At the end of each week, we will share with you our favourite reads. We would be grateful if you could reciprocate. This week’s reads focus on how Made in USA works, why poverty is like a disease, Samsung’s foldable phone as a ‘halo’ product, how discount retailers are gaining share, how machine learning pays forward musicians and Best Buy’s comeback.
Author: Rana Faroohar
Source: Financial Times (https://www.ft.com/rana-foroohar)
This brilliant article from Rana Faroohar exemplifies why the world’s best financial writers aspire to write for the FT. Faroohar uses the example of American Giant, a maker of upmarket hoodies, to explain why some American companies are able to make stuff in the US and compete successfully with rivals who source their products from Asia. We believe that similar strategies could help Indian firms deal with cheap imports from China and Bangladesh.
In American Giant’s case the first reason for its success its price point – its cotton hoodies retail are over $100 i.e. twice the price of hoodies from the Gap. Secondly, the company has made that sure its plants are located in low cost locations in the US (and even then its labour costs per hour are 3x that in China). Thirdly, it has made sure all tedious and repetitive tasks are automated/robotised. Only the skilful bits of apparel making are left to workers and these workers in teams, not in an assembly line. So the worker is NOT doing the same thing again and again (as Adam Smith would have seen in “The Wealth of Nations”) but is instead responsible for a certain target output in a given workday. Fourthly, American Giant uses the internet to sell direct to customers and thus eschews distribution through the traditional department store channel. This not only boosts the company’s margins, it gives the company access to customers’ purchasing behaviour which help it design its products better. As Faroohar says – and we concur wholeheartedly basis what we see in India – “the most successful manufacturing businesses these days, no matter what the size, tend to be the most high-tech.” American Giant invests heavily in new machines and in data analytics.
Unsurprisingly the owners of American Giant, and other American manufacturers who are seeing a renaissance, are fans of Donal Trump’s tariff impositions on China. Beyond their obvious self-interest in such support, there is also the conviction that given a level playing field (which they felt preceding American Presidents hadn’t given them), they can take on China.
Author: Christian H. Cooper
Source: Nautilus (http://nautil.us/issue/68/context/why-poverty-is-like-a-disease-rp)
This beautiful piece in the Nautilus adds a completely new dimension to the inequality debate. Whilst for much of the last century, Americans have celebrated the meritocratic system to give equal opportunity for those who are willing to strive to excel, the article first points out how today’s in-your-face inequality debunks that myth. Then, it goes on to provide how starting out poor puts one at a disadvantage for life, not so much from a socio-economic perspective but having biological effects on your brain and consequent cognitive abilities. Worse, it goes on to show that these effects could be inheritable suggesting inter-generational persistency. The author suggests that most rags to riches stories including his own experience boils down to pure chance – ironically also a biological effect of poverty – an induced tendency to take outsized risks, a handful of which would payoff but in a spectacular enough fashion to enhance the myth of meritocracy.
“First, that the stresses of being poor have a biological effect that can last a lifetime. Second, that there is evidence suggesting that these effects may be inheritable, whether it is through impact on the fetus, epigenetic effects, cell subtype effects, or something else.
This science challenges us to re-evaluate a cornerstone of American mythology, and of our social policies for the poor: the bootstrap. The story of the self-made, inspirational individual transcending his or her circumstances by sweat and hard work. A pillar of the framework of meritocracy, where rewards are supposedly justly distributed to those who deserve them most.
What kind of a bootstrap or merit-based game can we be left with if poverty cripples the contestants? Especially if it has intergenerational effects? The uglier converse of the bootstrap hypothesis—that those who fail to transcend their circumstances deserve them—makes even less sense in the face of the grim biology of poverty. When the firing gun goes off, the poor are well behind the start line.
Why do so few make it out of poverty? I can tell you from experience it is not because some have more merit than others. It is because being poor is a high-risk gamble. The asymmetry of outcomes for the poor is so enormous because it is so expensive to be poor. Imagine losing a job because your phone was cut off, or blowing off an exam because you spent the day in the ER dealing with something that preventative care would have avoided completely. Something as simple as that can spark a spiral of adversity almost impossible to recover from. The reality is that when you’re poor, if you make one mistake, you’re done. Everything becomes a sudden-death gamble….
…We stand at the precipice if we don’t re-evaluate our understanding of poverty and inequality. The narrative in the neo-liberal west is that if you work hard, things work out. If things don’t work out, we have the tendency to blame the victim, leaving them without any choices. Brexit, Le Pen, and the defeat of Hillary Clinton are examples of the cracks that result from inequality and poverty, symptoms of my childhood experience writ large. The Piketty pitchforks are out, and the march to global disorder can only be arrested by adopting measures that begin to price in the stacked deck that I and anyone else born into deep poverty sees, and resents.
I believe we will see the Italian Five Star Movement submit a referendum to leave the EU this year, and that Marine Le Pen has better than even odds of winning the French election. The EU is in danger of buckling under a globalist defeat and may exist in name only two years from now.
These trends are being accelerated by the blind belief that the poor have failed to seize the opportunities that the market or globalization has created. This myth deserves to be taken off life support—and the emerging, empirical, and carefully observed science of poverty can help us do so if we pay it the attention it deserves.”3. Long read: The Aldi effect: how one discount supermarket transformed the way Britain shops
Author: Xan Rice
Source: The Guardian (https://www.theguardian.com/business/2019/mar/05/long-read-aldi-discount-supermarket-changed-britain-shopping)
Last week, we wrote about the emergence of the supermarkets in India in our weekly blog. This riveting piece in The Guardian about the success of the German discounted supermarket chain, Aldi, builds on that with a more nuanced picture of how it is likely play out in the future, if it isn’t already, thanks to the likes of DMart. The piece talks about how Aldi in 1990 entered the British supermarket industry dominated by the Tescos and Sainsbury’s with fat profit margins, disrupted not so much with technology but with a mindset to deliver to the consumer what matters – time and cost savings.
For “Aldi, the panic and rush is an integral part of the shopping experience for two reasons. The first is the happy realisation once you have left the store, and your heartbeat has settled, that you have spent less time shopping than you would have in a typical supermarket. The second, and most important, is what Aldi managers describe, straight-faced, as “the thrill at the till”: your trolley full of goods has cost less than you thought it would. The rushed, no-frills experience isn’t something you merely endure for the sake of saving money; the awareness of your savings makes that experience a pleasure in itself.
… there’s still only one type of ketchup (45p a bottle). The total number of products – known in retail as stock-keeping units (SKUs) – found in all Aldi stores has tripled since the early 90s to nearly 2,000, although that remains tiny compared to the 25,000 or more in a big supermarket. Most of these products are private labels that are made specifically for the company, even if they are designed to appear familiar to shoppers. In the chocolate aisle you will find Aldi’s own version of Mars and Snickers bars (“Titan” and “Racer”) – although its long struggle to copy the KitKat ended in failure.
The stores’ overall feel is still more gritty than pretty…Merchandise is still displayed on pallets, in plastic crates or cardboard boxes – or arranged haphazardly, as in the case of the one-off, bargain-priced goods found in the “middle aisle”, which hosts a rapidly rotating assortment of ultra-discounted oddities.
The famous “middle aisle” is the one place in Aldi where people linger for more time than is absolutely necessary, and it inspires devotion among customers, who know it by an assortment of made-up names: “the WTF aisle”, “treasure aisle-land” and, my two favourites, “the Aisle of Wonder” and “the Aisle of Shite”. You might find yourself walking into Aldi for coffee, pasta and milk and walking out with a discount welding helmet, an inflatable watermelon or a blanket for a horse (even though you don’t own a horse)…
….Other companies that have upended industries, such as Amazon with books and Uber with taxis, have relied on new technologies – the internet, the smartphone – as the disrupting force. Aldi is still relatively low-tech: without a loyalty programme, it knows little about individual customer preferences and you can’t buy its groceries online. What it has done is disrupt a mindset: the settled wisdom about how we think of ourselves as shoppers, and the basis by which we identify with a particular supermarket. Aldi’s victory was to show that there was no shame – and in fact there was satisfaction – in shopping at a discount supermarket. British mums once worried about their children being embarrassed to find Aldi food in their lunchboxes; now they happily swaddle their babies in Aldi’s disposable nappies, which are now the second-most popular brand in the country, behind only Pampers. “Aldi’s customer profile is now classless,” said Hyman. “The supermarket is as strong with affluent people as it is with people on low incomes.”
4. Short read: Samsung’s foldable phone isn’t about making money – and that’s the whole point
Author: Mohanbir Sawhney
Source: CNN (https://edition.cnn.com/2019/02/25/perspectives/samsung-galaxy-foldable-phone/index.html)
The author highlights that when “Some 25 years ago, Chrysler introduced a sportscar called the Dodge Viper. It had a monster V-10 engine, and Chrysler never sold that many of them.”
He says that the Viper was never intended to make money. Chrysler’s real intent was more subtle. “The product was more about elevating the Dodge brand and giving Chrysler a veneer of “cool.” People went into showrooms to gawk at the Viper — then they bought a Chrysler minivan or a sedan.”
He says that Samsung’s foldable phone is the Dodge Viper of our times. “Samsung’s new Galaxy Fold, a foldable smartphone with an eye-popping price tag of nearly $2,000, is a lot like the Dodge Viper. It’s a game changer — a brand play by Samsung to burnish its image as an innovation leader.
With bragging rights to the first foldable smartphone, Samsung is taking the innovation lead over Apple. That’s why the Galaxy Fold isn’t about generating sales. In fact, it’s doubtful that Samsung really cares about selling any significant number of these smartphones that fold out into a tablet. Samsung’s strategy — and a good one, at that — is about generating buzz in the smartphone category that has had very little real innovation news until now…The Galaxy Fold, like the Dodge Viper, is a “halo product” — a complex piece of machinery at a ridiculous price point that is not intended for the mass market. And that is the point. The appeal of the Galaxy Fold is not based on its functional appeal, but rather on its emotional appeal as the coolest toy in the smartphone business. If you want functionality or value for your money, buy a Galaxy S10+ and a tablet instead, and you will still have money to spare.”
5. Short read: Machine learning is helping unsigned artists make Spotify pay
Author: Sanjana Varghese
Source: WIRED (https://www.wired.co.uk/article/machine-learning-streaming-music-amuse)
A topical piece given starting this month, Indians can finally start streaming music on Spotify, arguably the best self-learning algo for music out there. Now, another Swedish start-up promises to upfront reward budding artists using machine learning to predict the potential success of their music.
“…Here’s how it works: artists upload their tracks onto Amuse, and those tracks are distributed onto streaming platforms such as Apple Music and Spotify. Then, a team of experts at Amuse analyse where the streams are coming from, what kind of stream they are (for example, if they come from premium users), and how many streams different artists get.
A program that Amuse has developed in-house assigns each of those characteristics a value. It then calculates how much an artist could expect to make in future royalties and offers a corresponding upfront payment, called a Fast Forward Advance. An artist who has 300 followers, all of whom are from Brazil, will be offered a lower Fast Forward Advance than someone who has 5,000 followers that are spread out throughout the world or are in the country the artist comes from…
… Although Amuse is also a record label with some artists signed to it, the major difference is that it’s also a free distribution service, so an artist simply has to sign up to use it (without signing to the label) in order for their data to come into Amuse’s hands and for them to be offered an advance. In order to finance the system, Amuse charges a fee between 10 to 20 percent of the payment it offers. In terms of risk, the artist only pays back the royalties that they are expected to make.”
6. Short read: Amazon Almost Killed Best Buy. Then, Best Buy Did Something Completely Brilliant
Author: Justin Bariso
Source: Inc. (https://www.inc.com/justin-bariso/amazon-almost-killed-best-buy-then-best-buy-did-something-completely-brilliant.html)
More on good old-fashioned brick and mortar retail. Indeed, one that shows how traditional retailers can reposition themselves to face the disruptive forces of online retail, especially in the area of consumer electronics where e-commerce has disrupted the most. Best Buy, America’s leading electronics retailer, since 2012 when it was mired in scandal and facing sharp decline in business, has turned around, thanks to “a combination of corporate strategy and emotional intelligence to save itself from ruin”.
1. Focus on people.
When Hubert Joly took over as Best Buy’s chief executive in 2012, he knew he had to tap into his people if the company had a shot at surviving. So, in his first months on the job, Joly did something great: He visited Best Buy stores (and even worked at a store for a week), giving him the chance to speak directly to front line employees.
Based on their feedback, Joly:
· fixed broken systems, like an internal search engine that gave bad data about which products were in stock;
· restored a beloved employee discount program; and
· invested heavily into regular employee training.
The measures seem to have worked.
According to workplace review website Glassdoor, 78 percent of employees would recommend working at Best Buy to a friend, and Joly enjoys a 92 percent employee approval rate. (Compare that with fellow retailer Walmart’s figures, with only 55 percent of employees who would recommend working at their store to a friend and 65 percent approval of the CEO.)
2. Turn weakness into strength.
Joly was well familiar with the practice of “showrooming,” in which customers came into a store to test products before buying online from competitors. So, he used that practice to his advantage–by instituting a price matching system.
This was a bold move that critics said would cannibalize more expensive sales. But the strategy made sense because it took advantage of the fact that customers want to see expensive items like a big-screen TV or smartphone up close before they buy. If the store is willing to price match, why not buy then and there?
“Until I match Amazon’s prices, the customers are ours to lose,” Joly told the New York Times.
The company also figured out how to make showrooming work for its advantage. It made deals with large electronics companies (like Apple and Samsung) to feature their products. In essence, these companies rent square footage within Best Buy to feature all their products together in a branded space, which gave Best Buy access to a new revenue stream.
Additionally, Joly and his team made changes that allowed stores to serve as mini warehouses for online customers. That means customers can order a product online, then choose whether to pick it up or have it shipped. This allows Best Buy to compete even better with you-know-who.
3. Don’t sell. Build relationships.
There was one advantage Best Buy already held over Amazon and other online retailers: the ability to connect with customers.
The company’s Geek Squad, a group of especially trained tech support experts, were popular with many. But Joly and Co. went a step further by starting an In-Home Advisor program. Through this program, Best Buy sends consultants to the privacy of your own home to offer advice and help you decide if and what you’d like to purchase.
“Advisors” are encouraged to establish long-time relationships with customers, rather than chase sales. In fact, according to a Bloomberg report, In-Home Advisors don’t need to track weekly metrics and are paid an annual salary instead of an hourly wage. House calls are free, can last up to 90 minutes, and advisors are told to “be comfortable not closing a deal by day’s end.”
These are just a few of the things Best Buy has done to stay relevant, and avoid falling victim to the retail apocalypse. But in the end, Joly realizes he doesn’t need to defeat Amazon. Just co-exist with it.
“You won’t get me to say a bad word about Amazon,” Joly said. “It’s not a zero-sum game.”
“There is a lot of room for both of us.”
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