What Does the Data on Our Target Market Say About Your Business Strategy?
It was a lot of years ago when I first started reminding you not to focus just on your gross margin percentage, but your gross margin dollars as well. Then, in 2009, with the recession in full swing, I got all excited about Gross Margin Return on Inventory Investment (GMRII) after Cary Allington at Action Watch pointed me to the concept.
I discussed it in some presentations and wrote about it. Here’s one of my articles on the subject. It’s held up pretty well.
I liked the GMRII concept because my reading of history is that debt caused recessions (if recession is an adequate word to explain what we’re going through) last a long time. This one, I concluded, was not going to be different from all the others. It seems, unfortunately, that so far I’m right about that.
So I began to recommend a business model that I thought appropriate to this environment. Regular readers know it anticipated that sales increases would be harder to come by, but that I thought (still think) bottom line profitability and brand positioning could be improved through more thoughtful management of inventory and distribution and more focused expense control.
To way over summarize and simplify, I said this approach would let you reduce your working capital investment and raise your gross margin while reducing marketing expenses because your more cautious distribution strategy would create some product and brand differentiation.
Wow, that is really over simplified and I don’t claim it’s appropriate for everybody. It seems to be especially inappropriate for public companies, which need regular and significant revenue increases to make Wall Street happy. It’s not that it wouldn’t work for them, but they kind of aren’t allowed to try it in exactly the way I suggest due to outside stakeholder pressure. At some level, Skullcandy is trying it anyway and I’ve been impressed by their efforts.
It’s a good strategy for two fundamental reasons. The first is because so many of our products are difficult to distinguish from those of the competition. Now, if you’re a big company with a strong balance sheet full of clever marketing people, be my guest. Create that brand value through a strong emphasis on marketing. But for a smaller company, my hypothesis is that mostly that isn’t a choice.
The second, and what got me writing this, is the economic condition of many of our traditional customers.
I read a blog by a guy named Mike Shedlock, affectionately, I hope, known as Mish. Here’s the link to it. The other day, he posted the chart below that had been provided by a Mr. Tim Wallace. I don’t know who Tim is, but I’ve been impressed enough by what Mish has shared over the time I’ve been reading him to believe this is probably credible. It’s also consistent with other data I’ve seen.
You can see that since April 2008 in the U.S., the population in the age group we consider our primary target market has risen by 3.6%. That should be good for us. The labor force in that group, however, declined by 4.2%, and its employment fell by 5.9%. That’s bad.
You can be the best manager with the best brand in the world, but you’ll still be impacted by this. But if you are a strong manager with a solid brand and have a strong balance sheet (I like strong balance sheets) you’ve got an opportunity because some of your competitors are going to find themselves significantly screwed.
And if you’re a smaller brand, consider the strategy I’ve outlined above because it will strengthen your balance sheet and your brand positioning. That’s what you’ve always needed to do, but now it’s more important than ever.
One of the interesting points of view that seems to be lost much of the time is that people grow up with brands and the brands seems to want to chase the youth market rather than the eternal youth market. I am sure there are plenty of Baby Boomers and Gen Xers with good jobs good income who are more or less forgotten by the brands. Musicians and artists seem to be able to reinvent themselves so they are cross generationally relevant. Why is it so hard for brands to do this?
I would say, based on my own experience, that as you move towards 30 and beyond the priorities in your life change and that impacts the frequency at which you purchase and hence brand revenue. I would also say that as you start working and build your career more of your clothing, etc purchases will be aligned to that journey and you likely turn to brands you see as more credible in supporting your status at work, etc.
It could be difficult for the brands you grew up with to make that transition (to compete in new markets with a different value proposition) within the same timeframe that your life changes. The investment required from management to do this organically is likely to be quite high and could impact the focus able to be placed on day-to-day operations.
Hi Josh,
Basically, I agree with you. I’ve called the problem for the brands we grew up with (heritage brands) “aging out.” The problem I see is that you need not to just maintain your existing customers but, eventually, get some new, younger ones. As you say, that’s hard. As we get a bit older, it’s not just that we pick different brands, but that there are things like health insurance, mortgages maybe, and children to pay for and they have some priority over the latest and greatest. My point in the article, and in showing the chart, was that the younger customer, even as there are some more of them now compared to 2008, have less money to spend because they don’t have the income they had before. So your brand can’t expect to succeed with that customer group unless it’s differentiable from other brands in the space. If you can’t make a distinctive product based on features, and I think we’d agree that can be tough in this space, then you’ve got to have a business model that relies on some level of scarcity to differentiate it. My belief is that this strategy leads to higher margins, lower costs and, finally a bigger bottom line even if your sale don’t grow like they used to.
Thanks for the comment,
J.
Thanks Jeff – I definitely agree with you. I suspect what you are asking is very hard to do for brands that are in the “middle” of the market in terms of size, level of fixed costs, types of retailers sold to, etc.
As a small brand with limited access to capital you likely need to do this to make a profit in the first place. You would be very focussed on building a community around a ‘design language’ to build demand. As a large brand you may have sufficient capital to avoid ‘death by commoditisation’ (if you can drive change fast enough) by building a portfolio of small differentiated brands with their own ‘design language’, target segments and intimate customer relationships on top of an efficient supply chain.
The other interesting question I think that’s here is what could the industry value chain look like in the medium term for those firms who are successful, (I’m not sure if you’ve written about this before). How have they used technology that now makes the need for a large organisation somewhat less as co-ordination costs head to zero? Are they vertically integrated or are they able to use say a ‘supply chain as a service’ given their advantage comes from the more intimate relationship they now have with their customer? Business models in the telecommunications space have changed significantly in recent times due to disruption of the traditional value chain – what could be possible in the ‘action sports’ space?
Josh,
Yes, it’s hard to do and, as I’ve written, damned near impossible for public companies. And you’re right that small companies have to do it because they don’t really have a choice. I like your “design language” term as a description of the kind of marketing a small brand has to do to be effective.
I’ve written quite a bit about the use of systems, noting that almost every company I write about is investing in systems not just for efficient operations, but as a strategic tool. Probably no choice in an online world. Good systems are critical to getting the right product to the right place at the right time. They are a competitive advantage, though maybe soon they will just be another thing you have to do right to allow you to have a chance to compete at all. And they favor the big players.
Thanks,
J.
Hi Kel,
I love the distinction between the youth and the eternal youth markets. I’ve got to think about that. See my reply to Josh above. I’m not saying it’s bad to sell to the youth market or that you shouldn’t or that you can’t succeed there. I’m just saying that if that’s your target market, they’ve got less money to spend, so how you sell to them might have to change
Thanks for the comment,
J.
Guess we’ll just wait for the baby boomers to die off and pass down some of this money. Until then, kick rocks kids/brands!
Hi be rad,
I’m honored to be read by somebody from Yobeat. Your plan isn’t bad. I’m just worried that by the time we get through some inflation and taxes are raised, there won’t be any money left to pass down. Hence the approach I suggested in the article and have been suggesting.
Thanks for the comment,
J.