SUPPLY CHAIN

Efficiency vs. Effectivenesss

BY Kevin Coupe

Maybe I’m just too old—or cranky—for the Disney experience.

There doesn’t seem to be an age limit on enjoying the so-called “most magical place in Earth.” After all, I know people older than me (I’m 52) who continue to visit Disney World every year, spending days or even weeks there soaking up the atmosphere.

But not me.

During a recent trip with my wife, my 17-year-old son and 12-year-old daughter to Orlando, Fla., we had a chance to visit Disney’s Magic Kingdom, EPCOT and Disney/MGM Studios. As expected, the facilities were noisy and crowded, but they also got me thinking about the difference between efficiency and effectiveness. After all these years, and after having established a general reputation for excellence, Disney, it seems to me, may be better at efficiency than effectiveness. In the long run, that’s probably not good for the brand.

It had been years since my last visit to the theme parks (my first visit was when both Disney World and I were young, early in 1972), and my general impression this time was of a theme park suffering from wear and tear…which is very different from what Disney would have you believe. It was like the folks at Disney have been so focused on cramming as many people into the parks as possible, and getting as much money from them as possible, that the magic of the experience has somehow been diminished. EPCOT and the Disney/MGM studios were marginally better, but not much…though I have to say that the Mission: Space ride in EPCOT may be the single best ride I’ve ever been on.

(I also have to acknowledge here that I am an exceptionally lucky fellow, which is why some of the Disney magic may have fallen flat with me. For example, a lot of people who visit EPCOT are thrilled to spend time and money on the various exhibits that illustrate facets of a dozen or so countries. But I’ve actually been to every one of the countries in the park, with the exception of Morocco. It is hard to be enthralled by a fake Eiffel Tower when I’ve jogged under the real one. My daughter, on the other hand, had a great time…and the argument can be legitimately made that the experience is supposed to resonate more with her than with me. I would counter, however, that many of Disney’s most successful movies of late have been those that have appealed both to adults and to children. It is a lesson that I think could fairly be applied to the theme-park experience.)

Now, some would say that by the very nature of the crowded conditions, Disney isn’t in any immediate danger of losing brand equity. That’s probably true. But I’m talking long-term. Even a company as big and successful as Disney needs to think about the distant future, and worry that it could be focusing more on efficiency than effectiveness.

It is, in fact, a question that every retailer and marketer needs to think about.

In recent days, the struggle between efficiency and effectiveness came into sharp relief with the reporting on two companies—Whole Foods Market and Starbucks—that have been far more than just retail entities. They’ve become cultural icons, because they have represented something more than the selling of organic and natural foods and coffee. And so, when there is even a hint that shifting priorities could be altering the DNA that allowed them to occupy special positions in consumers’ consciousness, there is an almost immediate backlash.

At Whole Foods Market, which is the company that is acquiring Wild Oats Markets, the question is whether management has grown to be out of synch with its core consumers—who in fact may view the retailer as being too big and too mainstream to effectively represent their interests and priorities. Whole Foods management has to figure out how to manage the often-conflicting expectations of Main Street and Wall Street—growing and becoming more efficient while at the same time not losing the essence that has made Whole Foods so special.

This is especially hard at a time when the natural/organic debate is so focused on the differences and relative advantages of big vs. small, and national vs. local. For some, “big organic” is out of synch with the values that made people turn to organics to begin with; they also believe that as major agribusinesses move into the organic arena, they cannot help but water down basic organic standards, therefore corrupting the whole category. When Wal-Mart announces that it is expanding its organic offering and wants to make it “more accessible” to consumers, that isn’t seen as validation by many diehards. Rather, it is a confirmation of their worst fears, because Wal-Mart is better known for efficiency than effectiveness.

Starbucks actually managed to get ahead of the criticism when a memo by company chairman Howard Schultz questioned whether the company was moving away from its core competency—coffee—and from the theatrical and unique in-store experiences that were the foundation for the company’s growth. For example, Starbucks does-not roast coffee in-store anymore, and most of its baristas use machines to make cappuccinos and lattes rather than doing it by hand. Efficient, yes. Effective? Schultz obviously is beginning to wonder.

The suggestion seems to be that if it is not careful, Starbucks could become this year’s Krispy Kreme…though I suspect that this isn’t likely to happen. I haven’t had a Krispy Kreme doughnut for about two years, but I can’t imagine going that long without drinking a venti skim latte. I think there are a lot of people who would feel the same way and, besides, I think Starbucks’ management is a lot more on the ball than Krispy Kreme’s.

That doesn’t mean it is going to be easy, or that Starbucks won’t face its challengers. Not only is Caribou Coffee, the closest thing Starbucks has to a national competitor in the gourmet-coffee arena, getting a lot of good notices, but there are plenty of small independent coffee shops making hay out of the fact that they are the anti-Starbucks, that they are more effective than efficient. And both McDonald’s and Dunkin’ Donuts have been improving their coffee offerings, even being ranked above Starbucks in certain taste tests. So being able to build while maintaining fidelity to the core experience and mission will be extremely important for Starbucks in both the short- and long-term.

Think about it. Disney. Whole Foods. Starbucks. Three companies that are more than just companies, and they are all facing the same basic problem.

Now think about your company. Do you have the same issues? Are you dealing with them, or ignoring them?

If you have them, and you aren’t facing them head on, then you are making a mistake that could, in the long run, be fatal.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: SAM’S REALIGNS STORE-LEVEL MANAGEMENT

BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions.

“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.

THE FIX: Differentiation would better help Sam’s

Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.

Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.

That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: TOYS ‘R’ US EARNINGS GAIN 40.1%

WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers.

Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.

Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.

THE FIX: Improved shopper experience ups comps

Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.

Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.

Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.

Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”

He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.

“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”

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