Should Have Known Better

By now you have probably caught at least some of the news reports about the Abercrombie situation - the video interview where their CEO basically told everyone who doesn't look like a fashion model that he does not want their business or even their unsightly presence in his stores. It's not clear from the interview how much of this was a publicity stunt - along the "any exposure is good exposure" lines - and how much of it was a considered articulation of the company's policy and mission, but whatever effect the CEO was going for he doesn't appear to have gotten it...

An article off the Brand Index web site indicates that ever since the interview went viral the popularity of the Abercrombie & Fitch brand with consumers in the coveted 18-34 demographic has been plummeting – based largely on the buying preferences of the Millennial generation, who don’t appear to have taken the whole thing well. Whether or not this die-off in the brand’s popularity includes the “beautiful people” who were the original target of the Abercrombie advertising remains to be seen, but even if the loss in sales and corresponding loss of revenue are the result of people who do not fit that image becoming offended and taking their business elsewhere, this seems like an unusually stupid example of management arrogance…

Now, we should probably acknowledge that Abercrombie is hardly the first company, even within the fashion industry, to attempt to create an image of exclusivity around its product line. In general, the idea that a product is intended not just for anyone, but specifically for your demographic group is appealing to a large percentage of consumers, and since clothing can be said to have specific age, body type, activity and financial restrictions on appropriate consumption, it lends itself very well to such a marketing strategy. By the same token, only an idiot would go around telling potential customers that their money is not welcome, and that they should take their business somewhere else. Especially considering that this is not the first such gaff committed in recent years…

Consider, for example, the infamous case of Gerald Ratner, who was once CEO of the family’s chain of jewelry stores – until one day in 1991 when someone asked him how his company managed to sell a specific product for such an absurdly low price. Ratner replied “Because it’s total crap” – apparently failing to understand that, like several other industries we have discussed in this space, jewelry stores make sales based on image, salesmanship, and occasionally craftsmanship, rather than the absolute value of the goods being sold. As a result, his company’s stock lost somewhere on the order of $1 billion USD in value in less than a week, Ratner was forced out of the CEO’s position in a business his family had owned for three generations, the company became such a laughingstock that they had to change the name of their corporation and re-brand all of their stores, and to this day a major act of management idiocy is still called “Doing a Ratner” in the United Kingdom…

Will this kind of mistake come to be known as “Doing an Abercrombie” in the U.S.? Or perhaps, “Doing a Jeffries” in honor of the CEO himself? Will the company survive, or will it finally lose the gut-fight it was in with American Eagle and H&M and disappear from the scene? Will Abercrombie’s ownership group demand action, possibly including Jeffries’ resignation and a complete spin control/brand recovery effort? It’s really too early to say what the final outcome will be, but I think we are justified in saying that the CEO at Abercrombie and Fitch really should have known better…

Burger Wars III: Escalation

When I was younger a “guilty pleasure” was going to McDonald’s and eating five or six cheeseburgers at a sitting – or, if you like, one and a half of the “Double Big Mac” products you sometimes see on the Value Menu nowadays. I’ve never been a particular fan of the company, and the regular cheeseburger isn’t even my favorite product on their menu – it hasn’t been more than a light snack for me since 1975 or so, or at least a single one hasn’t been. But there’s something wonderfully decadent about just eating as much of something as you want to, especially if it’s something that was originally supposed to be an entree. And with cheeseburgers and double cheeseburgers now some of the cheapest products in fast food, thanks to the infamous Value Menu, this custom seems to have become widely popular – to the point where it is interfering with healthier fare…

According to an article from the Associated Press by way of the ABC News site, McDonald’s has announced that it is dropping several of its high-end products from the current menu, including the line of Angus burgers, the line of Chicken Select sandwiches, and something called the Fruit & Walnut salad. Although the company hasn’t explicitly said why they are taking this step, the industry expects cited in the article note that sales of the Angus line and other top-end products have been soft for some time, in large part due to the availability of cheaper products off the Value Menu program. By itself this probably isn’t terribly significant – McDonald’s has been experimenting with various new products since the 1960s, and has rotated things in and out of their menu as purchasing trends developed, just like any other food service company. What makes is event interesting from a strategic point of view is that the trend does not appear to be limited to McDonald’s…

I had written in this space a couple of years ago about the deteriorating relationship between many of the Burger King franchise holders and the parent company over control issues such as selection of advertising campaigns and menu selection. One of the key areas of contention, in fact, was Burger King Corporate demanding that all of the franchisees offer a value menu that was cheaper than the competition (primarily McDonalds) at prices too low to include any profit. This was great for the company – it allowed them to claim (correctly) that their outlets offered more product for less money than the competition – but problematic for the franchisees, who were having to bear all of the attendant costs. If this campaign had merely been a loss-leader strategy – using the unprofitably low prices to increase customer traffic and develop sales for other products – it might have worked, and the franchise holders might have accepted it. But with the rise of customers eating nothing but low-margin Value Menu products this idea no longer made any sense…

It’s still too early to say if there will be any long-term fallout from these maneuvers. Fast-food and quick-service customers are still changing their buying patterns, and there is no way to tell if healthier or cheaper product offerings will gain the lead, let alone hold onto one. But as any undergraduate business student can tell you, price wars rarely end well for any of the combatants, and sometimes they end badly for the customers as well. If all of the major fast-food chains end up offering nothing but low-cost products (a dollar or so) and “healthy” products like the “Snack Wraps” it is possible that they will end up fighting over a smaller and smaller set of customers, while the people who like sandwiches that actually taste like hamburgers (or real food in general) gravitate to other parts of the industry or out of the quick-serve sector altogether…

How Stuff Works: Property Tax Paradox

Today in our occasional series on “How Stuff Works” we have a tragic example, brought to us by a genuine tragedy: the fertilizer factory explosion in West, Texas. In light of the injuries, loss of life and all of the associated pain and suffering it seems heartless, if not downright cruel, for the City, County and State to go on taxing the residents affected by the explosion, and in particular to demand property taxes be paid on homes that were damaged or destroyed by the blast. And it sounds completely outrageous that those property taxes are based on the valuations of the corresponding properties as of January 1, months before the blast occurred. Until you realize that property taxes in West are paid on the previous tax year, just the way income taxes are – and without those tax payments the town itself may not be able to recover…

You can pick up the news story from the Waco Tribune site if you want to, but the concept is ultimately very simple. Like many places in the U.S. West (and the county in which it is located) run on property tax revenue, and those taxes are charged for the previous year at the values assessed on January 1 of the next year. Unfortunate as it may be, the people of West are being billed for the full year (2012) during which their homes were not damaged by chemical explosions or anything else, but during which they received all of the services the city and county provide. And however much the city or county governments might like to release the residents from those obligations, doing so would eliminate 20% of the property tax revenue at a time when the community needs all of the help it can get…

Estimates of the damage put the losses in West at about $29 million, or roughly 20% of the taxable property in the area. Without those funds the city has no hope of building the infrastructure improvements (such as an expanded sewer system) slated for this year, but they also will not have the funds they need to repair non-taxable property such as schools, water systems, roads and so on. The city and county governments can apply for state and Federal disaster relief assistance – and already have – but even if such funds are granted and repairs can be made, the local governments will still not be able to provide the necessary public services with 80% or less of a budget that was barely adequate in the first place…

I called this a paradox because in this case there is nothing the local governments would like better than to give their constituents the funds needed to repair all of the homes and businesses damaged in the blast, cover everyone’s medical bills, replace everything that was destroyed, and bring the community back to normal – or, at least, as close to normal as it will ever be again. But to do that these governments will need money, and their primary source of funding is the people who are at this moment demanding money from the governments…

Let’s just hope that there is state, Federal or private disaster relief funding available for the folks out in West, because this probably isn’t something they’re going to be able to solve on their own…

The Worst That Could Happen?

From time to time I will call your attention to a story where a business disaster happened against all logic; when there really wasn’t anything the management team or anyone on the payroll could have done to prevent the problem, and even the other stakeholders were caught by surprise. There is no way you could have predicted that turkey vultures would take a shine to a hospital and start roosting on the windowsills of patient rooms, for example, or that a sudden (world-wide, web-based) interest in the output from your small soda bottling plant will draw so much attention that the franchisor will decide that you have violated your territorial limits and threaten to pull your franchise. The idea that people might use the Linked-In business networking site to advertise escort and prostitution services, however, shouldn’t have been all that hard to predict…

You can pick up the Business Insider story here if you want to, but the basic idea is simple: since personal “adult services” like prostitution are legal in many parts of the world, and since business people are the primary demographic targeted by such services in the first place, a number of individuals involved in that “business” sector have started listing their services on Linked-In. Of course, most of the listings on Linked-In that mention prostitution directly are from law enforcement, medical, criminal defense law or governmental personnel who deal with the criminal aspects of the business, but apparently enough escort services and massage therapists advertise on the site to push matters into the grey area. What makes this story remarkable is that Linked-In is trying to suppress such listings…

Craig’s List has been having problems, both customer relations and legal, with services of this type for years now, and has actually attempted to eliminate the “Adult Services” category on their site more than once. Unfortunately, none of their efforts at suppressing these ads has had any effect on either the popularity or the profitability of such services. As a result, those individuals (and organizations) selling sex on Craig’s List have just changed the euphemisms they were using for prostitution and continued on as escort services for lonely business people who are only in town for a few days, massage therapists who work in the nude, or dating services for people who don’t mind paying to get laid. There is no possible way for Craig’s List to eliminate all possible euphemisms for sex services from its site, and even if they did they would have no way to identify apparently legitimate businesses that are merely a front for these (or any other) criminal enterprises…

If anything, Linked-In has it worse, both because of the aforementioned legal sex services and also because their business model is predicated on retaining a professional, businesslike image. Crag’s List and the other Internet bulletin-board sites make no pretense of professionalism; you can sell a sack of fertilizer you made at home or offer your new fertilizer gift pack (“Smith’s Can ‘O Crap!”) without any pretense of reaching out to a community made up entirely of businesspeople in expensive suits. Adult escort services – or even genuine call-girls – would probably raise the tone of many transactions carried out on some of those sites. But there’s no way anyone is going to pay the (outrageously high) rates Linked-In demands in order to gain access to an online community frequented by “undesirable elements” – let alone try to put those charges onto their expense account…

But while the motivation for trying to keep such businesses – and professionals – off the Linked-In service is obvious, what the company intends to do about it is not. Criminals in general are not known for their willingness to adhere to company policy; companies that already operate in a legal grey area are unlikely to be impressed by a private company trying to tell them what to do. And anyone who runs a search on Linked-In using those particular key words probably already knows that such individuals and organizations are represented on the site. I’m not saying that Linked-In should just give up and let anyone who wants to do business over their service do so; I’m just suggesting that a strongly-worded policy is unlikely to have any effect on the outcome…

Black Guns and Red Ink

From time to time people will ask me why a given business did something that was it its own best interest, but not necessarily that of the community, the state, the country or the world. After all, between public relations, the desire and need to be good corporate citizens, stakeholder theory, and the fact that managers have to live in the same world as everybody else, you would expect the company to want to always do the right thing. Unfortunately, this expectation fails to consider what mangers are being paid to do in the first place: manage the company on behalf of the owners. With the exception of some very special cases (such as non-profit corporations), most companies are not in the business of trying to change the world, legislate new regulations, or govern the lives of their customers, let alone the rest of the community. And we will not have to go very far in order to find examples of companies coming to grief when they try to do anything beyond the business they were created to do…

Consider the example of Dick’s Sporting Goods, a company which attempted to do the right thing and joined in a voluntary ban of the so-called “black guns” – semi-automatics that look vaguely like the AR-15 rifle used in the Newtown shootings and other outrages in recent years. Keep in mind that these products are completely legal, and Dick’s has all of the state and Federal permissions they need to carry such weapons. We should also note that despite calls from the gun control advocates (and most left-of-center politicians in general) to outlaw these guns, not only have no such laws been passed but sales have been at an all-time high for months amid fears that the Federal government will attempt to confiscate these (or possibly all) firearms. This does not sound like an auspicious time to be refusing to carry such products – a supposition borne out by the recent performance of the Dick’s company and its stock…

The story on Guns.com insists that the company’s financial troubles trace directly back to the black gun ban; the somewhat less pro-gun version available off of the Reuters.com site also gives credit to the backlash against Livestrong branded products follow the fall of Lance Armstrong from the public’s good graces, but acknowledges that the voluntary gun ban is not helping, and that the company’s performance is significantly below predictions. And while it would be overstating the case to say that these figures (gun-related or not) pose a threat to the company’s survival, it is only fair to say that disappointing financial performance in the fourth quarter (the critical one for retail operators!) is not a good thing, especially when at least part of the cause appears to be putting the good of the public ahead of the good of the company…

Now, no one is saying that a company should put the pursuit of profit ahead of the welfare of the community; that kind of reasoning is what leads to explosions in chemical factories that kill tens of thousands of residents downwind. But Dick’s isn’t responsible for gun safety, gun legislation or gun-related crime in America, or even in the communities in which they operate. They’re a retail business selling completely legal products to people who want to purchase those products, and until such time as the state or national governments tell them to stop, they should probably concentrate on making a living and leave the debate over gun control to somebody else…

The Ethics of Interviews

Let’s try this one as another hypothetical. Suppose for a moment that you are a hiring manager, attempting to fill a critical position within your organization, and that you have an internal candidate for the job who you feel will be the ideal choice. We will stipulate that there is no ulterior motive involved; the internal candidate isn’t the CEO’s nephew, or your sister’s boyfriend, or the person who gets everyone in your work group the really good prices on cheese curds from the local dairy. We will also stipulate that there is no particular objection to hiring this person on diversity/EOE or other regulatory grounds. Do we have an ethical obligation to publish the opening and accept applications from outside the organization before making a hiring decision?

In the United States there are Federal laws that require us to offer equal opportunity to all applicants, but I refer here to an ethical, rather than legal, obligation to do this. Even assuming that circumstances would allow us to forgo any additional search for candidates and proceed with the hiring of our internal candidate, should we consider external applicants for the position? As usual, the question isn’t as straightforward as you might think…

On the one hand, we have a fiduciary responsibility to the owners of the company (the stockholders, if we are a publicly-held corporation) to spend as little of their money on extraneous matters as possible. If we can avoid the expenses associated with a full-on search for additional applicants we are obligated to do so. At the same time, promotion from within is good for morale, which will increase worker satisfaction, improve productivity, and thereby also improve the performance of the company, to the benefit of the owners and everyone who works there as well. But what if we’re wrong about the internal candidate being the best one available?

By the same token, our responsibility to the owners, the employees, and the other stakeholders requires us to find the best choice for this position, not just the most expedient choice. If there is a better candidate available for the job, and we never become aware of that person because we do not advertise the position, interview other applicants, or do anything beyond simply approving our internal candidate for the job, then we have not truly fulfilled our responsibilities as the management team. But the existence of a better candidate is an unknown (and generally unknowable) possibility, and even if such an individual exists he or she may not apply, or accept the position if it is offered. Meanwhile, we have established that conducting a search for additional applicants will require resources (time and money) that will not be available for other purposes, as well as potentially damaging morale…

Which leads me to the question: Does our responsibility to obtain the best possible employees for any given position supersede our responsibility to contain costs, improve employee morale, and take care of our existing workers? Or does our responsibility to manage the company’s assets and maintain stability and profitability supersede our responsibility to seek out the best resources, human and otherwise, that are available to the company? Or can we simply take refuge in the applicable state or Federal laws, conduct applicant searches and interviews that comply with the regulations placed upon us by our respective nations, and let the proverbial chips fall where they may?

It’s worth thinking about…

No Limit

Over the years I’ve been watching and writing about business failures I’ve encountered examples that can be explained by bad strategic planning, bad marketing surveys, bad demographic information, bad product design, faulty product development, faulty product construction, bad advertising, bad product distribution, bad customer service, bad human resources policy, bad financial decisions, bad accounting practices, fraudulent accounting practices, idiotic purchasing decisions, incompetent technology development (too high and too low), insufficient capitalization, absurdly bad public relations, and horrible taste. I have also encountered experts, both consultants and professionals available for hire, who can help you to avoid every one of these errors and many more in both concept and execution of your business model. There is, however, only so much they can do about rampant stupidity…

Consider, for example, the case of a movie theater in Jefferson City, MO, which decided to stage a publicity stunt for the opening of the new Iron Man movie: having a man dressed in tactical gear and carrying a prop assault rifle walking around the building. You can pick up the account of the situation from the local ABC affiliate if you want to, but the story should still seem vaguely familiar…

If you were watching the news last summer you will probably remember this as exactly how the movie theater shooting rampage in Colorado began – except, of course, that one was a real maniac with a real gun. But the similarity in the scenario (man in black tactical gear with an assault rifle invades a movie theater on opening night of a superhero movie) was enough for several patrons, who summoned the police. Needless to say, perhaps, neither the law enforcement personnel nor the theater patrons were happy to learn that the whole thing was a hoax…

Now, in fairness, the “gunman” in our story was part of a group that included an actor wearing an Iron Man costume, and anyone seeing the entire scene would probably have realized what was going on without any additional issues. Still, I think we are justified in asking why the actors arrived in costume and walked onto the property dressed that way, instead of suiting up once already inside. And, of course, we could also ask how management could possibly have thought that this sort of stunt was a good idea in the first place. Granted that having costumed actors on hand could add some impact to an otherwise routine event, there is still an excellent chance of offending people who are in favor of gun control, have friends or relatives affected by the Colorado shooting, or who have friends or relatives who have been affected by some other gun-related incident…

Then there’s the issue of fake armed confrontations turning into real ones. In this case, no one was hurt – the responding police units did not jump to the wrong conclusions, and there was no actual armed showdown. But if the officers responding to the 911 call had been just a little bit trigger-happy – or worse, if someone inside the theater had been carrying a concealed weapon and decided to take pre-emptive action – this whole situation could have ended in tragedy…

Many years ago, when I was trying to explain my new job as a management consultant to my (then) 92-year-old grandmother, what I ended up saying was “I provide common sense to companies that don’t have any of their own.” It wasn’t much of a joke even then, but when I read stories like this one I sometimes wonder if such consulting firms may become a growth industry in the new century. Assuming that anyone has the common sense to hire them in the first place…