Business Blog: Hoover’s Business Insight Zone

Apropos of our conversation the other day about Starbucks trying to regain its “founder’s mojo,” I recommend this Joe Nocera piece — written in the form of an open letter — from the New York Times. In it, he takes to task Howard Schultz, the once and current CEO, for his failures of leadership, and for failing to grasp the state in which Starbucks now finds itself. A sampler:

But revitalizing the Starbucks experience is not going to be enough. Not even close. You also have to accept certain realities that right now still seem beyond your grasp. You talked, for instance, about slowing the growth rate in the United States, and even closing some stores. That’s good — so far as it goes. But if you are just cutting back by a couple of hundred stores, that won’t cut it. “The basic model of opening stores and fueling expansion should stop in the U.S.,” said Marc Greenberg, an analyst at Deutsche Bank.

What was particularly discouraging was hearing you tell investors to look to the international markets, where Starbucks has “only” 5,000 stores, for accelerated growth. That suggests to me that you still don’t get it. You can’t fix a car going 60 miles an hour. If you are going to fix what ails Starbucks you have to forget about growth. And you have to stop thinking of your company as a sexy growth company. Those days are over.

It’s so very hard for anyone — Schultz or anybody else — to accept that the magic is gone. Confirmation bias tends to run rampant; it tells you that, yes, we’ve been doing the right things fundamentally, but we need to execute them better, and that, yes, I’m the person to do it.

Good luck, Mr. Schultz. I happen to agree with you that people need a welcoming “third place” to build community and to seek a haven from life’s pressures. Contra Mr. Nocera, I think Starbucks could actually still fulfill this role — if you make some big changes to what you’ve been doing. For that, you’d be well-served to take Nocera’s words to heart. If you can escape the silo of confirmation bias in which you’ve found yourself.

[This is a bit of a Monday-morning ramble coming in between doses of coffee. Please just take it for what it’s worth — and feel free to tell me what it’s worth, good or bad, in the comments.]

When should an industry die? Should consumers hasten the process? Should regulators? These questions don’t have easy answers, but they’re worth thinking about, especially when we consider some of the macro-scale problems facing the U.S.

Once upon a time, the tobacco industry peddled what Doonesbury has lampooned as a “healthful lung snack.” But centuries before that, the fledgling tobacco industry brought thousands of adventurers, planters, and indentured servants from England to Virginia and the Carolinas, planting the seeds (literally and figuratively) not just for the worldwide boom in smoking and snuff-taking, but for the cash-crop economies of the New World. Oh, and the sustained European settlement of Virginia and the Carolinas, too.

But that was before people understood the now-obvious connections between tobacco use and various ailments including cancer and emphysema. Nothing against tobacco farmers, who typically work like dogs to support their families, but they grow a crop that (eventually) makes a lot of people sick. It’s not a political statement or even an editorial statement to point that out — it’s just the state of reality as understood by disinterested parties today.

A disinterested view of the early-onset obesity that now afflicts so many American children says that these kids are taking in way too many calories while getting way too little exercise. That doesn’t mean that we outlaw corn syrup — which, simply by the numbers, represents a lot of the empty calories in the typical American adolescent’s diet — or that we try to ban video-game use among kids in the U.S. But it could mean, in the long run, a consumer backlash against couch-potato activities (and, by extension, video game makers), possibly extending to calls to cut subsidies to the corn farmers whose crops help to produce all the yummy corn syrup that sweetens our sodas and everything else.

One more short example: coal is the largest source of electricity in the U.S., but also by far the largest source of greenhouse emissions related to energy production. Again, that’s not a judgment against the coal industry — or coal miners, or electric utilities that run coal-fired plants. It’s just an observation of the facts as we have them now. At some point, if worries about global warming become widespread enough, there will be calls to shut down the coal industry and coal-fired electricity generation in the U.S., or else to force emissions controls on these industries, even at costs that today seem too exorbitant even to contemplate.

I carry no brief for tobacco — I’ve never smoked and I don’t invest in cigarette companies. But I surely take in my share and more of corn syrup, and I happily use plenty of electricity produced from coal-fired plants. No one needs to tell me that people in these industries work hard, and I’m well aware of the unintended consequences — and large inefficiencies — that often accompany broad-based governmental regulation. In general, I’m a believer in the power of markets to deliver the goods to the public.

But what about when we decide that the goods in question are more than economic? We did that when the Surgeon-General started putting the warnings on cigarette packets, and when cigarette advertisements were banned from television. We did it, to a degree, when the elder President Bush helped push through bipartisan legislation that regulated emissions of sulfur dioxide and other acid-rain-causing chemicals. We’ve done it, piecemeal, as school districts have banned soda machines from their schools.

Of course, the industries affected don’t go along quietly with these changes. They will preach up and down about how we can’t afford to regulate these things, or how the products aren’t actually harmful at all, or how the real responsibility for childhood obesity lies with parents (which, as a parent, I can say is incontrovertibly true). But if there’s enough of a groundswell — and even if it’s ill-advised — these industries could go the way of the asbestos business.

Like I said, pardon the philosophical Monday-morning ramble, because these thoughts are still only semi-formed. But there’s something here worth talking about. If you want to tell me what you think it is, I’ll be most grateful.

This week SABMiller and Molson Coors agreed to combine their US operations. This undoes a substantial chunk of the mergering that Molson and Coors did just two years ago, and gives SABMiller — which, of course, makes Miller beer — an even bigger footprint in the US.

And who cares? Probably not beer drinkers. The deal is intended to pit the Miller/Coors group against the Budweiser franchise of Anheuser-Busch, but this entire segment of the beer market is moribund, not least because it centers around very light, very bland beers. Growth, in recent years, hasn’t come from brands like Bud or Miller Lite or Coors, but from microbrews and specialty imports.

This may not be fair, but honestly, the business side of this deal bored me from the moment I heard about it. The best take I’ve seen on the beer-drinking side of the deal comes from this Deal Journal interview with beer critic Don Russell, a.k.a. Joe Sixpack:

Coors vs. Miller: Joe Sixpack’s Taste Test

Deal Journal: What do you make of the merger announced today? From a beer drinker’s perspective, which tastes better?
Don Russell: They may as well be the same beer. […]

Today’s Company of the Day is Tim Hortons.

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Ask a Bostonian how popular Dunkin’ Donuts is on its stomping grounds of New England, and you might hear a glowing report about the chain’s coffee. Ask a Southerner the same about Krispy Kreme, and you’ll get an earful about the lightness and sweetness and perfection of their product. Yet for all the loyalty these chains enjoy in their home turf — and the sugar-caked smiles they inspire across the US — they don’t enjoy anything like the market penetration of Tim Hortons in its native Canada. The chain, which was co-founded in 1964 by National Hockey League star Tim Horton, serves a variety of doughnuts and baked goods, along with simple lunch fare and lots and lots of coffee. The chain has been so popular in Canada that the company has little room to expand there, except in selected areas like Quebec. So, like other successful Canadian companies before them, the company has looked to the massive US market for future expansion.

Challenges abound, starting with Starbucks and the aforementioned doughnut chains — above all Dunkin’ Donuts. Most of the US expansion Tim Hortons has enjoyed so far has come close to the Canadian border, where consumers already are familiar with the brand. But don’t count Tim Hortons out, because the chain has evolved over the years to appeal to more customers — by banning smoking, by expanding the menu, by putting stores in malls and other nontraditional venues, and by changing the interiors of the stores to make them more like sit-down restaurants and less like diners. While it wasn’t able to expand in the US very well during the years when Wendy’s International owned it (from 1995 until last year), the company’s current management is intent on bringing the best in Canadian breakfast food to hungry Americans.

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Today’s Company of the Day is Nestlé S.A.

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Nestlé may still make the very best, N-E-S-T-L-E-S, but they make it in a lot more areas than chocolate. Many Americans are most familiar with the Nestlé name because of its signature chocolate bars, which make the Swiss company the global rival of US-based Hershey and Mars. Yet chocolate makes up only a small part of the portfolio of the company, which is the largest food maker in all the world. Among many other market-leading positions, Nestlé is the world’s top producer of baby food and coffee, and a power in pet food, pasta sauce, and other packaged foods.

One key growth area for Nestlé, especially in North America, is bottled water, where the company is again #1. Through its Nestlé Waters unit, the company offers dozens of water brands, including Ozarka, Poland Spring, Perrier, and San Pellegrino. These brands put Nestlé in competition with other large beverage makers, including PepsiCo, which produces Aquafina, and Coca-Cola, which produces the Dasani brand.

Bottled water is the fastest-growing beverage category in North America, and Nestlé and its rivals expect that growth to continue as more Americans concerned about obesity and other health concerns turn to water in place of soda. Yet these major water vendors have also come under fire from some environmentalists, who charge that bottled water places a huge premium on a product that can be had essentially for free from the tap, and that the billions of plastic water bottles discarded by Americans each year represent a heavy environmental burden. In part to answer these critics — and to save itself money for shipping costs — Nestlé has introduced a lighter bottle design that uses less plastic. Meanwhile, it keeps touting water’s health effects of water and encouraging consumers take their water by the half-liter.

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–Joel Makower offers extensive thoughts on Coca-Cola and plastic bottles, which we discussed here the other day.

–Ryan Paul of Ars Technica reports on the decision that SCO will face a judge rather than a jury in its Novell trial. We talked about SCO’s legal issues last month.  SCO’s troubles look to be getting worse.

–Ville Heiskanen of Bloomberg reports that “Motorola May Fail to Lift Profits With New Razr Phone.” This reminds me — in the vein of this post from a couple of months back — of how poor an indicator business-magazine stories are for long-term success. When the Razr was at its peak, the stories came thick and fast about how Motorola had gotten its groove back. Now the prevailing line — which seems apt, given the company’s struggles to sustain financial and branding performance — is that Motorola had a one-hit wonder with the Razr, and that so far it’s not built to produce a string of hits a la Apple.

–The New York Times offers this extended business/exec profile on Dell the man and Dell the company: “Can Michael Dell Refocus His Namesake?” Writer Steve Lohr’s answer to that runs to several thousand well-informed words. My own take: Dell the company is nowhere near folding its tents, but Dell the man faces an uphill battle. Just because his company has been successful doesn’t mean it has the long-term answers. It’s hard to think of it this way, but in fact the PC market is still quite young in historical terms. I wouldn’t bet against Michael Dell, but what got them to where they are is not likely to get them where they want to go.

–Like the rest of the business world, we’ve talked plenty about Countrywide Financial as the huge mortgage company has navigated the troubles in the real estate and credit markets. Now they’re going to be navigating with fewer hands on deck: the company is laying off 12,000 employees. I’ll say again what I’ve said before: we’re a long way from working out all the hidden problems that built up during the real estate bubble of the early 2000s.

Charles Fishman is subtler than that, but it’s not hard to come away from his big Fast Company article — Message In a Bottle — with that conclusion. I adverted to the article in a post last month, but I didn’t get a chance to re-read it thoroughly until last night.

Fishman’s piece is a real eye-opener. Especially if you drink much bottled water, please do yourself a favor and read the whole thing. Meanwhile, here’s a key chunk from the early going of the article to set the tone.

Bottled water is the food phenomenon of our times. We–a generation raised on tap water and water fountains–drink a billion bottles of water a week, and we’re raising a generation that views tap water with disdain and water fountains with suspicion. We’ve come to pay good money–two or three or four times the cost of gasoline–for a product we have always gotten, and can still get, for free, from taps in our homes.

When we buy a bottle of water, what we’re often buying is the bottle itself, as much as the water. We’re buying the convenience–a bottle at the 7-Eleven isn’t the same product as tap water, any more than a cup of coffee at Starbucks is the same as a cup of coffee from the Krups machine on your kitchen counter. And we’re buying the artful story the water companies tell us about the water: where it comes from, how healthy it is, what it says about us. Surely among the choices we can make, bottled water isn’t just good, it’s positively virtuous.

Except for this: Bottled water is often simply an indulgence, and despite the stories we tell ourselves, it is not a benign indulgence. We’re moving 1 billion bottles of water around a week in ships, trains, and trucks in the United States alone. That’s a weekly convoy equivalent to 37,800 18-wheelers delivering water. (Water weighs 81/3 pounds a gallon. It’s so heavy you can’t fill an 18-wheeler with bottled water–you have to leave empty space.)

Meanwhile, one out of six people in the world has no dependable, safe drinking water. The global economy has contrived to deny the most fundamental element of life to 1 billion people, while delivering to us an array of water “varieties” from around the globe, not one of which we actually need. That tension is only complicated by the fact that if we suddenly decided not to purchase the lake of Poland Spring water in Hollis, Maine, none of that water would find its way to people who really are thirsty.

A chilled plastic bottle of water in the convenience-store cooler is the perfect symbol of this moment in American commerce and culture. It acknowledges our demand for instant gratification, our vanity, our token concern for health. Its packaging and transport depend entirely on cheap fossil fuel. Yes, it’s just a bottle of water–modest compared with the indulgence of driving a Hummer. But when a whole industry grows up around supplying us with something we don’t need–when a whole industry is built on the packaging and the presentation–it’s worth asking how that happened, and what the impact is. And if you do ask, if you trace both the water and the business back to where they came from, you find a story more complicated, more bemusing, and ultimately more sobering than the bottles we tote everywhere suggest.

Especially when you consider the success of products like Fiji Water, the issues surrounding bottled water are myriad and far from simplistic, as Fishman goes on to explain. But if you have a concern for the environment, it’s hard not to conclude that the prevalence of bottled water is more than just a negative trend — it’s a big negative, and one that’s eminently avoidable.

And yet it’s also a $16 billion business, and a staple for giant companies like PepsiCo, Coca-Cola, and above all Nestlé, so it’s not going away anytime soon.

Here’s more from Fishman:

Once you understand the resources mustered to deliver the bottle of water, it’s reasonable to ask as you reach for the next bottle, not just “Does the value to me equal the 99 cents I’m about to spend?” but “Does the value equal the impact I’m about to leave behind?”

Simply asking the question takes the carelessness out of the transaction. And once you understand where the water comes from, and how it got here, it’s hard to look at that bottle in the same way again.

I agree. In fact, I’ve decided not to buy bottled water whenever I can avoid it. I don’t think Big Water will come to supplant Big Oil as a target for environmentalists’ ire, but it’s surely coming into the crosshairs.

Today’s Company of the Day is McDonald’s.

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Tens of thousands of McDonald’s restaurants dot the world’s landscape, but in the past few years the company’s pervasive presence hasn’t meant automatic success like it did in decades past. Case in point: McDonald’s has posted just two quarterly losses in its half-century of operation, but both of them have come during this decade. The second instance came in the most recent fiscal quarter; yet the loss stemmed from costs related to the sale of 1,600 Latin American restaurants, a move that is part of the company’s overall strategy to retool itself for prolonged growth in its hottest markets. Foremost among those markets, believe it or not, is Europe, where McDonald’s has reaped fat profits thanks to renovated restaurants that sport upscale décor, regional menu items (beer for German diners, porridge for Britons’ breakfasts), and fancy coffee drinks on par with Starbucks.

In the US, too, McDonald’s has continued to fine-tune its approach to everything from menu items to marketing. Chicken wraps and salads appeal to health-conscious eaters; these offerings, combined with a better breakfast menu and extended operating hours, have boosted profitability for McDonald’s US stores. To focus on its core brand, the company has also reduced its diversification, first by selling its stake in Chipotle Mexican Restaurants (which enjoyed a successful IPO in 2006), and then by selling its Boston Market unit to Sun Capital Partners. On top of that, it has reached beyond its traditional core audience of children to market more intensely to moms. Nicer design and a menu more in touch with the times make it likelier that moms will want to keep returning to McDonald’s with their kids in tow. So far, these moves have paid off with strong growth in same-store sales, which suggests the Golden Arches remain relevant for diners from Frankfurt to Fresno.

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Y’all be sure to keep me honest when I blow a prediction, but on this one, I’m claiming victory. Having beat the anticompetitive rap that the FTC tried to pin on it in court, Whole Foods has completed its acquisiton of Wild Oats.

Whole Foods Closes Wild Oats Deal

What I wrote about this in June:

My opinion is that in this case Whole Foods is right, the feds are wrong, and it’s not even close. I’m willing to cite my own experience, unscientific though it is, in support of this view: I sometimes buy groceries at Whole Foods, as well as a Wild Oats-owned Sun Harvest Market around the corner from my house, but I also regularly shop at H-E-B and Randall’s, which is owned by Safeway. Here in Austin — the hometown of Whole Foods, remember — the primary competition for Whole Foods’ mega-flagship store downtown isn’t the little Sun Harvest in my neighborhood, but the large and exquisitely capitalized Central Market stores owned by H-E-B.

That’s why I’m claiming victory now. Of course, I’ve also come down on the side of the FTC, more or less, in the Rambus case, so let’s see how that one works out . . .

No common theme here — just a follow-ups and one-offs on items that intrigue me:

• Ryan Paul of Ars Technica has a nice summary of litigious saga of SCO, which we discussed the other day. Well, the summary isn’t nice for SCO, which Paul believes is headed for “financial oblivion.” Paul has a complementary piece on the precipitous decline of SCO’s stock price — which, as I write this, is 39 cents.
• Kara Swisher of AllThingsD has an interesting video conversation with political-media blogger extraordinaire Jeff Jarvis. Jarvis classifies Yahoo as an “old media” company and thinks it’s just as doomed as the newspapers unless it “blows up” its business model. (We discussed Yahoo’s future a couple of weeks back.) You can read some of his further thoughts on media innovation in this column posted on his blog.
• The latest news in the mortgage meltdown/credit crunch: Merrill Lynch analyst downgrades Countrywide Financial. (What — don’t they read this blog at Merrill?) Yesterday, the NYSE halted trades in Thornburg Mortgage shares after prices fell 47%. But Thornburg has assured the markets that it will soldier on, and the share price has bounced right back up.
• The old rule makes sense in Indian grocery stores as well as anywhere else: give your customers what they want.
• Not related to the business world at all, but interesting in its own right: The Sun in Motion.