A Discussion of Digital and Physical Retail Trends

Over at Barry Ritholtz blog I saw this video by Scott Galloway (at the Digital-Life-Design Conference) titled, The Four Horsemen – Amazon/Apple/Facebook & Google – Who Wins/Loses. Mr. Galloway is Professor of Marketing at NYU Stern School of Business where he teaches Brand Strategy and Digital Marketing NYU Stern School of Business, see his background here. In this presentation he packs a terribly insightful discussion into just fifteen minutes where he covers what he believes will be the advances and declines among the big four (“Four Horsemen”) of digital (and the convergence of retail) sales. Professor Galloway is quick to disclaim that any decline among these companies in no way means insignificant but rather, a shift in market share between four companies that hold a titanic share of the retail market.

A few high points from the discussion:

Amazon’s “race to the bottom” strategy where they then wait out the competition has an Achilles heel: shipping costs. The solution (or the future)? Fractional employment among the ranks of flexible employees such as Uber and Carpooling.com.

The trend of existing brick and mortar retail stores edging into the completion through the transformation of their retail locations into flexible warehouse fulfillment centers.

A few harsh words, matched off against some significant compliments for Facebook.

Key to Apple? It’s “self-expressive benefit.”

Finally, there was an unfortunate takeaway. The trend of Macy’s illustrates the further reduction of the middle class in America – “$40-60k jobs are giving way to $20-40k per year jobs” related to factory and fulfillment functions. So mid level service jobs are giving way to lower level service jobs, illustrating the point that even where there is job growth, no job is irreplaceable, which puts even more pressure on the individual to contribute value and if possible, make themselves indispensable.

 

Dated Policies and the Obsolescence of Command and Control

When you look around, what tips you off that policy may be out of date?

Dated Policy

The case has been made in recent years of the obsolescence of the average human resources department and its policies. But is the problem human resources or an overall approach? An article in Forbes by an industry expert makes the following assessment:

The traditional “Human Resources” programs which were designed in the early 1900s are rapidly falling away. Are they becoming out of date? The answer is yes.

If your HR and Learning programs are focused on building customer centric teams, empowering managers and people to make decisions, encouraging a culture of learning, teaching managers to coach and develop others – then you have moved to the Agile Model for HR. If your HR programs are still focused heavily on enforcing the rules, formalizing structure and centers of power, and putting leaders on a pedestal, then your HR and employee programs are probably holding your company back.

The lean, dynamic, open source and autonomous approach as cited above was what I read about more than twenty years ago in my undergraduate studies, but saw very little of outside of the tech industry, some small companies and a few unusual examples (organizational and leadership). But this problem is not limited to human resources – it permeates many aspects of business operations. I regularly equate this to doing business the way we did fifty years ago, only now with a computer on the desk. And command and control mentality goes right along with this failure not only to understand a radical and essential cultural shift, but how to tap into a talented labor pool. I’ve had several discussions with a colleague regarding why our industry does not generally attract millennials. I’m not sure there is one precise reason but clearly, value system, culture and command structure is completely at odds with this cohort.

In a recent post, HR Is Obsolete, a number of relevant reasons are cited for why, in the author’s opinion HR (in its lack of response) is obsolete. Here are some ideas from the findings:

The era that current policy reflects: when an HR department that was “created for the post-industrial revolution era as opposed to the information age.”…failure to implement technology that could automate operational tasks such as tracking compliance, licensure, etc…HR acting as surrogate instead of actually managing, mentoring and developing staff…dereliction of duty on the part of leadership regarding the hard work in hiring (no short cuts to getting the right person in the right role).

In a discussion about how to motivate staff, I had a boss declare in full volume, “my philosophy of leadership is simple, GET THE [EXPLETIVE] WORK DONE!” Here’s a helpful rule of thumb: if your attitude toward staff would fit well in an episode of Mad Men, your thinking is probably obsolete. Dated policies and approach are no different.

Smoking Safety - Australian Road Safety Council poster- 1950s

Public Libraries Disrupting the Likes of Amazon

When you think of the modern iteration of your local public library, a couple things might spring to mind, such as the perverts sitting at the computers offending everyone around them in the name of free speech. But another might be the question, how long can this model of an institution last? Well chalk one up for another blow to the hard and fast rule of disruption. I have observed the growing catalogue in recent years of digital material available for check out, including audio as well as e-books. But in the age of streaming versus download, the for-profit sector has started rolling out its own version of subscription based reading, and they face headwinds of an unlikely competitor, as noted in the Wall Street Journal, Why the Public Library Beats Amazon—for Now:

A growing stack of companies would like you to pay a monthly fee to read e-books, just like you subscribe to Netflix to binge on movies and TV shows. Don’t bother. Go sign up for a public library card instead. Really, the public library? Amazon.com recently launched Kindle Unlimited, a $10-per-month service offering loans of 600,000 e-books. Startups called Oyster and Scribd offer something similar. It isn’t very often that a musty old institution can hold its own against tech disrupters. But it turns out librarians haven’t just been sitting around shushing people while the Internet drove them into irrelevance. More than 90% of American public libraries have amassed e-book collections you can read on your iPad, and often even on a Kindle. You don’t have to walk into a branch or risk an overdue fine. And they’re totally free. Though you still have to deal with due dates, hold lists and occasionally clumsy software, libraries, at least for now, have one killer feature that the others don’t: e-books you actually want to read.

E-books you want to read? That’s right. So instead of an all-you-can-read list of digital titles with the equivalent of Smokey and the Bandit III, you have access to many of the titles from Amazon’s top 20 Kindle best-sellers of 2013 list with the following impressive results:

Percentage of Top 20 Kindle Titles of 2013

See the full grid from the WSJ article here. The article goes on to explain an interesting history of this windfall for local libraries:

How did library e-book collections get such a leg up? Amazon is locked in a hate-hate relationship with many publishers, so none of the five largest will sell their whole collection to Amazon for its subscription service…Over at the library, the situation is different. All of the big five publishers sell their e-book collections for loans, usually on the same day they’re available for consumers to purchase. They haven’t always been so friendly with libraries, and still charge them a lot for e-books. Some library e-books are only allowed a set number of loans before “expiring.”

There are obvious limitations to free services, such as availability, wait lists and time span for checked out materials. But for now, this is a terrific example of a public institution in the local community showing itself able to respond to disruptive forces, and provide viable resources to a wider audience with limited resources. It is also an excellent example of how a business model can benefit from adapting to a model that helps a local community as “publishers have come to see libraries not only as a source of income, but also as a marketing vehicle…since the Internet has killed off so many bookstores, libraries have become de facto showrooms for discovering books.” See brief overview here:

Corporate Inversions – Do you think this is going to become an issue?

Corporate inversions are not a new issue, but it has had its run-ups over the years, as illustrated by Google’s Ngram Viewer:

What is a corporate inversion? From Investopedia, an inversion is simply,

Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.

But based on the anecdotal evidence alone, this issue is going to heat up. The Wall Street Journal has hosted an excellent short take on how these inversion deals work:

Many observers intuitively consider this simply an unpatriotic exploitation of a broken tax code and one of its remarkable loopholes. One legal counsel’s comment pretty much says it all, “it’s just too good of an opportunity to waste.” Others consider the expatriation of tax revenue the result of disproportionate burden on businesses and corporations. Either way, there is a race to mergers as business leaders and legal strategists believe this run is coming to an end. The Wall Street Journal has recently published a flurry of articles and posts on this subject with one conspicuous standout, the pharmaceutical industry:

The race by companies to sidestep U.S. taxes reached a fever pitch as two drug firms unveiled foreign mergers that will help them slash their tax rates…[there is a]  growing craze for so-called inversions, in which a U.S. company buys a foreign target and adopts its lower tax rate or establishes a holding company in a country with a low tax rate.

The deals, mostly in the pharmaceutical industry but also cropping up in retail, consumer and manufacturing, have come fast and furious amid two trends: rebounding appetite for large, transformative mergers and acquisitions; and fear that the opportunity to use the cross-border tax strategy soon could disappear.

Pharmaceutical Industry Inversion (WSJ)

Regardless of the cause, the reality is that the U.S. government stands to lose significantly from this export of tax revenue. From an another WSJ article:

How much revenue does the U.S. Treasury stand to lose from corporate tax inversions? It is difficult to say precisely, but one estimate puts the figure at close to $20 billion.

A nonpartisan congressional research panel said the U.S. would receive an additional $19.46 billion over a decade if most new tax inversions were essentially halted with proposed changes to the tax code. The estimate, by researchers at the Joint Commission on Taxation, is based on estimates from previous inversions, in which U.S. companies make overseas acquisitions to gain tax advantages, and doesn’t take into account deals being made now…calculating how much the U.S. Treasury would lose is nearly impossible because of a dearth of reliable tax data from companies’ public filings and the variables in how companies can structure their businesses, tax experts say.

However this is resolved, I think we can all agree that when a corporate trend that generates the above results is being referred to as, “all the rage,” or, “too good an opportunity to waste,” one wonders how, as yet another Wall Street Journal article reports, Congress Is Split on Taxing of Corporate Inversions.

How Optimism Bias Changes Long-Term Projections

Weekend reading: IMF Working Paper, Growth: Now and Forever? by Giang Ho and Paolo Mauro. Those who do not follow the global market in general and the BRICs in particular (or other emerging economies), may not see a correlation to the U.S. market. In reviewing the paper, I would focus more on the psychological behavior of investors and the capital markets, rather than the particulars of emerging markets, their fundamentals, or the drivers in these markets, many of which are quite different from any of the G7. The premise is clearly stated in the abstract,

Forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth. Using long-term forecasts of economic growth from the IMF/World Bank staff Debt Sustainability Analyses for a panel of countries, we show that the baseline forecasts are more optimistic than warranted by past international growth experience. Further, by comparing the IMF’s World Economic Outlook forecasts with actual growth outcomes, we show that optimism bias is greater the longer the forecast horizon.

Just what do the authors mean by optimism bias? It’s frankly, little more than wish fulfillment. In the authors’ opinions, it is adding more weight to recent occurrences, then extrapolating those positive outcomes across the spectrum of events, where “forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth.” Again, this does not have a direct correlation to recent events in the U.S., as this economy has experienced forward yet modest growth in the last five years. But could this say anything about the continued expansion in the capital markets, which have little relation to economic events as they tend to affect the average person, employment and a service driven economy? In other words, although the markets seem to be pushing forward at dizzying heights, most would say there is nothing to indicate any kind of an eminent correction. Is the same bias at work in our capital markets? You decide. But the paper makes for an interesting case for why, in spite of argumentation for why global growth may in fact be slow in the coming years, forecasters continue to project strong growth, where predicting “economic growth into the medium term and beyond is notoriously difficult.” It would seem there are lessons to be learned here about bias from any perspective and how this bias has a tendency to affect the view of the future.

Ignorance is NOT Bliss

“The only real mistake is the one from which we learn nothing” – John Powell

Right now the overall job market is an undeniable difficulty for us as a country. Thinking about this reminds me of a few things from some years back. The above quote causes me to reflect on a few difficult times and painful past lessons – experiences which are now filtered with hindsight (and the advantage of 20/20 vision as it were). But I am thankful for the experience of many of these difficulties, though some have taken years to get to that point. After one painful business experience in particular, I was encouraged by a friend (at a different stage in life and much more experienced than I) to journal out what I had learned. I remember that at that time, I didn’t want to hear of it, and I certainly didn’t want to talk about it, even alone within the very safe pages of a journal. All I could think about was the frustration I was experiencing from my own decisions, some of them hasty. But learning is an ongoing, dynamic process.

Sometimes, I believe, we don’t feel quite ready to learn from what we are presently going through. Which is part of the reason I am determined to learn from decades past, because our current problems span way beyond few years of misguided choices. I am optimistic too, because I think for many, there is an honest inquiry into present difficulties, and why past approaches may no longer be relevant. Ultimately, I want to be a better learner, and a better practitioner of that knowledge and experience.

IBM’s Mysterious “Big Blue” Nickname

In honor of IBM’s conference call, I wanted to revisit the topic of the provenance of the nickname, Big Blue.

IBM's Mysterious Ubiquitous Name - Big Blue. Logo "bluing" courtesy http://howbehindwow.com/

IBM’s Mysterious Ubiquitous Name – Big Blue. Logo “bluing” courtesy http://howbehindwow.com/

I like urban legends not because they are believable, but because of what they say about human nature and sociology. Urban legends are also amusing not necessarily to believe, but they are fun to engage in (as if to believe) the idea of them being true, such as us humans ingesting eight spiders per year in our sleep.

A search for the provenance of the name Big Blue turns up very little historical documentation. Some say the term was first used in the early 1980′s, with the self-obviating point of the adjective big. But that doesn’t explain much. There are plenty of organizations with significant size, extent, influence, market share or intensity, and we don’t automatically add big to their description. The blue part seems to have no plausible theories at all. I have tried in vain to find the origins of this name, as I found myself instinctively using it years ago before ever realizing it was an ubiquitous nickname. I searched Google Books for the term and have been able to move the date back to 1975 with this mention. But the truth is, no one really knows the origin, including IBM:

How did IBM get its distinctive nickname, “Big Blue?” While the name came about organically, with no known single source, the first official reference in print to IBM as “Big Blue” was in BusinessWeek magazine:

“No company in the computer business inspires the loyalty that IBM does, and the company has accomplished this with its almost legendary customer service and support … As a result, it is not uncommon for customers to refuse to buy equipment not made by IBM, even though it is often cheaper. ‘I don’t want to be saying I should have stuck with the “Big Blue,”’ says one IBM loyalist. ‘The nickname comes from the pervasiveness of IBM’s blue computers’” (No. 1’s Awesome Strategy, BusinessWeek, June 8, 1981).

So there you have it. Isn’t that great, kind of mysterious and interesting? Or at least, it’s fun to engage in any of the possible explanations.

Center of the U.S. Population 1790-2010

The U.S. Census Bureau has some of the most interesting data visualizations, many of which help illustrate the magnitude of the data being presented. According to the Bureau, after each decennial census is tabulated, “the Census Bureau calculates the center of population. The National Mean Center of Population based on the 2010 Census is near Plato, Mo., an incorporated village in Texas County.” The mean center is fictitious of course, for the purpose of illustration as the Bureau goes on to explain, “the center is determined as the place where an imaginary, flat, weightless and rigid map of the United States would balance perfectly if all residents were of identical weight.” And the movement is in a southwesterly direction as the interactive map below illustrates: 

What is even more interesting are the suggestions for why the migration has moved in this direction. The Bureau states that the westerly direction has historically been the result of a “sweep [that] reflects the settling of the frontier, waves of immigration and the migration west and south.” But it is fair to say that although the imaginary mean center still resides in the South, a very large and disproportionate part of the population (as well as commerce) has settled in the West in general and California in particular. And there is a clear movement (though not a net loss) from California and the Southwest. The economic and sociological reasons for this would be very interesting to explore.

CYNK: The “NINJA Loan” of the Capital Market

Do we remember the NINJA loans? Or has it been too long – six or seven years? You know, loans made to folks with no income, job or assets for that matter. Does THAT sound familiar, and for that matter completely insane? Investopedia explains just why such loans are so risky,

While the specifics of any NINJA loan can change, most offer the lender a low initial rate, which is then increased after a few periods of payment. The borrower is hoping for the value of their property to appreciate significantly, allowing them to repay the loan with the newly found equity. However, when the property doesn’t appreciate, many borrowers cannot make the repayment.

This of course explains the full implications on the CDO market as outlined in an IMF paper which, oddly enough, seems less filtered by hindsight as it was written in 2008, so close to the mayhem and actually written in June of that year preceding the Lehman bankruptcy:

The damage was propagated at each stage of the complicated process in which a risky home loan was originated, then became an asset-backed security that then formed part of a collateralized debt obligation (CDO) that was rated and sold to investors.

The paper is worth a re-read as it underscores the fundamentals of the madness of the crowds, the reckless history of much lending activity (not the first time there has been a banking crash), followed by an absence of liquidity, panic, crash and finally, a backstopping by the government.

Of course the case of CYNK is quite different from the CDO market crisis mentioned above. But there are similarities of behavior, especially as they relate to knowingly engaging in fraudulent behavior, and the predictable irrationality of the crowd. And unfortunately, in the case of a pump and dump (or whatever this is), no backstopping is on the way.

Outside of those flipping round turns based on oscillators, algorithms and signals – the assumption is that this crowd knows what they’re doing – does anyone ostensibly investing in a security like this actually read, or even glance at the financial statements? And what about the qualitative data that should accompany the quarterly and annual reports, such as an absence of filing? No, unfortunately, all of the handwringing and analysis is pretty much foolishness. All you needed to know was the basic ‘NINJA’ equivalent found right there in the SEC filings:

No Income:

CYNK No Income

No Assets:

CYNK No Assets

No filing.

No dice.

And finally, this, the footnote on going concern (emphasis mine):

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about its ability to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan to obtain such resources for the Company include: sales of equity instruments; traditional financing, such as loans; and obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.

Enough said. All the other anecdotes and, “meet the mysterious executives” behind the mythical unicorn, is just noise.

Population Shifts After Ten Years: 2002-2003 and 2012-2013

According to the U.S. Census, population shift has occurred for the following reasons:

Spurred in part by growth of the energy sector, some metropolitan and micropolitan statistical areas in North Dakota and west Texas are now experiencing rapid population gains, while growth has slowed or halted for some formerly fast-growing areas in the South and West.

What you immediately notice are the dark green shaded areas (representing 3+ percent growth), many of which that were, of course, where the height of the madness was occurring during the real estate boom. Some of these areas were the southwest states and especially California (generally anywhere east of the San Andreas Fault). As well as selected areas in southern states, and even a few high-growth inland areas that saw a tremendous ramp up during the early to mid-2000s such as Idaho.

The last ten seconds of the video shows a contra trend, practically wiping out growth area by area in the same manner that it appeared ten years prior. Corresponding to the quote above regarding the impetus for the current migration in recent years, you see 3+ percent growth in North Dakota as well as the current popularity of Texas. Another very interesting shift is from the north western, Reno area of Nevada to the north eastern area of the same state. What was driving that growth?

At the risk of sounding a bit like Pudd’nhead Wilson for pouring over such things, additional data sets and customizable maps for metropolitan and micropolitan statistical areas can be found here, the interactive map here.