Unleashing the Consumer-Driven Profit Machine
Consumers are changing, and so are their needs. If you want their business, you’ll have to know what they want before they do.
September 1 2002 by Jennifer Pellet
Two years ago, when sock and hosiery manufacturer Gold Toe Brands embarked on a consumer study, CEO Jim Williams expected the research to confirm what he and his company already knew. After all, the company-formerly known as Great American Knitting-has been selling its trademark men’s dress socks to Americans since 1929. In fact, its Gold Toe brand already represented more than one-half of all department store sales of men’s dress socks in the United States. Gold Toe Brands, figured Williams, already knew all about who buys men’s socks and how they go about making the purchase.
He was wrong. “For years and years, I was telling people 80 percent of socks are bought by women,” says Williams, who has been the Burlington, N.C.-based company’s CEO since 1985. “That’s just not true; men shop for their own socks. I also thought that socks were bought with underwear. That’s not true. The fact is men buy them to match their pants, their suits or their ties-not their underwear.”
For Williams, and Gold Toe, the consumer research was a revelation. While no slouch in its category-the company already commanded a formidable 54 percent market share of department store sales of men’s, women’s and children’s socks-Gold Toe needed growth, explains Williams. “Being number one is very scary,” he says. “When you are by far the market leader, you’re always the target. So, we not only had to identify our strengths and opportunities in our present marketplace, but also the opportunities of the markets that we’re not in.”
Sound familiar? It’s an age-old challenge, but one made more complex today by a host of factors, from more demanding consumers and rapidly evolving consumer behaviors to declining brand loyalty and a technology-driven increase in innovation and speed to market. In an environment where consumers-and their expectations-are constantly changing, only those companies that can collect data, analyze it and react quickly to create new value propositions that address customer needs will succeed, according to CEOs gathered for a roundtable discussion jointly sponsored by Chief Executive and Cap Gemini Ernst & Young.
“Today’s consumers are leading a revolution against business as usual,” points out William Burgess, global consumer products industry executive at Cap Gemini Ernst & Young’s customer-driven transformation services division. “They are demanding that we recognize them as individuals and that we conduct business on their terms.”
Consumers’ buying criteria, explains Burgess, has become more sophisticated, shifting from product features and functions to product experience and from low price to best value at a consistent and fair price. “The new definition of value is content delivered in context. Prices that vary and are heavily featured create distrust because you’ve artificially created a situation that will come back to haunt the consumer when they have to pay the higher price. The value levers have become, in a nutshell, access, experience, product, price and service.”
Meeting these heightened consumer expectations demands innovative approaches to markets, such as leveraging the expertise of other firms through joint ventures and working closely with vendors, peers and business customers to deliver greater value, Burgess adds. As an example, he cites a recent joint venture between Austin, Minn.-based Hormel Foods, a manufacturer and marketer of meat products, and beef and pork supplier Excel, a subsidiary of Minneapolis-based Cargill.
“They created a network to come out with a full line of case-ready prime meats under the Hormel Always Tender brand that [bypasses] the butcher in the local store,” he says, noting that what might seem a natural line extension actually required orchestral-like synchronization. “With all of the variations and volatility in demands for cuts of meat, think about what that means in terms of connecting to your partners and retail store locations, and tracking information so that you can maintain the best-in-class fulfillment that Wal-Mart rewards Hormel and Excel foods for today. The need to be connected is not just B2C; it’s B2B, so no consumer needs to know what goes on behind the curtain.”
In many cases, the need to perform such logistical feats is customer-driven. As competition intensifies, leading companies demand more and more of their top suppliers, points out Jack Davis, CEO of City of Industry, Calif.-based Ventura Foods. “We used to think that a 97 percent [fulfillment rate] was really great, until we had Sysco tell us that the minimum they would accept is 99.7 percent,” he says. “We thought, €˜Gosh, we’ll never get there,’ but we did. And then we were told by McDonald’s that their expectation is 100 percent.”
Whether B2B or B2C, virtually every firm faces similar logistical pressures today, says Kenneth Camp, president and CEO of Batesville, Ind.-based Batesville Casket. “For us it’s an interesting challenge because no consumer wants to buy our product-they’re forced into this by a change in their lives,” he says. “So they’re suddenly in an environment where they have to make funeral decisions and they want personalization-a funeral that matches the person-but they don’t want to make 50 decisions.”
To ease the process, Batesville Casket offers “clustered” options so that customers can “get personalization without having to go down the entire checklist of decisions,” he explains. At the same time, there are time and cost pressures to consider. “Providing personalization in a cost-effective manner has been a challenge for us,” says Camp. “We’ve had to create a distribution network that can move a bulky, somewhat fragile product from the point of manufacture to the point of use, in some cases halfway across the country within 24 hours.”
A distribution network modeled after Federal Express’-a hub-and-spoke system capable of moving caskets across America overnight-proved the solution. “We’ve also learned to use manufacturing postponements, so that the style of casket is actually changed at the next to last point of distribution or, in some cases, in the funeral home,” adds Camp. “Even in a business that has historically moved as slowly as funerals, information management has become absolutely essential to meeting consumer needs. Without it you just can’t survive.”
The need for speed
But while information technology has become an invaluable tool, it’s also upped the get-to-market ante. The pace of change, points out Jeffery Mordos, COO of New York’s BBDO ad agency, is forcing companies to skip risk-minimizing steps that have long been a part of the traditional production and marketing process. “The speed at which everything is changing is causing us to alter our strategies,” he says. “New products in all categories are being introduced in a matter of days or weeks, where once it would take months or years. Test marketing is a thing of the past. There isn’t enough time to do the due diligence that was once expected, because if you don’t get to market fast, you don’t get there at all.”
“When I think about the challenges facing CEOs today, it really comes back to the speed issue and this ability to collaborate,” agrees Hank Bonde, COO of Denver-based J.D. Edwards & Co. “How do businesses manage the cost structure associated with shorter product life cycles? And then, with contract manufacturing and third-party partner management, the collaboration piece of it-networking and sharing information. It’s no longer enough to improve collaboration within your own company; you have to improve it across the whole supply chain from the customer to the end user.”
Even as companies collaborate to deliver innovation and meet customer demands, collaboration itself brings a new set of challenges. Power purchasers such as Wal-Mart, Bonde points out, have been known to demand a change in packaging and expect delivery in 24 hours. Complying with such a request can send a supplier-and, in turn, its own suppliers-into a frenzy. To be able to deliver the product, a supplier might, for example, have to call upon the third-party supply company that packages their product, which might in turn need to purchase new shrink-wrap machinery from one of its own suppliers.
“The way the whole speed thing plays out, if you can’t provide a €˜yes’ or a solution to a problem, someone else will be ready and accessible [to take your place],” notes Mordos. “So you just have to be that much more nimble.”
Accessibility, too, is a prerequisite. Established companies can no longer rely exclusively on their traditional selling and marketing channels, nor can tech-centric startups get by with Internet-only promotion and sales efforts. “We all have to rethink our go-to-market strategies,” says Ed Kopko, CEO of Montvale, N.J.-based Butler International. “So that I as a consumer can learn about your product in a store or on the Web or anywhere I want to. We’ve got to make it easy so that at each step of the process in the purchasing cycle, the customer or prospective customer gets exactly the experience he or she wants.”
Customers from different generations, for example, are likely to embrace different purchase methods. “This whole generation is different in terms of the way they think, operate and get their sources of information,” asserts Bob Prieto, chairman of construction management company Parsons Brinckerhoff. “This weekend my son, who is heading back to college, mentioned that he has to buy a bed. So my wife suggested he go to a particular store that offers free delivery,” he says. “He said, €˜No, I’ll buy it on the Net, because I can find it easier and cheaper, and they’ll deliver it.’ My wife is very Internet savvy, yet that’s not the way she would think to buy a bed.”
But the benefits of developing the ability to reach out to customers through multiple channels must be balanced against the costs of developing and sustaining that capability. For example, not all retail operations are capable of running profitable online ventures, cautions Sy Syms, chairman of Syms. He points out that the challenges of handling delivery and product returns complicate the online retail equation. “The only ones who will be somewhat successful are those who already know how to do a catalog business, who have the inventory ready, who know how to process it and who can get it to you in 24 or 48 hours,” says Syms.
Rather than attempt to debut an online retail arm, the Secaucus, N.J.-based discount retail chain opted for a more modest Internet program-using its site to advertise promotions and provide store locations. “We had to show that we’re in the 21st century,” explains Syms. “So we started out by offering a 10 percent e-mail discount card, which we advertised by saying, visit www.syms.com and you’ll find a happy surprise. And we’re still pulling in 2,000 to 3,000 coupons a week.”
Turn Chefs into Salespeople
“We’re in two different channels. The first is the retail consumer business. The second, which is the largest segment of our business and the growing segment within the food industry, is the food service industry. And one of the biggest challenges we faced there was understanding who we were trying to sell.
We spent a lot of time trying to sell buyers who were purchasing for these various food service distributors or big chain restaurants, and we found we were constantly competing on specs and price. It was almost like bidding on a government contract, but on a smaller scale. Then we decided that buyers don’t make the decisions about what chain restaurants consume and use. Those decisions are made by people who are in menu planning-the culinary chefs and teams of those people. So we had to restructure our entire sales organization. Now we send chefs in to work with the product development and culinary development people and we get our products specified for a particular flavor profile.
A chain like McDonald’s might have a huge staff of people who are trying to develop products, but they need input from outside of that myopic view of their business. Our job is to go in there and say, “Hey, there’s this new taste profile or new product offering that you need to put on your core product hamburger, not go out and create 32 different kinds of sandwiches, which is not part of your core business.” And, once you get your product specified, then your competition is blocked.
So our challenge has been a little bit difficult for us to grasp-to get rid of all of our salespeople and hire a bunch of chefs. But fundamentally, that’s the direction. Now if we can just teach those chefs how to price properly, we will have made the hurdle.
In our business there is also one absolute core value that no one may deviate from: You must perform at 100 percent all of the time on food safety. Because one small occurrence can sink your company.
A few years back, a company by the name of Hudson Industries put out some hamburger meat and five people on a barbecue cookout in Denver got a little ill. We still don’t know whether the barbecue grill was contaminated or not. But two weeks later, Burger King said, €˜We’re not going to buy any more hamburger from you.’ And the company went out of business. Consumers are paranoid about the safety of their food, so safety is paramount in our business. You can’t afford to make any mistakes.”
The power of no
In the face of Internet hype, Syms managed to skirt temptation and take a realistic approach to the new channel. But other CEOs have been less fortunate in their decision-making. Operating in today’s volatile and highly competitive environment often fosters a sense of innovation urgency that ultimately leads to detrimental decisions about risky ventures. “One of the easiest things to do as CEO is to say €˜yes,’” asserts Batesville Casket’s Camp. “It’s also one of the most dangerous. I think the real role of the CEO is to stay close to customers, collectively if not individually, and manage what I call the €˜Actions in Process.’ So many people in your organization have ideas of what you should do or where your energy should go. But what you don’t do is often more important than what you do, because not doing something allows you to focus on something that’s more important.”
“In the dot-com era a lot of CEOs lost their way, got enamored with lots of the wrong things and lost focus on their business models,” agrees Stewart Krentzman, COO of Oki Data Americas, based in Mount Laurel, N.J. “We have an obligation to make sure we stay the course and don’t lose sight of the business we’re in. We need to have the discipline to make sure we don’t take the company in a direction it really wasn’t designed to go.”
Owning the Customer
We’re a very old sock manufacturing company-80 years old. We’ve made four major decisions in the history of our company. The first one was to put the gold toe in the sock. The second one was to sell one retailer per store. The third decision we made was to sell to more than one retailer per city, which was a brilliant move. And, the fourth decision was to broaden our distribution a little bit, but to stay focused on our business. So that’s 80 years of decisions in four strategic initiatives.
The No. 1 challenge we have is convincing the retailer that we are right in what we’re saying about his consumer. And our No. 1 strategic objective is to be the category manager of the department. Now, a lot of people don’t like to hear it, because it eliminates the merchandising people, the buying people, the consolidation of the whole thing, but it’s a money-saving initiative. And the idea that we would put something in the store that we don’t think is absolutely going to sell at a five-to-10 percent multiple or 15-percent sell through, is absurd. If it doesn’t work, we’ll get it out of there. But the store is a conduit from us to the consumer, and it’s our job to adapt to the environment of that store and its strategic initiative.
We thought we knew everything about the consumer until we did more research identifying the shopping habits of the consumer. Today, what we’re trying to do is produce a product [with a] proper price value that is actually the reward for the shopping experience. The thing we’re struggling with is, where is that customer shopping and what are his buying habits?
Once we get a customer to buy our product, the consistency of re-buying our product is up around 90 percent. We don’t lose a customer once we have that customer. And the more educated the customer is about our product, the more often they will wear our product. The thing I have done, and I feel it has been very successful, is I’ve surrounded myself with people who know what they’re doing; the people who accentuate my strengths and build up my weaknesses-both. They’re damn good people.
My job is to keep them focused. It’s not how fast you’re going; it’s how fast you get to what your target is. So, it’s just keeping them focused. My primary job is to protect the integrity of those brands that I’m responsible for in the bottom line.
I’ll give you a story about setting the benchmark of performance. My team says, “Jim we can deliver 97 percent complete on time.” Now, I looked at it and I thought for a few minutes and I said, “Well that’s really good, but you know what’s so interesting to me?” This was a year or so ago. I said, “Duke beat Carolina, 100 to 97.” I said, “Who won? The one that delivered 100 percent won. They beat the other guy.” And, the thing about it is, it’s logical benchmarks that you can hold everybody accountable for. But you’ve got to always, as a CEO, keep everybody focused [on the fact] that perfection is the name of the game.