Lululemon Athletica: Driven by fundamental trends

On August 28th, 2010, I wrote the following ‘tweet’ in my Investbyads’ Twitter account:

"At Lululemon's store yesterday. Great consumer experience. More to come on LULU."

I never got to write the article I intended to on Lululemon Athletica (LULU). At that time, the share price for LULU was $32. Yesterday it closed above $70.

In an article I just published in Seeking Alpha, entitled "Lululemon Athletica: A Great Consumer Experience Has This Stock Rising" I explain what I think is so right about Lululemon’s consumer experience and why I believe it is not too late to invest in this superb retailer.

The need for 'more': Cisco Systems vs. Netgear

The technology sector is one that I think can benefit immensely from taking a real consumer approach to their marketing and thus reap the rewards of leveraging the need for ‘more’. I am going to use the Home Wireless Networking sector as an illustration of this point, but the situation is replicated in several other segments dealing directly or indirectly with consumers.

There are two key players vying for the consumer favor in the Home Wireless Networking category: Cisco Systems (CSCO) and Netgear (NTGR). The potential in this market is still largely untapped. Why? In an April 2010 article entitled “Tools That Make it Easy to Network Home PCs”, US News reported that :

“… About 20 percent, or 1 in 5, sets of wireless networking gear is returned to stores as buyers buckle beneath the vagaries of networking.

There has been progress. It was nearly twice as hard to set up a wireless network just a few years ago, when return rates were closer to 40 percent. But even today's numbers largely represent tech-savvy consumers; many average PC users still don't even try. Ten years after they hit the consumer market, wireless networks have made it into only 30 percent of American households, report market researchers at ABI Research.”

What’s the issue? Many of us can attest that setting up a router is not that hard. Yes, we might be the tech-savvy consumers the article refers to; but I’d sustain that the real obstacle lies in the intimidating number of incomprehensible technical terms manufacturers use to describe their products and their functionalities. Both Linksys and Netgear proudly announce their products meeting the IEEE 802.11 N standard, which is superior to the B and G ones, but not to worry, because they are backward compatible… huh? So now you can have the RangeMax Dualband model XYZ-1234… HUH?

In addition, if you try to shop their line of products, the technicality of the offerings makes it really hard for the layman to understand what he is getting, if he is over-shooting against his needs, and moreover, if he is getting himself into a mess that will end up frying his hard drive, blowing up his monitor and ultimately, getting the US into WW3. And as mentioned above, a consumer faced with such enormous challenges would simply avoid making a decision.

To Cisco’s credit, in 2009 it launched a line of routers denominated Cisco Valet Wireless Hotspot, focused exactly on simplicity. It was definitely the right step in the right direction. However, its support barely went beyond the launch phase and I think it failed to create a significant stir up in the category.
OK, now we know what the issues are. How are they to be addressed? And moreover, how can one of these companies not only get consumers to look at routers with different eyes, but moreover, activate and leverage the need for ‘more’? Based on what have been discussed so far, the winner will do the following:

• It will create a new category, with a consumer-friendly moniker, like ‘wireless Internet hubs’ or ‘wireless centrals’. Anything but ‘routers’ which is an archaic definition from the times of the corporate networked PCs.
  
• It will define it in terms of easy to understand, relevant dimensions. In my view, they will be a) speed: how fast my data will travel, b) range: how far away I’ll receive my signal and c) power: how many devices can I hook up simultaneously.
  
• It will create easy codes for each of these dimensions that consumers can understand, follow… and desire.
  
• Its communications will be: a) mainstream: stop advertising in techie magazines and geeky websites, b) reassuring: not focused on the gadget, but on its simple installation and the lifestyle benefits; c) consistent: follow the pattern of their consumer electronics cousins.

The definition of these relevant dimensions, and the corresponding easy to understand codes to qualifying them is what will signal consumers of the need (or desire) to upgrade. The consistent communication will keep consumers interested in and aware of the evolution of the category. If and when we see this happening, we’ll have a winner.

This is a very useful framework to scout for companies that represent an interesting opportunity for investing, and/or to assess the real potential of a new product launch or marketing initiative. Keep it in you toolbox.

Leveraging the desire for ‘more’

No different than in other aspects of life, as consumers we are anything but rational. As a general rule, rationality kicks in just after we are emotionally committed to a decision. That applies to almost anything: from the impulsive decision of buying a pack of chewing gum at the convenience store’s counter to choosing the person we will share the rest of our lives with. We emotionally decide we need that new flat-screen TV. Then rationality engages to a) validate and justify the decision, and b) sift through features and alternatives to select the specific product and model to buy. Even this is not a sequential process: there is a constant feedback loop between our emotional and our rational beings before we arrive to a concrete purchase decision and act on it.

Based on this precept, the implications for any marketer are obvious: engage the emotional side of the customer first. Get him to emotionally commit to your product first and just then provide him with the rational arguments for him to justify and validate his decision. If a marketer tries to win the competitive war based on the assumption of consumer rationality, he’d be choosing the harder, riskier path to success.

One of the most powerful emotional drivers ruling our consumer behavior is, simply, our desire for ‘more’. More what? Anything: better, faster, cheaper. We are helplessly compelled to want whatever we perceive is an improvement to what we already have. We want it (emotional): we can’t always justify it… or afford it (rational). Yet, this is the drive that makes us ditch perfectly fine, working cell phones, TV sets, jeans, sofas, cars to go and get the shiny new one. If emotionally we perceive there is more to be gotten, and rationally we can justify it, then we have a purchase.

While the principle might seem obvious, its execution is not that simple. The challenge for a marketer is not only creating a tangible “better” that consumers can understand and ultimately, desire, but also creating the codes to communicate it. And this is key: consumers must be able to ‘emotionally’ understand the improvement that is offered. Emotionally understand? Isn’t “understanding” an eminently rational trait? Well, not really.

Here is where I want to introduce the concept of category “dimensions” or “coordinates”. For any given product category, consumers create a sort of a mental map or space, not unlike the physical space we live in. In each of these categories, though, there are just a limited number of ‘dimensions’ that consumers use to make up their mind about what is desirable and relevant in a product. Usually there are maximum three or four of these “dimensions” that are relevant. More than that and the decisions become too complicated. Our brains abhor complexity, and when the decisions become too complicated, our tendency is to just avoid them. If the “better” is not immediately obvious, then I’d rather avoid the risk –and the associated pain- of not making the right decision. Dan Ariely covers this topic in its book Predictably Irrational. When you think about it, this is not that different than the way we perceive the physical world: everything is in three dimensions. We can even entertain the thought of a fourth dimension: but if we are pressured to consider a fifth, sixth or more dimensions, we enter into a mental short circuit. We simply discard the thought.

One of the best examples of how product ‘dimensions’ work and are able to drive consumer behavior is the PC market of the late 80’s, early 90’s. It is also a great example of how departing from a simple model consumers can easily “emotionally” understand creates a short circuit, and ultimately, lack of consumer interest. It is an example where a drive for rationality took over, paralyzing consumers and ultimately, hindering the growth of a Company that still today is looking for its north.

Many claim that Intel’s (INTC) stroke of genius was its “Intel Inside” campaign. That campaign turned a highly technical computer’s component into a desirable consumer brand. Intel was able to have consumers demanding PCs built with its processor, and that generated the dramatic growth that ultimately turned Intel into the uncontested leader of the processor industry it still is today. But Intel inside is just half of the story. The other half is how Intel was able to simplify for the consumers what otherwise could have been a very technical and almost ethereal category. What Intel did was to simplify the processor category for the consumers in terms of just two, simple to get, and very desirable dimensions: a) capacity and b) speed. That’s it. Along with that, it created communication codes that where easy for the consumers to follow. When PCs started making inroads into the consumer market, Intel very quickly changed the branding conventions from its processors from a technically driven nomenclature (286, 386, 486) to a cool, awe-inspiring brand name: Pentium. And for speed, Intel made sure to make news with the easy to follow clock rate in terms of Mghz. And this is exactly the point: consumer didn’t need to know what made a Pentium 2 better than a Pentium 1. They didn’t need to know what the clock rate exactly meant. These where just easy indicators for the two dimensions consumers cared about; an increase in the indicators signaled the consumers that there was something ‘better’ out there. That’s all they needed to know. And the race to upgrade started. I vividly remember the buzz among consumer when Pentium 3 was launched; or when the first 1 Ghz processor was introduced.

And then, everything just got more complicated. Suddenly, Intel launches the new Celeron processor. Consumers scratched their head: what is the difference? Should I buy Celeron or Pentium? How do I know? Pentium reached the 4 version as the last significant launch, and that was it. The race for speed stopped at 3.6 Ghz. More dimensions where introduced: the category turned complicated, technical. Decisions became difficult, and with that, consumer interest faded. The PC turned into a commodity. Yes, of course other factors came into play. But the single most important one is that, as I like to say, engineers took over.

This analysis process can be applied to any category. Then you’ll notice that those brands and companies that are able to disrupt a category are the ones that a) create one or more new dimensions in such a category that are more relevant for the consumer; and/or b) create more meaningful, easy to understand codes to communicate “better” to consumers.

Which companies are mastering this need for “more”? Just to mention a few examples:

Apple (AAPL) of course comes to mind. The lines in front of stores when a new iPhone is launched are a clear indicator of that. Apple is a master in planned obsolescence. Yet, watch out for Google (GOOG), who is threatening the iPhone supremacy by leveraging a key dimension in the smartphone arena: accessibility.

Netflix (NFLX) continues driving the key dimension that made them a disruptive force on the entertainment delivery category: ubiquity. Let me see a movie when I want it.

Microsoft (MSFT) does a good job with Office and with Internet Explorer. They also finally adopted a more meaningful code for Windows. The use of numbers will allow them to do more frequent updates to its OS that need not be tremendously onerous in terms of time and resources.

In the luxury car category, I think BMW (BMW.DE) has one of the smartest and more consistent product branding strategies. Just two numbers: size and engine power. It’s very easy to understand and shop their line-up. Lexus, Infinity, Accura and Cadillac use a series of meaningless, hard to understand combinations of letters and numbers that are impossible to commit to memory.

I will continue referring to this concept in future publications.

The Prospects for 2011

The last part of 2010 and these first days of 2011 have been exciting indeed. It almost doesn’t matter what is in your portfolio: the best bet is it performed handsomely during the last few weeks. The big question now is: where to from here?

I am very optimistic about 2011 prospects. There are solid signs of economic stabilization, and most importantly, consumers got tired of the economic doom and gloom, as demonstrated by the rosy December retail figures. This is key: economy is, above all, a psychological phenomenon. If enough people believe things will be OK, then things will be OK.

On the other hand, though, I don’t see the stock market reaching an all-time high in 2011. The wounds of the very recent collapse are still fresh, and investors, both individuals and institutions, will thread lightly. The action in 2011 will be characterized by the over-used but very real concept of “cautious optimism”. What does that mean in practical terms? High volatility. Investors will get spooked with every hint of bad news, and will shoot –read ‘sell’- first and ask question later. Once the bad news are assessed as not that threatening, they’ll quickly come back with a vengeance. Also, frequent profit-taking will add to the choppiness I foresee. So, what are my assumed implications of this behavior for a sound investment strategy for 2011?:

1. On October 9, 2007, the Dow reached its all-time high of 14,164. Today, the Dow is hovering above 11,730. That’s barely 2,400 points or 20% of its all-time peak. If we assume we can reasonably cover half the distance this year, that puts the Dow closing 2011 at around 12,900. In a straight-line, that would mean a gain of more or less 100 points a month from now to year end. But of course it won’t be that easy. Because of the circumstances I mentioned, I think that we will have three or four short-lived corrections of around 5% each, the first of which is likely around the corner. I don’t believe we will finish January without seeing a drop in the market indicators. But these will all be buyable dips, and very much indispensable to achieve a decent return in 2011.


2. I see two sectors as the real winners in 2011: Financial Services and Technology. Financials are still laggards in the recovery experimented in 2009-2010. With improved economic prospects, investors will rush to take positions in the biggest names in the sector. With regard to Technology, just two words: iPhone and Android. This is what Jim Cramer is qualifying as the “Internet Tsunami”, and on this one, I have to agree with him. Other sectors to benefit? Retail, Energy, Industrials and Commodities.

Of course, talking about sectors is just the beginning. Which individual stocks will be the big winners? I’ll share my ideas in the following posts.

Embracing the Zeitgeist: Apple vs. Microsoft

In a world regimented by the relationships we had to establish and upkeep in order to have a life, the role of branding was very clear. A brand was to project to others your personality and your character. The ensuing advertising was very straight-forward. A brand would show the type of character you wanted to portray and presto, it was selected by those who required that specific trait.

Nowadays, however, things have changed. The most important change is that people can choose. No, I am not talking about choosing between flavors or between different brands in a given category. Today, people can really choose: choose what to believe, choose who to relate to, choose what to care about. Ultimately, they can choose how to live their lives. The drivers of this change are very simple but very profound: a) access, and b) closeness.

In other words, globalization. Not just globalization as an economic trend or economic doctrine, but true globalization: being aware of what's going on in any part of the world the instant it's happening; not being limited by geography when choosing who to relate to or what to talk about; the empathy created by being first-hand witness –through the power of media- of the suffering and triumphs of people on the other side of the world, and ultimately, the understanding that we are all interrelated. It's never been easier or cheaper to move from one place to another. Not that long ago, self-expression and creativity was limited to those who had well-honed artistic skills.

Today, self-expression and creativity takes the form of pictures in Flickr, videos in YouTube or a page in Facebook. Suddenly a world is open for everyone and people are exposed to the myriad of experiences that life can be made of. And people today want to have them all. Like never before, life can be fulfilling and diverse and varied and exciting. There is no time to waste and certainly, no conventions to obey to. Molds have been broken, closets have been pried open and non-committal experimentation is possible. In this new world, what you need to be is secondary to who you want to be and what you want to do.

In order to be successful, brands need to follow suit. Consumers today are far more complex and far more fluid than never before. A brand that defines its business, its character or the consumers it serves in too narrow of a way might soon find itself displaced and out of favor among consumers that just moved on to the next thing. The typical criteria for consumer segmentation just don't work anymore. Demographics like gender or age or geography are simply irrelevant. Lifestyle? There are as many lifestyles as consumers out there.

As a marketer, what do you do? Successful brands need to engender familiarity, trust and a sense of consistency. They can't be erratic. They can't change with the wind. But at the same time, they can't be stagnant. This is the new positioning challenge marketers are facing in this brave new world.

The solution is to embrace and stand for the values that fundamentally define the era we are living in and that in one way or another touch or are embraced by most people; that is, embrace the zeitgeist. In other words, praise the journey, not the destination. What is exciting about this approach is that, as a brand, once you stand for a given value or set of values, you can embrace whatever is the expression of such values at any given time and still remain true to yourself and to what consumer have learnt to appreciate in the brand.

In very simple terms, as long as you stand for music, you can play any tune. But if you stood for swing, you'd be facing very tough times in a world dominated by hip hop and country. If as a swing brand you started flirting with hip hop or country, then you'd look inauthentic and out-right opportunistic; therefore, not credible and definitely not trustworthy.

This way of defining a brand, and the consequent implications on how a brand interacts and communicates with consumers, is what I've called Marketing to the Zeitgeist.

The most influential brand of our time is, by far, Apple (AAPL). How many brands or companies are there whose endeavors are so eagerly followed by press and consumers alike? While most companies need to resort to stunts and massive PR efforts to try to attract the attention of the press, Apple's every move is news. Journalists line up to try to break the latest idea Apple is working on. We, as consumers, are simply enthralled by the succession of amazing technologies Apple makes available to us. And even those of us who don't have that many Apple products wish we had them. As an investor, there is no doubt in my mind: Apple is a core stock that must be owned and retained for the years, if not decades, to come. But why? What is Apple's spell?

Many marketers and analysts have tried to rationalize it and decode it: innovation, design, courage, Steve Jobs. All those traits (except for Jobs, of course) are not unique to Apple. How do they pull them together, what sort of alchemy do they apply to combine them in such a successful proposition then?

In my view, I would summarize Apple's magic in two words: enlightenment and selflessness. Now, these are words that much rather seem to describe the Dalai Lama than a company, and that you will hardly find in any business or marketing text. They are kind of lofty and pretentious, aren't they?

The best way to start explaining my choice of words is by some quick comparative analysis: why aren't other Apples out there? Most companies invest a tremendous amount of resources talking to consumers, gathering insights, trying to understand what is important for them. All too often, though, those insights are unconsciously sifted through previously established paradigms. These paradigms are based on the knowledge and understanding accumulated by a company or industry through the years: what worked or what didn't in the past, previous understanding of the consumers and products, assumptions built on experience and so on. Paradigms die hard.

The world changes around us, but we have a tendency to cling to old paradigms. More often than not, new insights are either forced to fit the old paradigms or simply, discarded as outliers. Even when new insights are gathered and understood, the second sin most companies go through is to stubbornly try to, once again, force an existing solution into meeting the new insight. Most companies develop an introspective understanding of the world, of their industry and of their own capabilities, and end up believing it as the absolute Truth. That is, we tend to fall in love with ourselves and end up drinking our own Kool Aid.

For me, one of the most blatant examples of this behavior is Microsoft (MSFT). With regard to their operating system, their last true innovation was Windows XP. Everything else has pretty much been a cosmetic improvement over the same platform. Their product, their view of the world has become so ingrained in their organizational psyche, that they basically dismiss any consumer understanding that doesn't fit their own paradigm.

To illustrate this point, think of this capital sin: they launch a Home version of Windows 7. Home, OK? For you and me, basically: fairly proficient in turning the computer on, writing a few emails and surfing the Web, but not much more. One day, you are more or less happy at your computer when an error occurs and the message that you get is an unintelligible code accompanied by a "Talk to your system administrator" instruction. I don't know you, but at home we don't tend to have a system administrator lurking around in case Windows decides to misbehave. OK, so you don't know what to do and, of course, try to see if the Help function in the system can shed any light on your problem.

Have you ever tried to use Windows Help? You need a doctoral degree in Applied Electromechanical Astrophysics just to get a shot at understanding what they are talking about. If this is their "Home" version, I don't even want to imagine the nightmares the IT guys go through with the enterprise one! The issue here? The company's focus is on the product, not on the consumers that are going to use it. What prevails is the vision and understanding of the engineers creating the software. Sure, they listen to the consumers; they have extensive ethnographic and anthropological research on how the consumers use the products. But then, they develop engineering solutions to what they perceived the consumer is asking for. They force the insights into their own paradigms. After all, Applied Electromechanical Astrophysics has become part of the pop culture, hasn't it?

So Microsoft, proud of its accomplishments (and tickled by Apple's constant snipes at them), goes and spends a fortune in media with a campaign that try to convince consumers that "Windows 7 was my idea". Yeah, right. My "System Administrator" kind of disagrees. See, you can't resolve with advertising what your product doesn't deliver. Microsoft has become an introspective behemoth that ended up believing that the world truly is what they see through the lenses they've built for themselves, and that reflects in everything they do. Windows Mobile? As clunky as the parent application. Office? Still the standard, but getting harder to use.

And Apple? Suffice to say that Apple surpassed Microsoft in market capitalization. And consistent with the case I'm making here, I'd expect that difference to continue widening in the future.

As I was saying, I'd used two very unorthodox words to describe Apple's unique recipe for success: enlightenment and selflessness.

Why is Apple enlightened? An old colleague, the then global Market Research guru of the company I was with at that point, had a maxim that has stuck with me through the years. It's a very simple four-step doctrine, and yet, quite difficult to truly follow: 1) listen to your consumers; 2) listen to them again; 3) believe them; and 4) act on it. As I was explaining in the first part of this article, it is steps 3 and 4 were most companies struggle. It is where insights collide with pre-established paradigms that things go awry.

Yet, even if this doctrine is followed to the letter, there are yet another two pitfalls that must be dealt with: exactly which consumers do we need to listen to, and how literally do we take what they say. These are two pitfalls many companies also fall into. Based on outdated marketing precepts, they think in terms of "our regular brand users" or "competitive users"; or, being a little more sophisticated, the "creative class" or the "social adventurers". Then, they take what the consumers say to the letter, and build the literal meaning of the collected insights into their decision making process. All these very easy to make mistakes will, most of the times, result in initiatives that are unsuccessful and leave everyone scratching their heads: "we did all the research… what went wrong?".

Today marketers must free themselves from the constant chatter around them, climb the proverbial mountain and scour the horizon to understand where society is going as a whole. And in seeing the direction, they need to embrace it and decide to lead it. Not fight it, not trying to steer it, but just position themselves at the forefront of the future and start building it before the rest get there. That ability to hover above and beyond the noise of the market today and understand where society is heading as a whole; to believe in what you've seen; the will to truly embrace that future and have the capacity to articulate it and to build it ahead of the arrival of society to that point, that is what I call enlightenment.

That's what Apple is doing: Apple goes beyond the interests of particular groups or segments. Apple is reading and decoding society as a whole, seeing where it is going and just delivering against it. But, wow, what a delivery!

There is where the second component of their formula kicks in: selflessness. The secret of Apple is that they simply understand that what they must deliver is an experience, not just a product. It's not about features, it's not about trying to force fit my technology or to impose my view of the world onto others. Apple is masterful at understanding the experience the consumers want, and making technology work to provide it. They don't sell operating systems, chips, memories and hard drives. They don't brag about search capabilities, speed, computing power and other technical irrelevancies. No. Apple delivers beauty, the feel of your fingers gliding on the screen, simplicity, reassurance and reliability.

At Apple, the consumer is truly the center of their attention; not a prey that needs to be persuaded to buy their fares, but the capable individual they need to serve. And in that selflessness resides their power and their dominance. Interesting, isn't it? Apple dominates by seeking to serve. And those who seek to dominate end up pushed aside.

The iPad is just a superb example of that vision and and that understanding of where consumers are, where they are going and what they really want. The immediate reaction heard in the techie circles was: why would the consumers want one? It's not a laptop, not nearly as powerful; it's just a bigger iPhone that doesn't even make phone calls. And yet, consumers flocked to it.

But why? Simply, because it is the experience the consumers were longing for. Think of where laptops have been heading: smaller, lighter, netbooks. And despite these changes, you constantly hear people complaining about having to carry their clunky laptops. Think of where connectivity is going: it is a mobile world. In this small global village, consumers want… no, need to be plugged to the grid 24/7. And yet, even the mighty iPhone is rather small for most of the things consumers want to do with their connectivity.

Think of the future: what is the ideal scenario for anyone? The portability and simplicity of the phone with the comfort and power of the laptop. Some sort of cybernetic transformer that can be unfold from a small phone into a larger and spacious… what's the word? pad!... that facilitates work and fully blown entertainment anywhere. Some technologies like flexible screens will likely get us there.

But in the meantime, as we arrive there, Apple starts preparing the terrain with the iPad. Apple will take us there. Apple has become a symbol of the zeitgeist. As such, owning Apple is pretty much owning a big piece of the future.

Investing by Advertising

I strive to uncover interesting investment opportunities by looking for companies that, in my view, have been able to not only garner the right consumer insights, but have the skills and talent to translate them into great products with tremendous business potential; products that respond to the key fundamental values and needs defining the consumer today. I don't pretend to be a financial analyst: I am a Marketing professional, and my initial assessment is based on what I see companies doing in the marketplace and how those initiatives fit with the aspirations, lifestyles, emotions and trends that I know, through research and direct exposure, shape the behavior of this generation of consumers. There are lots of great resources on investing. There are hundreds of sites and thousands of authors writing everyday about stocks and the financial markets. But, interestingly enough, not that many address a very basic principle behind finding winners early enough: great products, brilliantly marketed, are the ultimate drivers of financial success. Find the great products, and you will find a great investment.

I truly believe that anyone can spot a great investment opportunity by just keeping the eyes wide open and paying attention to his/her surroundings. We are all constantly exposed to extraordinary marketing initiatives with huge potential pay-off; most of us, though, are just too preoccupied with our own activities and everyday pressures to stop for a moment and just observe. However, even if we stopped for a minute to watch what's around the corner, it would be good to count with some guidelines, some tools to help us better define what to look for, where to focus our attention. This note could play a role in generating that guidance, so I thought it would share with the readers some of the criteria I use to identify products –in the most ample sense of the term- that show great potential.

To start this process, let's talk a little bit about Marketing itself. Much is talked nowadays about how conventional marketing is not effective anymore. Consumers have changed, media is fragmented, and the promises of glitz and glamour that used to work so well in the old days fall in deaf ears with today's consumers. All this is partially true: consumers have indeed changed, media is certainly very fragmented, and therefore, new approaches need to be devised in order to better serve your prospects and communicate with them. This, however, does not mean that marketing, in its essence, has changed. Whoever talks about conventional marketing, I would argue, never really understood what marketing is all about in the first place. Marketing has always been about satisfying consumers' unmet needs. It starts with designing the right product, in both its functional and emotional dimensions, and ends with establishing a long-term relationship with your customers. Therefore, when someone talks about conventional marketing and its ineffectiveness, they are really talking about companies that took a formulaic approach to develop and market their products, and lost track of the needs that they were supposed to meet in the first place. As the consumer needs evolve, a company needs to evolve its products and the way they communicate them. If as a marketer you don't do that, is not that you are applying conventional marketing: it's that you are not applying marketing at all. Sure, you may be investing in R&D, advertising on TV and spending in promotions. But if you lost touch with your consumers, those efforts will be in vain.

Does it mean that advertising does not work anymore? Not at all! It works, and very well… if you have the right message for the right audience. TV still works; just not the same way it used to work in, let's say, the 60's. What about the glitz and glamour? Well, some consumers might still need it (emotional need), but is not a main trend anymore, as it might have been in, let's say again, the 60's, when the consumers were fundamentally outwardly motivated. There is no such thing as conventional marketing: there are outdated values, formulaic messages and out of touch companies. No amount of money will solve for that.

This defines then the first criteria in evaluating a company by its marketing efforts: not everything that shines is gold. It is not the amount of advertising and promotion a company deploys what defines its potential. A company or product is not good just because it advertises. The product, and by definition the messaging supporting it, need to be uniquely relevant to the way consumers want to live their lives and represent the values they embrace as their own.

The second criteria is how well the company is addressing the values that drive consumer behavior today. There are some key values that characterize this generation of consumers. These values are embraced with passion and drive people in their selection of the brands that they trust, buy and endorse. Let's review some of the most relevant ones:

Inwardly Driven: Today's world is exciting for the consumers. In a society of abundance, high living standards and instant connections, consumers can go beyond the satisfaction of immediate needs. The basic problems are taken care of, and consumers increasingly focus their attention and energy in satisfying what Maslow defined as higher-level needs, or, in their terms, higher pleasures. A high pleasure is one that transcends the mere functional and/or sensorial satisfaction, and involves emotional, intellectual or spiritual fulfillment. This pursuit of transcendental satisfaction means that the consumers nowadays are inwardly driven, that is, they are focused on fulfilling their inner motivations and aspirations, and are comfortable with putting their needs first rather than meeting others' expectations. By contrast -and as a way to complete the illustration of the concept-, a consumer in a situation where the main focus is addressing primary needs –i.e. the post-war era previously mentioned- would be outwardly driven, because their satisfaction is heavily reliant on external factors –i.e. peers, economy and environment-.

Experiential Enablers: The world is full of possibilities –more than never before- and consumers want to experience them all. In a comfortable and predictable society, their quest is for new experiential opportunities that allow them to enrich their lives, make them fun, exciting and energizing. This is another critical value then: beyond products, consumers are looking for the new experiences they enable.

Authenticity: The third value to review is authenticity, also referred to as being real. Authenticity is a tricky value to grasp, and even trickier to activate. Many marketers hear "authenticity" from the mouths of their consumers, and immediately think of heritage, the original, the first. In reality, all what consumers are asking for is to just being told the truth. To just forget the hype, stop trying too hard, and tell them what a product is, what it stands for and what they can truly expect from consuming it. Consumers are just disappointed with products and companies that promise the stars, when in reality they can only deliver a flashlight. The glamour and glitz I mentioned in my previous posting do just not impress them anymore: they just do not need it. In principle, consumers are just sick and tired of being marketed to with hyped offers and false promises, as if they were fools that can't see through the smoke and mirrors and make their own choice. It makes sense, doesn't it?

Use your own experience to start separating the grain from the straw. Think of a recent TV commercial or promotion that really caught your attention. What did you think of it? What did they say in the commercial (or print ad or web banner) that you felt was speaking to you? How different did you feel the offer to be? Did you think something like "why didn't someone think of it before"? You start getting the picture. Does this feel too simple or even mundane as a way to profile potential investments? That's the beauty of it: it is simple! Beyond simple: it is intuitive. The point, though, is that, as mentioned before, most of the time we are not on the lookout for an investment opportunity. When we watch a TV commercial that speak to us, we think of the product that triggers our interest as exactly what we needed to wash the car, or to listen to music, or to feel cool and energetic; we might even act on it and go and buy it. But we rarely think of it as something other people might be interested in the same way we are, or even question (if not outright obvious) which company is launching it. That is the shift in our mindset that is required to spot interesting investment opportunities: whenever you see a marketing activity that catches your attention, think of it as a potential opportunity first. Follow the thread from there to see where it can lead you.

Domino’s Pizza: the impact of Authenticity, Involvement and Reciprocity

In one of the first postings in this blog, “Consumer Values to Look For”, I indicated that two of the key values driving consumer behavior nowadays are “Authenticity” and “Experiential Enablers”. Briefly, “Authenticity” has to do with the transparency and credibility a brand can command among its customers. Consumers are skeptical about the hype and the false promises many marketers make through their advertising, just to vastly under-deliver by the time the consumer receives the product or service. Very pertinent to the case discussed in this article, I would say that the restaurant and food industry is perhaps the most blatant offender in this field. “Experiential Enabler” refers to the depth and relevance of the experiences a brand enables its consumers to enjoy. The experience goes beyond the functionality of the product itself, and involves layers of emotional satisfaction, fulfillment and discovery.

Embracing these key values demands a complete shift in the Marketing philosophy of any organization. It implies a level of honesty and openness that at times might seem counter-intuitive, if not outright suicidal. It requires a focus on –and the will to- inviting the consumers in, and allow them to actively participate in the definition of the brand. It is a commitment to doing what is right for the consumer.

Late last year, Domino’s Pizza (DPZ) chose such a path. When Patrick Doyle took over as CEO of the flailing pizza chain, he decided to address the issues face on, and launched its now famous ‘Pizza Turnaround’ initiative. The Company publicly admitted the shortfalls in its products, and made a commitment to fix them. While it was not the first time a company admitted its mistakes and vowed to fix them, what was different in the case of Domino’s Pizza was the positive energy behind the initiative, and the clear commitment the whole organization was making to be better. This was not a PR stunt; this was not a contrite CEO apologizing in a press conference. This was a group of people, real people facing a problem, overwhelmed by it and then showing the determination to fix it. Doyle himself was approachable, energetic and credible. The guy next door. Authentic.

Fast forward to the most recent marketing initiative. Opening up a brand, as I mentioned before, is not just a campaign. It is a long-term endeavor; an organization commits to involve its consumers, make them part of the brand and … yes, you’ve got it… enable them to participate in the creation of the complete brand experience. So, Domino’s creates its “Show us your pizza” program where it explains to the consumers the fakeness that usually goes into photographing food for advertising and tells the consumers: “We resign to such manipulation. You, consumer, you do it. You take the pictures of our products”.

This is huge in its simplicity. And that is the beauty of great marketing nowadays. It doesn’t need to be complicated; it just needs to be genuine. And consumers want it. They are willing to participate; furthermore, they demand it. Their retribution is the sense of recognition and ownership they get from it. It is the satisfaction of being able to express their opinions in a personal way and see those contributions becoming a part of something bigger.

If this was good, what I found to be a brilliant culmination to a brilliant initiative is the latest TV commercial, where Domino’s not only showcase several of the great pictures they received, but Doyle himself appears again picking on a picture sent by ‘Brian’ which shows a pizza badly battered and personally apologizes to him, assuring the audience that this is not right and that they will not rest until things like that never happen again. This sort of openness, epitomized by the CEO delivering a personalized apology to a consumer –and through him, to all consumers- is disarming, and engenders a level of credibility and admiration that triggers a higher level of consumer interaction: reciprocity.

In social psychology, reciprocity refers to responding to a positive action with another positive action, and responding to a negative action with another negative one. Reciprocity is one of the foundations of the social structure, and it is edged in our psyche. The mechanism works more or less this way: if we feel we are the object of a good action, we feel we need to respond in kind in order to preserve a balance in a relationship. It is what compels us to bring a bottle of wine to a dinner party, even though the organizer has repeatedly indicated nothing is needed. Reciprocity also has a role to play in marketing: for example, when a sales person has been particularly helpful and has spent what might be perceived as an inordinate amount of time with us, we feel bound to buy something from him or her. Likewise, when we perceive that a company or brand has been open and genuine with us, going above and beyond the cynicism we’ve come to expect in economic relations, we feel compelled to reciprocate by at least trying their product. They’ve earned it. Which, in the case of Domino’s Pizza, should translate into a heightened level of trial, which in turn will result in an increased number of new regular consumers. In summary: market share gains. Growth.

Domino’s Pizza is absolutely doing the right things. It is practicing the type of marketing that resonates with consumers nowadays, and that should translate into substantial growth for this company. So, take a bite: this slice is just about to get bigger.

More on Skechers

In continuing with my investigation about Skechers (SKX) and its line of Shape-Ups shoes, I found this video clip from CNBC. I find it really exciting. Skechers is fully exploiting the potential of their radial technology. I see the current price drop as a significant opportunity to accumulate shares.



Disclosure: I own shares of SKX

Procter & Gamble: Old Spice's amazing turn-around

Procter & Gamble (PG) has done a fantastic job in revitalizing an old brand, Old Spice. The "Manly Man" campaign with its tongue-in-cheek attitude and bigger than life character has put Old Spice back in the minds of consumers. What is most commendable is the brilliant activation of the campaign via an integrated social media strategy. The following note from Entertainment Weekly's digital newsletter tells the story.

OLD SPICE, NEW TRICKS
And the MVP award for increase in body wash sales (not to mention buzz for marketing firm Wieden + Kennedy) is…the manly man himself, Old Spice guy Isaiah Mustafa. The 71-year-old brand’s current campaign, which includes hilarious TV ads and viral videos, is not only the talk of the town, it’s also being lauded as the reason behind an incredible 107% jump in sales. If you haven’t yet experienced "the man your man could smell like," check out this gem, where the shirtless wonder proposes to a woman on behalf of one of his Twitter followers.

P&G knows how to manage brands, how to do effective advertising and how lead the future embracing the zeitgeist. Needless to say, this is a company that deserves a spot in everyone's portfolio.

Skechers: Shape up your portfolio

Success in marketing requires of the right convergence of several factors: a) the existence of a real, unfulfilled consumer need; b) a product proposition that effectively addresses such need; c) the ability to not only get the consumers to know of such product proposition, but to believe it; and last, d) sheer momentum. It seems simple, but achieving this confluence of elements is actually a delicate balancing act. Therefore, when I see a company that has stricken such balance, I jump at it with my two feet.

Case in point: Skechers (SKX) and its line of Shape-Ups shoes. Let’s see why I am so excited about this opportunity:

Consumer need: Everyone wants to be in shape. Not everyone is willing to endure the sacrifices and hard work required to achieve that condition, though. We all know we have to exercise and promise ourselves to do it at some point. But in reality, most of us barely scratch a vigorous walk now and then. It is our natural tendency to cut corners and look for the most efficient (or shall I say ‘easy’?) way to achieve what we want. Want to lose weight? There is a pill for that. Need more energy? Let me grab the energy shot. Want more money? Let me watch Mad Money. So, the opportunity to make those rare low-intensity exercise sessions really count is irresistible.

Product proposition: “So, you are telling me I can burn more calories, improve my posture and tone my muscles just by walking in your shoes? I want in!” Skechers’ Shape-ups’ proposition is simple and has ample appeal. The key is that they have developed and positioned it for the regular people. Reebok (a Adidas AG brand) has a similar line, called EasyTone. What is the difference? Reebok targeted its shoes to the image-conscious female athlete; people who already exercise. By definition, the segment is smaller and has a lot more ‘conceptual’ competition: most of these women are mostly looking for something else in their shoes: performance, balance, avoiding injuries and so on. So, when the infrequent occasion to purchase a pair of athletic shoes finally arrives, what benefit will drive the decision? In the case of Skechers Shape-Ups, the segment is practically uncontested. For walking, most people basically use whichever pair of shoes is comfortable. But there are no special technical requirements. So Shape-Ups is the first line that offers true benefits –reason to buy- to the casual exerciser. In addition, Skechers has been careful to offer a full range of shoes for every occasion: from the cool-looking sneaker-style shoe, to the casual shoe for work. Last, the Shape-Ups shoes are not cheap: ongoing retail price is above $100 a pair, but Skechers have made sure that the quality of the shoes is commensurate to the price. Ultimately, the perception of high quality in combination with a unique functional promise is the final rational driver that consumers need to see this purchase more as an investment than an expense, therefore providing the perfect justification for an otherwise questionable outlay of cash.

Awareness and Credibility: Skechers is marketing the Shape-Ups line intensely, with particular emphasis on the Internet. Judging by the number of Shape-Ups banners and promotions I’ve seen in different websites, I’d venture to say that nowadays Skechers can easily be one of the top Internet advertisers. And it does not stop there: almost any shoe store has prominent Shape-Ups displays. The unique shape of the product and the profuse technical information offered in their website and in their marketing materials make the proposition easy to understand and very credible.

Momentum: Shape-Ups is building tremendous momentum. At the stores I visited researching this product, the clerks reported brisk sales. Most importantly, consumers are raving about the comfort of the shoes in their reviews in sites like Zappos.com and Shoes.com. This viral momentum is infectious; consumers are encouraged by the positive remarks of their peers, and the momentum gains strength. My impression is that we are just at the beginning of the post-launch inflexion point in the life-cycle curve, so we should see accelerated growth for the years to come.

Based on all these considerations, I pulled the trigger and made an investment in Skechers on July 15th. Around that date I started writing this note. On July 28th, Skechers reported a stellar quarter and as a result, the share price jumped approx. 7%. While I regret I didn’t have this note ready before that date, my estimation is that this is just the beginning of a nice upward trend for Skechers. So, it’s not too late. This is a stock that can shape up your portfolio.

Disclosure: I own shares of SKX