PeppercomBlog

Today's lesson: One journalist = one battalion

Posted by Matt Purdue

If you want to know what gives a serious journalist goosebumps on the back of his/her neck, or, in today's communications parlance, what "resonates" with them in terms of "engagement," read Gideon Rachman's recent column in the FT. Rachman sets out to describe the perceived differences between American and British journos, in so doing, he presents in 900 words perhaps the finest description of journalism as craft that I've ever read. (Thanks to my colleague Joe Becker over in our digital practice for dropping it on my desk.)

American journos, Rachman writes, see their job as a civic duty. This partly explains why they are willing to work for peanuts, and partly explains why many newspaper executives have been so slow to adopt new technologies and business strategies in the face of digital competition. One portion of pride, an equal portion of hubris. Rachman hits at what beats inside the chest of every journalist when he quotes the UN commander in Rwanda during the genocide as saying, "A reporter with a line to the west was worth a battalion on the ground." Most journalists truly believe (or at least hope) they have this power to change things. 

Certainly reporters rake muck and sensationalize. For every Watergate story, there are 100 bits about rats at a KFC. But most PR folks could find more success in what they do if they remembered that journos have a bit of the idealist in them. Clients may continue to insist that a PR rep get the latest new product announcement printed word-for-word in their favorite trade pub. But, in the long run, that's not going to do anyone much good. Reporters know they aren't going to make a difference in the world (let alone in their careers) by covering the latest upgrade to the widget of the month. But help a reporter develop an angle that just might alter the status quo, and rest assured they'll come back to you again and again.

The King is Dead. Long Live the King

Posted by Matt Purdue

Roughly 650 years before German immigrant Eberhard Anheuser acquired a careworn, little brewery in St. Louis, the monks of Villers-la-Ville, Belgium, were already busy making that most sacred of beverages: beer. It continues to amaze me that every time a foreign entity takes an interest in a so-called American icon, pundits and politicos wail. This week, after weeks of hemming and hawing, Anheuser-Busch agreed to be acquired by Belgium-based InBev. One of the Show-Me State’s U.S. senators, Christopher Bond, crowed, "InBev buying Anheuser-Busch is as popular in St. Louis as $4 gas.” Bond has to say such things to have any hope of being re-elected, of course, but a guy with a BA from Princeton is certainly smart enough to realize that this is how commerce works. Capitalistic growth knows no geographic boundaries, heretofore to the enjoyment of many, many U.S. companies.

AB, after all, has been generating revenue overseas for decades. The company operates more than a dozen foreign breweries and owns huge stakes in Mexican and Chinese brewing companies. The name of their most popular product, Budweiser, is derived from the Czech city where the first true Budweiser beer was brewed at least 70 years before AB started marketing its brand in the States. Yet, despite all the rich history and brand power of BUD, the stock has been sotted for years. BUD hit nearly $54 in April 2002 and didn’t top that until earlier this year when rumors began pouring out about InBev’s interest.

Funny thing is, if you asked everyday Americans to name one beer, most would probably say Budweiser. But that awareness hasn’t really translated into shareholder value. It may seem anathema to the métier of a PR professional like me to suggest a disconnect between brand awareness and share price. But my point is that consumer reputation is only one component of a company’s value. All the positive media Budweiser got as it (disingenuously?) sought to fight off InBev meant very little in the end. Sometimes PR folks need to think less like consumers and more like shareholders. Exploiting both 9/11 and the ensuing “war on terror” to sell alcohol might play well on Main Street, but what types of deep communications strategies would AB have needed to raise its profile on Wall Street? Now we’ll never know.

As for the Belgians at InBev, if they can do for AB what they’ve doing for their homeland’s beer for centuries (not to mention chocolate, fries and waffles), then I say welcome to America.

Crapping Out in Vegas

Posted by Matt Purdue

I have a friend who thought he had it made. Smart guy, business journo. A few years ago, he got out of the rat race in L.A., sold his tiny condo and moved to Vegas. For less than he paid for his small condo, he nabbed a three-bedroom house just outside of Sin City. But that was then. 

This morning USA Today reported (if you can call their Snapshots reporting) that more than 80 percent of homes purchased in Las Vegas-Paradise in 2007 are now worth less than what is owned on them. That’s called an upside-down mortgage. And that’s not even the worst of it. Merced, Calif., and nearby Stockton-Lodi lead the nation in upside-down mortgages; there 91 percent of homes purchased in 2007 are topsy-turvy. For people like my friend, who’s in his early 40s, this is terrible news. But for older Americans, this is absolutely devastating.

People nearing retirement who were counting on the equity in their homes to help fund their golden years are really hurting. Researchers at the Center for Economic and Policy Research in Washington found that if housing prices hold steady over the next year, people aged 55-64 are looking at a 37-percent decline in their net worth since 2004.  People in the 45-54 age group will see a 25-percent drop.

During the growth of the housing bubble, many Americans used their homes like savings accounts or, worse, like payday-loan offices. They spent cash and borrowed against their homes assuming that their homes would continue to appreciate in value. Now that housing prices have plummeted, they are on the hot seat. As the researchers point out, this is everyone’s problem. These retirees are going to lean even more on entitlement programs like Social Security and Medicare until the housing market turns around…if it ever does for them.

Debating the Faltering Fortunes of Starbucks

Peppercom research analyst Milos Sugovic posted the other day about the faltering fortunes of Starbucks. Milos pointed out that in a market characterized by monopolistic competition, where there are many producers and consumers, few barriers to entry, and product differentiation via branding, Starbucks’ profits were doomed in an economic downturn.

During good times, consumers were willing to pay $4 for a cup of coffee because they found it more expensive in terms of time and effort required to find the “best” product than to simply take the convenient route and stop at one of numerous local Starbucks shops. In other words, consumers chose not to gather the data needed to make an informed buying decision. 

Milos’ post set off a pointed discussion here at Peppercom between him and senior analyst Matt Purdue.

Matt: The fact that companies caught up in monopolistic competition make it cumbersome for consumers to gather information seems valid, and this gets to the heart of PR. It seems as if these companies rely on information asymmetry. If consumers really could (or would) arm themselves with enough information, they could make intelligent decisions. If more consumers knew that Consumer Reports actually ranked McDonald’s coffee quality ahead of Starbucks’, the latter would have a hard time justifying their $4 java. But Starbucks would never want to divulge such information. In fact, their reliance on information asymmetry might make them a challenging PR client indeed.

Milos: I’d be careful about saying that companies “make” it cumbersome for consumers to gather information. The nature of the market (monopolistic competition) is such that there are many producers whose goods are differentiated by brand. Comparing them is inherently costly for consumers due to sheer numbers, not because the companies make it so. And because product consumption such as coffee generates only low marginal utility, the cost of information gathering, processing and decision-making is too high. In other words, seeking out the best cup of coffee has a high opportunity cost. So producers a la Starbucks take advantage of the market characteristics and consumer behavior under time/budgetary constraints.

Matt: I think it’s a bit naïve to think that companies don’t want to keep consumers in the dark in a commoditized market. Why did the New York State Restaurant Association spend five years and thousands of dollars to defeat state legislation to require nutritional labels on menus? You suggest that for consumers the act of information gathering is too high, but I would argue it is kept artificially high. So who makes it too high?

The companies realize the nature of the market they’re in, and know that consumers aren’t deciding on price. So the companies take that as an opportunity to control the flow of information consumers get. You say they do it through branding and advertising. I would suggest they also control it through obfuscation.

I can fairly easily find out dealer invoice for a new Subaru, but god help me if I try to find out how many calories are in a Chipotle burrito (a lot). Burp.

Milos: I agree and disagree with you, depending on which markets/goods we’re talking about. My point is: it doesn’t take much/any effort for Starbucks to keep consumers in the dark. It’d take a lot of time just to find out all the coffee prices on our street here, and Starbucks is betting that most consumers will not engage in price shopping. Granted, as the goods become more expensive, the incentive to gather information (beyond just price) increases, and so too does the need to artificially keep the cost of information gathering high. At the end of the day, it’s hard to generalize across all product categories. I’m still focusing solely on coffee.

Matt: I’d argue that it’s not so hard for consumers to compare coffee. In New York, we walk by 15 coffee places on our way to work. In this type of market where, again, price is not an issue, it’s relatively easy to try a different coffee every morning. Same goes for people who drive to work. I imagine they pass any number of coffee mongers on their commute.

Obviously, Starbucks realizes this and floods the market with shops. And, of course, makes the brand and the experience so compelling that people identify very strongly with it.

Bottom line is the Starbucks brand actually made a $4 cup of an inexpensive product a very reasonable expense for millions of people for a very long time. They should be in the Harvard Business School Hall of Fame. In their hearts, consumers know they are getting swindled, and they know it would be easy to find comparable coffee…but the brand is just so powerful, they don’t do it.

Fewer Bucks for Starbucks?

Posted by Milos Sugovic

With its loyal customer base and knack for attracting the masses, the green-and-white mermaid chain seemed immune from economic slowdowns that plague retailers. But not anymore. The Mom & Pop coffee shop predator is now the prey, as afternoon frappuccinos are a luxury. That’s why Starbucks Corp. announced the closing of 600 stores in the United States and the layoff of more than 12,000 employees.

In a market characterized by monopolistic competition, where there are many producers and consumers, few barriers to entry, and product differentiation via branding, the adverse effects of an economic downturn on profitability come as no surprise. 

The king of branded $4 coffee is feeling the pinch because consumption decisions are more income elastic (price responsive) during an economic trough. With consumers turning to inferior goods, they are finding alternatives for their caffeinated indulgences. The big problem for Starbucks is that plenty of coffee substitutes exist, such as…just regular coffee.

Starbucks has been on the offensive in the last couple of years, saturating the market and opening an average of six stores each day. It employed a strategy of what the company calls “infilling,” or adding stores where the logo is already commonplace.

That business model works very well when consumers find it cumbersome to gather information. In a monopolistically competitive industry like this one, the cost in time and effort consumers might use to find the “best” product exceeds the benefit of its consumption, so consumers take the easy way out. They rely on advertising and convenience to make their decisions. After all, how many people will actually take the time to compare coffee drinks at different chains while on their way to a meeting?

But the quantity and branding game has its limits. At the end of the day, it took a slump for Starbucks to realize its market forecasters were drinking too much sugar with their lattés.