$24 billion to $350 billion
by Tom Gardner
Alexandria, VA (July 1, 1998) -- Yesterday, I cruised over the process of building a branded consumer franchise, focusing primarily on the inherent dangers of promotional campaigns. The third-rate promotion of even a chocolate bar can stall sales growth, sink the morale of a company, send key executives to the hills, destroy shareholder value, and leave a public business feeling worn out, like a torn tennis shoe under the wheel of an old bicycle in the basement.
And let's not forget the companies -- like Apple and Snapple -- that, having thrived in the early rounds of promotion, ran out of gas in the third lap of what really is an endless race. It is. The public markets are a track without a finish line, hosting a race that isn't about speed so much as endurance. You know what happens to the one-tank race cars, the one-trick ponies, the flakes, the trends, the flashes in an Indonesian gold pan. The roaring throngs are a little startled to see them stall out in the lead, drop to a knee, maybe never run again.
And in enough situations to mention, a public company really had no other apparent motive but to run that sort of race. Out of the gate in a shouting sprint, arms waving, the lead growing early, but knowing that the pace can't be maintained. A short spurt of energy, then sputtering. That's the company in the business of promoting its stock to new heights. Loud and dramatic publicity without a care in the world about sustainable business growth. Companies like K-tel International.
In late April of this year, K-tel announced its intent to sell its various and sundry greatest hit albums and videos direct to you and me on the World Wide Web. K-tel became an "Internet" company. The trading volumes of its stock went through the roof. Its shares ran from $3 to $40 -- and a slew of K-tel executives sold heavily at prices ranging from $30 to $35 per stub. In fact, key insiders sold 2.4 million shares, for more than $60 million in value. That amounted to over 30% of the total company being sold to the public by executives, just in the month of May.
The events inspired Fool News writer Dale Wettlaufer to ask, "Who owns this company?"
I encourage you to return to the historical graph of K-tel's stock performance in the years ahead, because I think it'll tell you a lot about management's commitment to creating lasting shareholder value. Click here: KTEL Graph: Weekly for 1 year, and you'll get a front-row seat to what I call:
The Bird Flip stock chart.
Why that name? Well, step back from it and behold the image of management extending up its right middle finger to shareholders. Check the graph: To the left, the pinky and ring finger are down; to the right, the thumb and index finger are down; down the center, the middle finger is raised, symbolizing management's primary message for long-term shareholders.
You can find similar Bird Flip charts by clicking the following:
So the dangers of a bad plan for promotions are great for shareholders. Fool, fear those companies that fail with their message or that create unsustainable promotions or that concentrate on short-term stock valuation -- in the grandest tradition of Charles Ponzi. Among rising valuations, what was nothing more than a pipe dream of real underlying value can go POOF... and name, product, and wealth vanish.
So promotions can be a pretty discouraging game -- enough so that you'll often find disgruntled engineers and developers scowling or taking swings at the marketing team. George McFly squaring off with Don King. When things go wrong for promoters or the long-term doesn't matter, the majority of builders naturally take their efforts elsewhere. And investors disappear.
But here's where the flip flops, the zag zigs, and the momentum shifts in this report.
Because the reverse is just as deadly. An overattention to product development, product review, product rejiggering, product perfection in mass-market consumer franchises can bring public demand to a grinding halt. The view through to a narrowing audience of customers is a manufacturing floor full of clock makers, toiling with their heads down, with no aggressive marketing department to champion their works.
If shareholder value is to press ahead for a name-brand franchise, the company has to invest in heavy promotion aimed at reaching a broadening audience of customers. And as that consumer franchise grows, the natural progression of its business model is into greater marketing efforts and a reduction in the expense of product development. Take Coca-Cola as the greatest 20th century example -- billions of dollars to market a can of soda that has remained the same for decades. Mark down Hershey's as the same sort of company -- billions to promote a thin slice of chocolate in brown wrapping paper. Starbucks -- headed that way, too.
And watch what Gap Inc. does, if it's to continue its smashing success in the decades ahead. You can expect Gap to reduce product development expenses, to limit its exposure to fashion trends, to pound away on the staple sales of t-shirts, shorts, denim, and khakis, and to invest heavily in promotions. Those are some of the actions of a company realizing that it has become a brand machine more than a developer, a mass-market franchise more than a niche designer, a business that will compete more on high-volume pricing and convenience than on providing high-quality expensive wares.
For a mass-market franchise, the products that don't draw a growing audience of repeat buyers disappear. And the ones that do, remain the same. Gradually, the enterprise gears itself toward repeated promotions of changeless things that sell. Stuff like razor blades, chocolate bars, tomato soup, soda pop, chewing gum, bottled water, ballpoint pens, Foolish behavior, blue jeans, and hamburgers. Staple items that can be infused with a unique spirit by a shrewd marketing team.
It's that spirit that persuades people like you and me to buy in volume, to repeatedly purchase the product, and to overlook the small premium in pricing that can earn hundreds of millions for a corporation (and its shareholders) each year. Even, each quarter. Coca-Cola earned $1 billion of after-tax profit per quarter over the last year. And I believe that Gap is already aspiring to a model similar to Coke's -- the heavy promotion of changeless products to a broadening audience.
Yes, those promotions will cost a lot of money. But Gap is well-positioned to make it worth its while. At the game of building a mass-market brand that generates increasing profit, I think that the Gap today is only equaled by Coca-Cola and maybe Microsoft among American companies. That makes it an important study for us. And if Gap continues to hit it right, I think it'll turn the $24 billion corporation of 1998 into a $350 billion worldwide franchise in fifteen years.
Tomorrow, I'd like to write briefly about what specifically a company like the Gap gains from its customers by aspiring to a global name-brand franchise, and how this company might be tailoring its marketing message to attract more repeat buyers around the world. Of course, I hope you're enjoying this blather...
Stock Change Bid ---------------- AXP -2 112.00 CHV +1 3/16 84.94 CSCO +2 7/16 94.50 KO + 1/4 85.75 GPS +1 5/16 62.94 EK + 1/8 73.19 XON +1 5/8 72.94 GM +1 11/16 68.50 INTC +1 1/16 75.13 MSFT + 15/16 109.31 PFE -1 5/8 107.00 TROW + 3/8 37.88
Day Month Year History C-K +0.82% 0.82% 14.99% 14.99% S&P: +1.30% 1.30% 14.71% 14.71% NASDAQ: +1.04% 1.04% 15.83% 15.83% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 109.31 39.66% 2/3/98 22 Pfizer 82.30 107.00 30.01% 2/27/98 27 Coca-Cola 69.11 85.75 24.08% 5/1/98 37 Gap Inc. 51.09 62.94 23.19% 2/6/98 56 T. Rowe Pr 33.67 37.88 12.48% 6/23/98 23 Cisco Syst 86.35 94.50 9.44% 5/26/98 18 American E 104.07 112.00 7.62% 2/13/98 22 Intel 84.67 75.13 -11.28% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 73.19 15.90% 3/12/98 20 Exxon 64.34 72.94 13.37% 3/12/98 15 Chevron 83.34 84.94 1.91% 3/12/98 17 General Mo 72.41 68.50 -5.39% Cash-King Stocks Rec'd # Security In At Value Change 5/26/98 18 American E 1873.20 2016.00 $142.80 2/3/98 24 Microsoft 1878.45 2623.50 $745.05 2/3/98 22 Pfizer 1810.58 2354.00 $543.42 2/27/98 27 Coca-Cola 1865.89 2315.25 $449.36 5/1/98 37 Gap Inc. 1890.33 2328.69 $438.36 2/6/98 56 T. Rowe Pr 1885.70 2121.00 $235.30 6/23/98 23 Cisco Syst 1985.95 2173.50 $187.55 2/13/98 22 Intel 1862.83 1652.75 -$210.08 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 15 Chevron 1250.14 1274.06 $23.92 3/12/98 20 Eastman Ko 1262.95 1463.75 $200.80 3/12/98 20 Exxon 1286.70 1458.75 $172.05 3/12/98 17 General Mo 1230.89 1164.50 -$66.39 CASH $51.68 TOTAL $22997.43 *The year for the S&P and Nasdaq will be as of 02/03/98