Volume 34: What’s Google Glass got to do with it?

1. From Glassholes to the Douchehouse.

Tl;dr: Be careful the company you keep. First impressions can stick.

I’ve been sort of amused and horrified in equal measure reading about venture capitalists wrapping themselves up in knots via invite-only audio-conferencing app Clubhouse as they moan about journalists and their reporting on tech companies. The amusing part is just how silly these rich, entitled financiers look for attacking journalists for doing their jobs. The horrifying part is the lack of irony, the abusiveness, and the undercurrent of malicious intent on display.

Of course, what’s utterly stupid is that while there has been increased critical journalism around tech recently, the media stance remains overwhelmingly positive. The PR tech dividend that technology firms have taken for granted for years hasn’t been broken by journalists. If anything, public feelings about tech are turning negative because of the VC industry's cynical approach toward funding Ponzi-scheme-like exits rather than businesses and pretending that profitless business models dependent on regulatory and low-wage arbitrage represent ‘disruption.’

But that isn’t really what I wanted to talk about. What’s more interesting is Clubhouse itself, which now finds itself managing a new found reputation as the “Douchehouse,” much like Google Glass, whose users were labeled “Glassholes” and Segway, which became synonymous with overweight mall cops. What’s the connection you might ask?

When you launch a new product, the people who associate themselves with it start giving it meaning. Essentially, the product borrows equity from the people who use it. Some businesses try to explicitly manage this, like Clubhouse and Google, and some just accidentally let it happen, like Segway. But either way, if you get this wrong, you can end up in real trouble. Neither Google Glass nor Segway were able to get past the negative first impressions that were created.

Clubhouse thought that by beginning as an exclusive invite-only tech club they’d reap the rewards of creating demand from others willing to pay to join in, which is a classic launch strategy for premium brands. Associating the brand with specific kinds of people by giving it to them for free and then constraining supply to make the product appear more valuable to others. Of course, Clubhouse didn’t anticipate that the people they invited might make their app something to be avoided rather than something to aspire to. So can they fix it? Truthfully, the answer is maybe not. Anytime a young product acquires a negative first impression like Douchehouse or Glasshole it can be really hard to lose it. Don’t be surprised if Clubhouse ultimately ends up re-launching as something else.

2. Price, Premium & Differentiation.

Tl;dr: Three different strategies for a post-COVID-19 world.

One of the most singularly annoying statements thrown around in the past few months is “the new normal.” Aside from being a raging cliche, the biggest challenge is the intellectual dishonesty at the heart of the statement. There can be no such thing as a new normal because we have no fixed definition of what constitutes normal. The reality is that we’re always in a new normal because what constitutes normal is constantly evolving. This is why what people in the 1980’s viewed as entirely normal seems utterly abnormal today.

So, it’s good to see businesses making big strategic moves that aren’t based on a fantastical prediction of a “new normal,” but on very practical perspectives on the markets they serve.

Let’s start with Tesco. (If you don’t know Tesco already, they’re the UK’s largest supermarket chain with around 28% UK market-share.) They’re gearing up for a deep CV-19 fueled recession with an all-out focus on price. During the last recession of ‘08/’09, Tesco was caught flat-footed by low-cost German operators Aldi and Lidl, which entered the market and vacuumed a meaningful amount of market share through their limited selection, low-cost approaches. This time, Tesco is planning ahead with a push for a new pricing floor at all times to be accessed via millions of Tesco Clubcard holders. This is part price-war, part loyalty push. The challenge for Tesco, however, is twofold. First, unlike Aldi or Lidl, they don’t have a low cost business model so this is going to hurt somewhere (suppliers most likely based on Tesco’s past behavior, but funnily enough, not executive pay), and second, as the market-share leader they remain vulnerable to losing share to the discount operators that do have low-cost models. Will it work? Possibly as a short-term band-aid, but it’s hard to see this being sustainable unless Tesco takes a scalpel to its operating model first.

Next up, Dunkin’ (The artist formerly known as Dunkin’ Donuts) is moving in the opposite direction as they seek to shore up margin with a greater emphasis on premium products and a “next gen” store experience. They’re taking a steady-as-it-goes approach to an existing strategy to push upmarket into higher margin items served from a more pleasant store in the hopes of achieving a valuation that is more in line with that of Starbucks. With that in mind, they recently announced the closure of 450 locations in Speedway gas stations. These only accounted for around 1% of their profits, kept the brand downmarket, and hindered their ability to open their newest store formats in these service areas. Will it work? I’m more bullish on this one. I don’t see loyal New Englanders ditching Dunkin’ anytime soon, the new formats and offerings have much greater margin potential, and I’m not sure many will mourn the demise of a gas station coffee served in a styrofoam cup somewhere around the temperature of the center of the sun.

Finally, we have Walgreens, which is pursuing a differentiation strategy after announcing a $1bn investment in VillageMD as a part of a joint effort to put doctors offices into up to 700 of their pharmacy locations over the next five years. This is gearing up for a post-COVID-19 world and is primarily aimed at shoring up their core prescription filling business. Filling prescriptions is a key activity for any drugstore, so Walgreens is betting that by putting a doctor in the store, the increased convenience of seeing your doctor and picking up your prescription at the same location will create a moat around the business. This is especially important relative to the moves into healthcare made by Walmart and Amazon and the increasingly massive scale of traditional competitor, CVS. Will it work? Well, it’s hard to be certain because this sphere of the economy is becoming a lot more competitive and is being entered by some deep-pocket players. However, their plans to be active in underserved health markets (unfortunately, the poor tend to have a higher incidence of chronic conditions requiring prescriptions to manage) and the sheer scale of the healthcare industry suggests this is a smart move. Had they done nothing, they’d have been left far behind.

3. Brand building: Still a critical competitive moat.

Tl;dr: Don’t believe the mar-tech industrial complex hype.

I commented on LinkedIn a while ago that the “marketing of modern marketing is mostly bullshit” so I was quite heartened to see this report from Google actually makes a few good points. I’m not going to review the whole thing because it’s quite long, but I do want to focus on one of the core underlying elements hidden in the downloadable PDF - that brand strength acts as a powerful barrier to entry against new competition.

Why is this important? Well, for a couple of reasons. First, it suggests what we’ve already seen. Namely, that over-hyped VC backed DTC startups often dramatically misinterpret the markets they enter. Rather than the established brand “ripping people off” with high prices that make it vulnerable, there’s instead a preference-premium for that brand making it very difficult to compete against. Second, it’s yet another demonstration of how the marketing of modern marketing is mostly bullshit.

One of the most egregious elements of the shift to bullshit is the idea that the primary goal of marketing is not to build brand-strength and establish a hard to compete with preference-premium, but instead to focus religiously on transactional metrics around short-term campaign ROI and customer activation masquerading under the guise of “performance.” A focus that demonstrably has the dangerous side-effect of a negative, sometimes fatal, spiral of discounting and price promotion.

Why is that important now? Well, aside from the chart in the Google report showing that people are vastly more likely to search for the “best” product rather than the “cheapest,” the pressure is going to be on for many brands to compete on the basis of price. That’s the nature of recessions after all. But the problem with the wanton pulling of the discounting lever is threefold: First, you train your customers to delay the gratification of purchase until the inevitable discount promotion is running, which kills your margin. Second, you accidentally optimize for the least loyal and most price sensitive customers, which messes with your data-driven segmentation and renders customer lifetime value assumptions moot. And third, you can cause real harm to your brand that’s very difficult to repair. (I’ve worked with more than my fair share of clients looking for a brand revitalization caused by the realization that price promotion has caused real harm to their brand).

The true measure of the marketers who most effectively survive the recession we’re in today won’t be those who discount their way to marginless oblivion but those who resist the shiny promises of the mar-tech industrial complex and focus instead on building and sustaining a preference premium, even if it is only a slim one.

4. Amazon is barely profitable: E-Commerce isn’t the answer for everyone.

Tl;dr: Predictions of an online only future for retail are wide of the mark.

As the world moved into lockdown, retailers faced a new challenge. Were they “essential” (allowed to remain open) or “non-essential” (forced to close). A non-trivial difference that’s led to strong financial results from broad-scale retailers like Wal-Mart or Target and financial armageddon for narrower specialists like Kohl’s.

E-Commerce has been touted as the answer by many. Specifically, the future is online, and only those with robust e-commerce operations will succeed. On face-value, this rationale makes a lot of sense, especially if you take the view that once people develop the habit of online shopping and fulfillment for everything, why would they go back? But if that is true, why are retailers such as Primark in the UK or TJ Maxx in the US not only not pursuing the e-commerce path but appear to be actively rejecting it instead?

To put it simply, e-commerce fulfillment for retail is hard to do well, requires a significant strategic commitment to make happen, and even when you do, it operates at a lower margin than a traditional storefront does. This is probably one reason why even Amazon, at its overwhelming scale, barely ekes a profit from its retail operations and why I had to drive to IKEA to buy lamps this weekend after moving house (bizarre experience).

So, what about the future? Well, we’re still amid a pandemic without a vaccine or effective cure, but based on the economics you just can’t bet against physical retail. Yes, it will likely become even more omni-channel. But no, it’s highly unlikely we will see retail move wholly online anytime soon. Even if customers wanted it (which they don’t), the economics just don’t support it.