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Strategic Movements November 2017

November 2017 Corporate

Amazon can’t have Discount Luxury.

Months of talks between Swatch Group and Amazon proved fruitless.  Sticking point: unauthorized resellers.  Meaning:  Swatch wants to protect the price point at which its brick-and-mortar distributors can sell their luxury goods, while Amazon is fine with price competition.  As James Thomson of Buy Box Experts said: Amazon will say to any brand, “your distribution problem is your distribution problem.” Why should we support Swatch on this issue when Amazon could lower prices?  Logic: Horizontal channel conflict (which fails to reward channel members that promote Swatch’s brands and value points with high-touch service) will destroy the brand by reducing the rewards for selling and communicating the value through high-touch service.  Swatch’s brands, Longines, Omega, Blancpain, and Swatch need in-person, physical-presence selling.  Swatch needs to ensure businesses conducting that in-person, physical-presence selling gets rewarded.  A deal with Amazon would destroy those rewards by encouraging showrooming.  Bad idea for Swatch Group—and they didn’t do it.  Good for them.

Target Goes Small to Go Big

Target plans to remodel 1,000 of its existing 1,800 stores in the next three years. Why? Target achieved 2%-4% sales increases in remodeled stores.  On top of this investment, Target is opening 35 new, mostly smaller stores in 2018.  (Average size is 145,000 sq. ft.  Small format is 50,000 sq. ft.) Why? Target reports the small store formats prove to be twice as productive. New store formats and remodeled old stores are cited as driving a Q3 sales increase. It appears possible to compete with Amazon in brick-and-mortar retail.  Still, the future is online and Target, like Walmart, is investing there too.  Monopolies don’t make sense in retail, even online.  Competitors compete.

Streaming Inflection Point

Both Comcast Cable and AT&T Uverse / DirecTV are seeing declining subscribers, while Netflix, Amazon Prime, Google Chromecast, Roku Apple TV, and others are growing. In the Geoffrey Moore Technology Adoption Lifecycle, it looks like we have passed the Innovators and Early Adopters segments and entered the Early Majority for streaming TV. Expect two more years of fast growth, then slowing progress to follow. Comcast & AT&T: can you make being a broadband supplier work AND make your customers love you for it?

Is the New Zipcar Offering Leaving Money on the Table?

Zipcar is launching a $199-$299/month + $0.45/mile service of unlimited weekday usage of select cars.  Weekend service is still available at $/hr. rates.  Seems high at first glance, but let’s examine. Target segment: city dwellers who need to get to work every day but don’t want to own a car. Nearest comparable alternative: leasing a car at $439/month (average U.S. lease cost according to Edmunds).  Differential value over a leased car: includes insurance, gas, and most importantly for a city dweller, parking. Consider that parking spots in downtown New York and Chicago are often sold for $35,000, or that rented parking spots in residential neighborhoods are routinely $100/month—and this looks like a cheap offer.

I would not be surprised to see the subscription price increase by $100/month in certain cities where parking really is a constraint to car ownership, but I also see this as a very niche market.  Good offering, limited segment.  How limited? Less than 3% of the U.S. population lives in an urban core with highly constrained parking.  Perhaps 10% of this urban segment would value a service like this.  With a U.S. population of 320 million and rates at $199, it looks like a possible $192 million opportunity.  Let’s see if the latent demand can be activated.  If this succeeds, expect Enterprise and others to copy quickly.

Did Qualcomm Mistake Apple Power?

Apple and Qualcomm are in a feud. Issue: Qualcomm makes and holds patents over much of the modem chips that handle communications between wireless devices and cellular networks. Actions: Apple sued Qualcomm over market dominance, and Qualcomm responded by withholding software required to configure their next-gen chips. Apple responded by investigating Intel’s offering. Now, Qualcomm is reporting a quarterly profit plunge by 89% as Apple and others withhold patent payments. Future:  Qualcomm must hope this spat comes to a quick and positive end. Intel must hope otherwise. 

Political Risks Grows for Drug-makers

Attorney Generals of 45 states plus D.C. in the United States are taking legal action against Heritage Pharmaceuticals Inc., Mylan NV, Teva Pharmaceutical Industries Ltd., Novartis GA, Endo International PLC, Lannett Co., and Emcure Pharmaceuticals Ltd. Allegation: Price fixing in the generics market. On top of that, Ohio faces a ballot initiative to cap drug prices at VA Hospitals levels. These moves will take pharmaceutical companies out of the “value-based” pricing paradigm and into the “politically allowed” pricing practices. Pricers: time to add some new tools to our bag. Executives and investors: expect turmoil. Ideally, prices shouldn’t be determined by politics.  And, ideally, competition should drive prices down. Thus, ideally, market regulators should focus on the issue of competition and regulatory barriers to competing, not price mandates. But we don’t live in an ideal world.

 

This is what economist wanted to happen:  Big Corp. in Pot Markets

For years economists have stated that making marijuana legal would thus take it out of the illegal market, where it is sold by and to children for profits that support gangs and criminal activities. If legalized, the projected result would put marijuana in the hands of companies with legal oversight. Well:  Constellation Brands—a marketer of beer, wine, and spirits—is taking a 9.9% stake in Canopy Growth, a Canadian marijuana company. The plan is to develop cannabis-infused beverages for sale outside of the U.S.  Smart move, but be cautions. I wouldn’t try mixing it with a high caffeine concentration like the old Four Loko beer. If they do, Constellation Brands might be asked to prove pot is “safe for consumption.”



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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