed worse if taxes hadn’t been cut. But so far, GDP growth in the current economic recovery has been the slowest of any expansion since 1961. It is even slightly slower than the record-long expansion that began in 1991, during which presidents George H.W. Bush and Bill Clinton raised taxes.

I’m sure that there are a lot of people who would dispute this analysis. There is some evidence, I believe, that some of the individual tax cuts, especially in the lower and middle income levels help spur growth (or at least consumer spending) in the early part of the decade.
But, the effect of supply side tax cuts on the economy is still a debated proposition. For more, I would suggest Rob Atkinson’s new book, Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics is the Answer. I think their may be more to “liberal economics” than Rob give it credit, but I generally agree “innovation economics is the answer.”

Pushing for long term investing

Here is a news item you may have overlooked, but that has great significance for the future of the I-Cubed Economy — Audit Group Endorses Ending Quarterly Earnings Guidance – WSJ.com

The Center for Audit Quality, a Washington, D.C., nonprofit affiliated with the American Institute of Certified Public Accountants, announced its support Monday for guidelines requiring companies to stop providing quarterly earnings guidance to analysts and to tie executive compensation to long-term corporate growth.
The guidelines, known as the Aspen Principles, aim to end short-term focus on business performance in favor of long-term results. Firms that adhere to them won’t give quarterly earnings guidance to analysts or comment on analysts’ estimates for quarterly results. Such companies also require senior executives to hold stock they receive after leaving the firm, and bar them from hedging the risk of long-term stock option grants, tying the executives’ fortunes to the long-term health of the firm. Additionally, the principles call for “clawbacks” that allow firms to recover performance-based executive awards when results are reduced or erased later by financial restatements.

It is not just the Center for Audit Quality who has signed on to the Aspen Principles, but a coalition of groups (see press release) (See also the Center’s press release). The report – Long-Term Value Creation: Guiding Principles For Corporations And Investors outlines three areas of action:
• Define metrics of long-term value creation
• Focus corporate-investor communication around long-term metrics
• Align company and investor compensation policies with long-term metrics
While the report does not speak specifically to intangibles, the focus on long-term performance measure rather than short term financial results is exactly what is needed to better develop and utilize intangibles assets. Our earlier working paper, Reporting Intangibles, noted that increased disclosure of performance measures is sorely needed — and must be used as a management tool tied into management’s financial rewards and management accountability. The adoption of the Aspen Principles is a step in that direction.

End Of Doha Round?

The AP is reporting that “WTO talks in Germany collapse”:

A crucial meeting of the World Trade Organization’s four most powerful members has failed, officials said Thursday, dealing a major setback to efforts at reaching a new global commerce pact.
“It was useless to continue the discussions based on the numbers that were on the table,” Brazilian Foreign Minister Celso Amorim said after the talks ended two days ahead of schedule.

This may or may not be the end of the Doha Round — there have been numerous time that the Round has been called dead, only to see one more last-gasp attempt. As the – Washington Post reports:

But despite the severe setback, the ministers insisted that the Doha liberalization round was not dead.

If this is truly the end however, it does not come as a surprise – including to me. The real trick is what happens next. I have long argued for a more sectoral approach to the harmonization of economic rules (for that is really what it is all about – not just trade). For those who would argue that a sectoral approach won’t work, let me suggest that it is a little more than ironic that Doha seems to have crashed and burned on the sectoral issue of agriculture (see Global Trade Talks Founder On Farm-Subsidy Issues – WSJ.com). Explicitly recognizing the sectoral approach is, in my humble opinion, the only way we will move forward in our quest to cope with the emerging global I-Cubed Economy.

Financial competitiveness – part 9 -UPDATE 3

Two short bits about the pre-fight fight over the Supreme Court security litigation case. First, Treasury Secretary Paulson is the one who directly asked the Justice Department not to support the SEC position, according to the Washington Post — Paulson Behind Opposition to Third-Party Suits. This is consistent with the Bush Administration’s policy on lawsuits.
The second piece is more interesting. The public justification — or at least how the press is reporting it — is that the case could undermine the competitiveness of the US financial markets. Example if this is the following from the Economist’s story Securities lawsuits: The Stoneridge showdown:

The Treasury is at odds with the SEC, too, fearing that a ruling in favour of investors would further damage American competitiveness. Many foreign firms that choose to list their shares elsewhere point to America’s “litigation lottery” as the principal reason. Although filings of securities class actions have been falling since 2005, the overall value of settlements has continued to rise.

Yet, the case itself may have little bearing on whether companies’ list in the US or not. As the same Economist story points out:

If suppliers and advisers can be dragged into class actions, it would no longer even be necessary to issue shares in the United States to incur securities liability, points out Peter Wallison of the American Enterprise Institute, a think-tank. Any firm, anywhere, doing business with American companies would have to live with the risk that the transaction could later be portrayed as fraudulent or deceptive.

Let me repeat — “any firm, anywhere.” “It would not even be necessary to issue shares in the United States.” In other word, the case has no impact on whether companies are listed in the US.
Can we come clean on this then? The case may be bad for American companies – therefore US competitiveness in general, some might claim. But the justification that it will make the US financial markets less competitiveness seems to less than correct.

Changing accounting rules

In an earlier posting, I mentioned that the US may soon be willing to accept financial statements done in accordance with the rules of the International Accounting Standards Board (IASB). Yesterday, the SEC voted to allow foreign companies listed in the US to report using only the international rules. Technically, what the ruling does is eliminate the need for foreign companies to reconcile their accounts to the US standard of GAAP. While this only applies to foreign companies, it may be the first step toward greater harmonization, as the Wall Street Journal points out:

Adoption of the change could spell the beginning of the end for U.S. GAAP. The SEC will seek public reaction for 75 days, after which a second vote by the five-member commission is required before the rule takes effect.
The proposal doesn’t include giving U.S. firms the option of using international accounting rules, although the SEC is expected to raise that question this summer by issuing a “concept release,” often a prelude to a rule change.

For those interested in the I-Cubed economy, this development bears watching. US and international accounting standards differ in how they treat intangibles — specifically R&D (see our paper Reporting Intangibles). Having foreign companies report under one system and US companies under another will force analysts to confront the issue directly as they seek to make comparable analysis. It may therefore raise their awareness, both on intangibles and on the preference as to how to account for intangibles.
Then again, they may just blow the whole thing off – as they have been wont to do regarding intangibles in the past
We will see.

Education versus competitiveness

I ran across this AEI publication – Can NCLB Survive the Competitiveness Competition? – which to me serves as a good example why we have trouble getting the competitiveness debate right: too many non-issues and false trails. According to the authors, Frederick M. Hess and Andrew J. Rotherham:

Historically, there always has been an unavoidable tension between efforts to bolster American “competitiveness” (read as efforts to boost the performance of elite students, especially in science, math, and engineering) and those to promote educational equity. Champions of particular federal initiatives tend to argue that the two notions are complementary, but trends of the last fifty years show that the ascendance of one tends to take attention from the other.

Unfortunately, this is a misreading of the competitiveness debate. The argument that competitiveness requires concentration on elite education was never a dominate theme. The only way you can read that in is if you define STEM (science technology engineering and mathematics) as elite.
In fact, during the competitiveness debate of the 1908’s, it was often stated that we needed to learn from the Japanese. While the top students in the US did well, the average students in Japan did much better than in the US — and the poorest students in Japan did better than the average students in the US. The lesson was that we needed to bring up the bottom — not just concentrate on the top.
I won’t deny that there is a tension between emphasis on “rigor” and “equality” as the report describes. But don’t blame that on competitiveness. Too often, I suspect, the argument between the two is whether the school board has the political will to flunk the high school quarterback because he failed a science course. That goes to the tension between local and national control over education – something that the report seems to gloss over.
The report does highlight one major concern for competitiveness. As long as “competitiveness” is seen as equal to just STEM, and the extent to which math and science are seen as “hard” subjects to be avoided or relegated to just the super smart folks, we have a problem. First, as I argue over and over again, “competitiveness” is much more that STEM. What about entrepreneurship? What about the creative areas? What about increased innovation and productivity due to organizational, social and cultural skills? Competitiveness = math & science is the worst type of blinders.
Second, equating math and science for only the brainy kids is a losing self-fulfilling prophesy. Everyone needs a basic understanding of the STEM areas. If we don’t make STEM interesting and relevant to everyone, we have lost the competitiveness game before we even take the field.
So the authors of the report have done us a favor in raising the issue. It’s just not the issue they thought they were raising.

Wages and skills

The OECD Employment Outlook 2007 is out and one of the stories is increased worry about the downside of globalization:

Does globalisation, notably the integration of China and India in the world economy, render workers less secure or reduce their bargaining power? What are the implications of offshoring for employment and earnings? What can policy-makers do to ensure that workers receive their fair share of the gains from globalisation?

Of course, that is only a portion of the report — but the most headline grabbing. It is also the topic of the lead “editorial” in the report: Addressing the globalisation paradox
It seems, however, that the report may have missed part of the story. As the Wall Street Journal (Offshoring and Cheap Imports May Hurt Workers, OECD Says) points out:

But trade isn’t the main culprit, the OECD claims: The spread of computer technology — even harder to reverse than Chinese imports — is the main thing that is creating a widening gap between the incomes of low-skilled and high-skilled workers, it argues.

The interplay of trade and technology – and the changing nature of work – is likely to explain a lot of economic insecurity at all level of skills. It is not just the low skilled who are affected – although they bear the brunt of the change. But increasingly tradable high skill activities are rising everyone’s level of concern.
As Kenneth F. Scheve and Matthew J. Slaughter say at the start of their new Foreign Affairs article (A New Deal for Globalization):

In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master’s degrees saw their mean real money earnings decline.

Dealing with that decline will take more than some transfer payments for the winners to the losers, which is essentially what Scheve and Slaughter suggest. I like the idea of a more progressive tax system and eliminating the regressive payroll taxes. AS they argue, this would be a major step beyond bolstering education and adjustment assistance. But even that is not sufficient. It will take a deeper understanding of how economic activity has changed. Until we have that understanding, our policy prescriptions are, unfortunately, little more than band-aids.