SLOW Movement

FT: Procter & Gamble - Tumble cycle

Procter & Gamble: Tumble cycle

By Jonathan Birchall in New York

Published: December 17 2009 19:31 | Last updated: December 17 2009 19:31

EDITOR’S CHOICE

P&G warns over growth of global protectionism - Dec-17

Lafley retires as P&G chairman - Dec-08

Procter & Gamble’s ‘green’ campaign to target mainstream consumer - Sep-27

P&G to sell drugs unit for $3.1bn - Aug-24

Lex: Remaking Procter & Gamble - Jun-09

P&G set to replace Lafley as chief executive - Jun-09

On a recent visit to Moscow, Bob McDonald took time out to drop in on a Russian housewife. The chief executive of Procter & Gamble wanted to check up on what she was buying amid a severe economic downturn and an annual inflation rate running at about 9 per cent.

“The lady’s reaction to the economic crisis in Russia was to buy large sizes of everything,” recalls Mr McDonald of his visit to the suburban apartment. The working mother with two children was already buying bumper packs of laundry detergent. But she wanted large-sized bottles of shampoo and Fairy dishwashing liquid too. “Her whole purchasing habit had changed.”

In an interview at P&G’s headquarters in Cincinnati, Ohio, Mr McDonald notes that the world’s largest consumer goods company had seen this kind of change before: in Turkey, for example, during the dramatic currency devaluation of 2001, when he was head of P&G’s global fabric care business. “During every recession we’ve seen a change of behaviour,” he says. “During our 172 years of operation, [for] more than a quarter of them we’ve operated in a recession. So we’ve been there before.”

Rise of private labels

An advertising campaign for Charmin, Procter & Gamble’s US toilet paper brand, invites consumers to “soften your bottom line”, saying it may cost more but lasts four times longer than “leading value brands”. This is part of P&G’s “performance-based value messaging”, targeting retailer private- label brands that have gained market share in the downturn. A survey by research firm Consumer Edge suggests 30 per cent of US households now use private-label toilet paper. Just over 53 per cent of households surveyed were “very satisfied” with it, indicating shoppers might stick with private labels after the recovery, the firm says, underlining the challenge to P&G.

Mr McDonald’s sang froid amid the worst consumer recession since the 1930s is in tune with the style of A.G. Lafley, his unflappable predecessor, as well as his own background in the US army’s officer corps before he joined P&G 29 years ago. Previously chief operating officer and right-hand man to Mr Lafley, Mr McDonald had long been seen as his likely successor. But the timing of his appointment in June took the industry and Wall Street by surprise.

“It was probably a year earlier than we were expecting,” says Bill Pecoriello, analyst at the Connecticut-based Consumer Edge Research. “But we were totally confident that it would be a smooth transition, despite the fact that it was happening in the middle of a global economic crisis.”

With more than 4bn customers, and just over 30 per cent of its $79bn (£49bn, €55bn) annual sales coming from developing markets, P&G is both a barometer of the health of global consumer demand and a standard-setter for consumer goods marketing.

Sales of its brands such as Pantene, Head and Shoulders and Wella account for one-fifth of all the hair products used around the world; more than 70 per cent of the world’s razors and blades are made by its Gillette brand. Over the past decade P&G has led the creation of new product categories with products such as Crest dental whitening strips and Swiffer cleaning mops, delivering new products at a rate that has outstripped Unilever and other global rivals.

Mr McDonald (pictured left) argues that his arrival in the top job represents “continuity with change”. But the switch in leadership has been accompanied by a shift in strategy that, if successful, could put P&G on the list of companies, such as Estée Lauder and Avon, for which this recession turned into an opportunity – they pushed through restructurings that otherwise would have been harder to achieve. “Maybe when we look back, we’ll see P&G as being one of those companies,” says Lauren Lieberman, an analyst at Barclays Capital.

News of the change came after a quarter in which P&G’s sales were hampered by the price rises it had instituted in 2008 to deal with inflation and the jump in commodity prices the world was experiencing at the time. Mr McDonald admits that when he took over, the company was running in “crisis mode”, trying to stabilise its business as a fall-off in global consumer demand followed Wall Street’s precipitate slide the previous September.

“In October through December, things fell apart and they fell apart relatively rapidly,” he says of the post-crash universe. “It was clear to us ... that we had to take dramatic steps quickly to restore the financial structure of our business.”

Last week it was announced that Mr Lafley, who stayed on as chairman after the handover, would next month relinquish that post too to Mr McDonald.

Ms Lieberman argues that the crisis exposed weaknesses and missteps by P&G, such as launching Tide Total Care, the most expensive version of its Tide detergent, in July 2008 rather than the “value tier” Tide Basic line it is now testing in the US. The company had “the wrong product portfolio for the [economic] environment”, skewed towards higher-end products and discretionary items such as Wella. Its global business was also strong in Russia and eastern Europe and comparatively weak both in south-east Asia, where consumers were less affected, and Latin America, where they were more accustomed to inflation-related price increases.

Initially, P&G’s response included price rises in its overseas markets to defend the profitability of its brands, combined with a review of its planned product introductions and a shift in its marketing. That move, still under way, is towards “value-based metrics” such as stressing that its Charmin toilet paper may cost more than an alternative but lasts four times longer.

But it was the price increases that had the most immediate effect on its business. In Russia, for instance, it raised prices four times in a row on products such as Ariel detergent and Head and Shoulders shampoo, as it tried to offset falls in the value of the rouble. The rises had been expected to hit sales. But by spring and early summer of this year, the company came to recognise that its had fallen by more than it had reckoned for – just as it began to discuss the transition in the top job.

In the US and western Europe, the main beneficiary of those losses were the “private label” goods produced for retailers. By the time of the succession, P&G had determined a short-term plan of action to reinvigorate sales by boosting spending on marketing to rebuild market share. It also cut prices on 10 per cent of its product lines, undoing many of the price rises it had instituted in Russia that its competitors had chosen not to follow.

To allow it to invest more in marketing and brand building, the company also dropped its 2010 diluted earnings per share growth below the long-term double-digit target that had been a shibboleth of the Lafley era, as it shifted spending into the drive to win back market share. Having initially predicted that it would see an “inflexion point” for a return to top-line sales growth in the current three months, the company returned to growth by the end of its July-September quarter.

Mr McDonald maintains that the group is now placed to deliver profitable growth over the coming five years. “In those five years, we’re going from reaching 4bn consumers using our products to 5bn consumers. And we’re going to go from the average consumer in the world spending $12 a year on P&G products to $14 a year. And we have all the building blocks that lead to those results,” he says.

Ms Lieberman argues that the leadership transition also marks an evolution in P&G’s strategy, albeit one that was evolving even before the recession hit. After improving margins by creating innovation that customers will pay more for, Mr McDonald is focusing on building global scale through unit sales. “P&G was getting an existing Tide consumer to trade up to another version of Tide, rather than getting someone who is not a Tide consumer to buy one of the products. There’s not enough growth in that strategy.” Changing that, she argues, “is what Bob is all about”.

The new strategy includes a direct assault, both through marketing and new “value tier products”, on the private labels that have gained market share during the recession. “We don’t think there is any reason any consumer should have to use a private label. We should be able to innovate at multiple price points to delight all consumers,” says Mr McDonald.

In the US, P&G had already launched “basic” lower-cost versions of its Charmin toilet paper and Bounty paper towels before the recession hit. But this year it not only started testing “basic” Tide in the southern US but, in Europe, introduced the lower-cost Simply Dry version of its Pampers nappies. It is continuing the expansion of its Naturella female pad brand originally developed for low-income women in Mexico: after its recent expansion into Saudi Arabia and Khazakstan, a launch in China may follow.

In 2009, only about half of its product categories offered “value tier” versions in its top 17 country markets. The proportion is expected to increase to about 75 per cent by P&G’s 2011 fiscal year. “There is renewed commitment that this is very strategic, and we need to get it done more quickly than ever before,” says Mr McDonald.

To support what it calls “white space” expansion into new categories and markets, the company is in the midst of its largest ever increase in international manufacturing capacity, with almost 20 plants being built outside the US. That includes facilities in India, where consumers currently spend less than an annual $1 a head on P&G products, and China, where the amount is only $3 – compared with $20 in Mexico.

Mr Pecoriello at Consumer Edge argues that P&G is “still playing catch-up” against competitors in developing markets. “They have the opportunity to expand. But the reality is they are very competitive markets and there are entrenched local and multinational competitors, such as Unilever, L’Oréal and Colgate. It’s going to take investment, but it is absolutely the right strategy, because that’s where the growth is.”

Last week, P&G announced the $470m acquisition of Ambi Pur air fresheners and other household products from Sara Lee, one of its US rivals. The move gives it access to Ambi Pur’s markets and distribution network in Asia and Europe where P&G’s Febreze brand is not sold.

As the world edges out of recession, Mr McDonald says he is not among those who believe that basic consumer behaviour will have been permanently affected or demand reduced by the experience. “Is there going to be a new ‘reset’? I don’t know. I don’t think it’s going to be to the extent that people think it is. The US may reset to a somewhat less credit-driven level, but that has arguably a relatively minor impact in the world.

“We’ve been to the movie before,” he says. “We see behaviour change during the recession, we see [demand] come back with resilience at the end of the recession.”

How bonds beyond borders reveal the culture of the fabric conditioner

Bob McDonald argues that Procter & Gamble needs to look for new consumers not only in the developing world, but also in the company’s existing markets in developed economies.

The 56-year-old head of P&G says senior executives recently “committed to redouble efforts to serve Hispanics and African-American minority consumers” in the US. Although minority communities account for a little more than one-third of the population today, “some time between 2035 and 2045 the minority will become the majority in the US, and looking at the US as a homogenous country is a big mistake.

“Country boundaries are irrelevant,” he says, citing the influence on his thinking of Samuel Huntington’s 1996 book, The Clash of Civilizations and the Remaking of World Order, published when he was working for P&G in east Asia. Huntington’s stress on ethnic and cultural bonds over national identity “resonated” with his own experiences while selling haircare, fabric and beauty products. As a brand manager for laundry products in Canada from 1989 to 1991, he had observed that French-Canadians loved lavender-scented fabric conditioner, while the English parts of the country “hated” it. Then he found a similar love of lavender in parts of Europe and Latin America and the Philippines. “You start wondering why these cultures develop certain needs and similarities,” he says.

In east Asia in the 1990s, he saw cultural similarities between the transnational ethnic Chinese community in countries such as Indonesia, the Philippines, Malaysia and Singapore. “Why can’t we market our products to these civilizations? Well, now, with global retailers and with digital technology, we can do that.”

He plans a new commitment to the internet and e-commerce, with the company seeking to expand the small percentage of goods it sells online. “We’ve got to learn about that shopping experience the way we understand the shopping experience in bricks-and-mortar stores.”

Part of his challenge now is to persuade P&G’s country-focused managers to join him in his belief that borders are irrelevant. That would mean “the integration of approach from northern Mexico to the southern US” in America, for example. “You’ve got people going across the border and they need to understand that the brand that they know and love is available on both sides.”

Copyright The Financial Times Limited 2009.

Non Sequitur: The short attention span cemetery

This is so true...

NY Times: Wall Street's Math Wizards Forgot a Few Variables

September 13, 2009

Unboxed

Wall Street’s Math Wizards Forgot a Few Variables

By STEVE LOHR

IN the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.

But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.

The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.

That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.

“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” said Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”

In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.

The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance.

Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.

Financial markets, like online communities, are social networks. Researchers are looking at whether the mechanisms and models being developed to explore collective behavior on the Web can be applied to financial markets. A team of six economists, finance experts and computer scientists at Cornell was recently awarded a grant from the National Science Foundation to pursue that goal.

“The hope is to take this understanding of contagion and use it as a perspective on how rapid changes of behavior can spread through complex networks at work in financial markets,” explained Jon M. Kleinberg, a computer scientist and social network researcher at Cornell.

At the Massachusetts Institute of Technology, Andrew W. Lo, director of the Laboratory for Financial Engineering, is taking a different approach to incorporating human behavior into finance. His research focuses on applying insights from disciplines, including evolutionary biology and cognitive neuroscience, to create a new perspective on how financial markets work, which Mr. Lo calls “the adaptive-markets hypothesis.” It is a departure from the “efficient-market” theory, which asserts that financial markets always get asset prices right given the available information and that people always behave rationally.

Efficient-market theory, of course, has dominated finance and econometric modeling for decades, though it is being sharply questioned in the wake of the financial crisis. “It is not that efficient market theory is wrong, but it’s a very incomplete model,” Mr. Lo said.

Mr. Lo is confident that his adaptive-markets approach can help model and quantify liquidity crises in a way traditional models, with their narrow focus on expected returns and volatility, cannot. “We’re going to see three-dimensional financial modeling and eventually N-dimensional modeling,” he said.

J. Doyne Farmer, a former physicist at Los Alamos National Laboratory and a founder of a quantitative trading firm, finds the behavioral research intriguing but awfully ambitious, especially to build into usable models. Instead, Mr. Farmer, a professor at the interdisciplinary Sante Fe Institute, is doing research on models of markets, institutions and their complex interactions, applying a hybrid discipline called econophysics.

To explain, Mr. Farmer points to the huge buildup of the credit-default-swap market, to a peak of $60 trillion. And in 2006, the average leverage on mortgage securities increased to 16 to 1 (it is now 1.5 to 1). Put the two together, he said, and you have a serious problem.

“You don’t need a model of human psychology to see that there was a danger of impending disaster,” Mr. Farmer observed. “But economists have failed to make models that accurately model such phenomena and adequately address their couplings.”

When a bridge over a river collapses, the engineers who built the bridge have to take responsibility. But typically, critics call for improvement and smarter, better-trained engineers — not fewer of them. The same pattern seems to apply to financial engineers. At M.I.T., the Sloan School of Management is starting a one-year master’s in finance this fall because the field has become too complex to be adequately covered as part of a traditional M.B.A. program, and because of student demand. The new finance program, Mr. Lo noted, had 179 applicants for 25 places.

In the aftermath of the economic crisis, financial engineers, experts say, will probably shift more to risk management and econometric analysis and concentrate less on devising exotic new instruments. Still, the recent efforts by investment banks to create a trading market for “life settlements,” life insurance policies that the ill or elderly sell for cash, suggest that inventive sales people are browsing for new asset classes to securitize, bundle and trade.

“Good or bad, moral or immoral, people are going to make markets and trade via computers, and this is a natural area of financial engineers,” says Emanuel Derman, a professor at Columbia University and a former Wall Street quant.

Copyright 2009 The New York Times Company

NY Times: Turning to Tie-Ins, Lego Thinks Beyond the Brick

September 6, 2009

Turning to Tie-Ins, Lego Thinks Beyond the Brick

By NELSON D. SCHWARTZ

Billund, Denmark

FROM the outside, there is nothing playful about the drab, two-story Lego Idea House here, where designers gather in whitewashed rooms to dream up new toys. But upstairs, behind a series of locked doors accessible only to employees with special passes, is a chamber that might as well be toy heaven for kids — and more than a few adults.

Multicolored Lego creations in every imaginable size and shape spill from the shelves, from Indiana Jones’s biplane to Darth Vader’s fighter. Boxes stamped “confidential” hold potential future blockbusters, like Buzz Lightyear, the hero of the “Toy Story” animated films, as well as a police station bustling with miniature cops and robbers.

“It’s our way of looking at the world,” says Soren Holm, the head of Lego’s Concept Lab. “We have happy criminals; even they are smiling. The sun is shining every day.”

While that may be true of Lego’s toys, until recently it was hardly the case for Lego’s bottom line. But five years after a near-death experience, Lego has emerged as an unlikely winner in an industry threatened by the likes of video games, iPods, the Internet and other digital diversions.

Even as other toymakers struggle, this Danish maker of toy bricks is enjoying double-digit sales gains and swelling earnings. In recent years, Lego has increasingly focused on toys that many parents wouldn’t recognize from their own childhood. Hollywood themes are commanding more shelf space, a far cry from the idealistic, purely imagination-oriented play that drove Lego for years and was as much a religion as a business strategy in Billund.

Just as the toys are changing, so is the company. Jorgen Vig Knudstorp, 40, a father of four and a McKinsey & Company alumnus who took over as Lego’s chief executive in 2004, made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was to succeed.

FROM the outside, there is nothing playful about the drab, two-story Lego Idea House here, where designers gather in whitewashed rooms to dream up new toys. But upstairs, behind a series of locked doors accessible only to employees with special passes, is a chamber that might as well be toy heaven for kids — and more than a few adults.

Multicolored Lego creations in every imaginable size and shape spill from the shelves, from Indiana Jones’s biplane to Darth Vader’s fighter. Boxes stamped “confidential” hold potential future blockbusters, like Buzz Lightyear, the hero of the “Toy Story” animated films, as well as a police station bustling with miniature cops and robbers.

“It’s our way of looking at the world,” says Soren Holm, the head of Lego’s Concept Lab. “We have happy criminals; even they are smiling. The sun is shining every day.”

While that may be true of Lego’s toys, until recently it was hardly the case for Lego’s bottom line. But five years after a near-death experience, Lego has emerged as an unlikely winner in an industry threatened by the likes of video games, iPods, the Internet and other digital diversions.

Even as other toymakers struggle, this Danish maker of toy bricks is enjoying double-digit sales gains and swelling earnings. In recent years, Lego has increasingly focused on toys that many parents wouldn’t recognize from their own childhood. Hollywood themes are commanding more shelf space, a far cry from the idealistic, purely imagination-oriented play that drove Lego for years and was as much a religion as a business strategy in Billund.

Just as the toys are changing, so is the company. Jorgen Vig Knudstorp, 40, a father of four and a McKinsey & Company alumnus who took over as Lego’s chief executive in 2004, made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was to succeed.

“We needed to build a mind-set where nonperformance wasn’t accepted,” Mr. Knudstorp says. Now, “there’s no place to hide if performance is poor,” he says. “You will be embarrassed, and embarrassment is stronger than fear.”

But the story of Lego’s renaissance — and its current expansion into new segments like virtual reality and video games — isn’t just a toy story. It’s also a reminder of how even the best brands can lose their luster but bounce back with a change in strategy and occasionally painful adaptation.

Founded in 1932 on the principle of “play well,” or “leg godt” in Danish, by a local carpenter, Ole Kirk Christiansen, this privately held company had a very Scandinavian aversion to talking about profits, much less orienting the company around them.

Mr. Christiansen’s family still owns Lego and its business may still be fun and games, but working here isn’t. Before Mr. Knudstorp’s arrival, deadlines came and went, and development time for new toys could stretch out for years; in 2004, the company racked up a $344 million loss.

Now, employee pay is tied to measuring up to management’s key performance indicators (K.P.I.’s, in Lego-speak). And cost-saving touches are encouraged when it comes to designing new toys.

That has helped to lower development time by 50 percent, with some new products moving from idea to box in as little as a year. Mr. Knudstorp’s bottom-line-oriented team, meanwhile, has shifted some manufacturing and distribution from Billund to cheaper locales in Central Europe and Mexico.

Nevertheless, Lego hasn’t entirely shed its Scandinavian sense of social mission when it comes to making toys. It kept quality high and never moved any manufacturing to China, avoiding the lead paint scare and grabbing market share when rivals stumbled amid multiple recalls.

Now, with profits swelling and the turnaround firmly in place, Lego is preparing for a future that moves well beyond the basic brick but carries big risks as well.

Last month, it opened its first “concept store” in Concord, N.C., where parents can bring children for birthday parties and classes with master builders; another concept store is set to open near Baltimore this fall. It’s all part of a broader retail expansion that will give Lego 47 retail stores worldwide by year-end, up from 27 in 2007.

In 2010, the first board game designed by Lego will go on sale in the United States, while its new virtual reality system, Lego Universe, will make its debut on the Web, with children able to act out roles from Lego games and build toys from virtual bricks.

Video games — yes, Lego is there, too — are increasingly important to the company, as are Lego’s legions of adult fans, who can now buy kits to build architect-designed models of Frank Lloyd Wright’s Fallingwater and the Guggenheim Museum. What’s more, the company is in talks with Warner Brothers about a mixed live-action and animation Lego-themed movie that would move the company and its Lego brand even further into the Hollywood orbit.

“Developing a movie doesn’t come cheap,” says Soren Torp Laursen, a 23-year Lego employee who heads its North American operations. “But five years ago, we were in the midst of a crisis, and now we’re in a growth phase. We are definitely taking bigger risks than we previously did.”

WHILE that shift has disappointed purists and prompted worries from experts that some of what has long made Lego special may be in jeopardy, it’s paying off, at least in the short term.

Amid a 5 percent drop in total United States toy sales last year and the industry’s worst holiday season in three decades, according to Sean McGowan, an analyst at Needham & Company, Lego’s sales surged 18.7 percent in 2008. And despite a worsening global recession, Lego powered through the first half of 2009, with a 23 percent sales increase over the period a year earlier. It earned $355 million before taxes last year, and $178 million in the first half of 2009.

The numbers are all the more impressive given the sales declines this year at the two biggest toymakers, Mattel and Hasbro.

“I was stunned when I heard how strong Lego’s performance was,” says Mr. McGowan, who has covered the toy industry for 23 years. “How could an $80 Lego set sell better than a $10 action figure?”

The answer is as multifaceted as one of Lego’s most complicated brick creations — and, like the best children’s stories, contains elements of luck, hard work and the loss of innocence.

SOREN HOLM looks down at the machine gun atop Indiana Jones’s jeep and winces. By the standards of video games like Grand Theft Auto and of other childhood attractions, it’s mild stuff.

But here in Billund, toy weapons have always been a touchy subject. “I can tell you there’s been a lot of debate about how far we can take it,” Mr. Holm says. Right down to Indy’s gun? “Oh, yes,” he says slowly. “Oh, yes.”

Since Lego overcame its initial hesitation about rolling out a “Star Wars” series a decade ago because the word “war” would appear on the box, the company has grown more comfortable with conflict.

“We’ve opened up slightly,” Mr. Holm says. After all, he adds, “when you give boys a bunch of bricks, they build a gun.”

In fact, Lego has opened up more than slightly. Whether it’s the Star Wars Assassin Droids Battle Pack or the Indiana Jones Ambush in Cairo set — featuring a pistol-wielding Indy against a scimitar-swinging local — many of Lego’s most popular toys today seem inspired by the special effects and violence of the big screen.

In the United States, Lego’s biggest market and the biggest toy market in the world, games with themes like “Star Wars” and “Indiana Jones” were among the reasons Lego sales jumped 32 percent last year, well above the global pace. But experts like Dr. Jonathan Sinowitz, a New York psychologist who also runs a psychological services company, Diagnostics, wonders at what price these sales come.

“What Lego loses is what makes it so special,” he says. “When you have a less structured, less themed set, kids have the ability to start from scratch. When you have kids playing out Indiana Jones, they’re playing out Hollywood’s imagination, not their own.”

Even toy analysts who admire the company and its recent success acknowledge a broad shift. “I would like to see more open-ended play like when we were kids,” says Gerrick Johnson, a toy analyst at BMO Capital Markets in New York. “The vast majority is theme-based, and when you go into Toys “R” Us, you’d really be challenged to find a simple box of bricks.”

Lutz Muller, an independent toy analyst in Williston, Vt., who has long followed the industry, estimates that 60 percent of Lego’s American sales are linked to licenses, double the amount five years ago.

And the coming “Toy Story” sets have retailers salivating, as Disney prepares to release the latest movie in the hit series next June. “ ‘Toy Story’ is a fit made in heaven,” raves Jerry Storch, the chief executive of Toys “R” Us, which has increased the shelf space allotted to Lego in recent years.

Nevertheless, acquiring licenses to make toys linked to hot Hollywood properties like “Toy Story” carries risks. “It’s a slippery slope,” Mr. Johnson says, and today’s hit can quickly turn into tomorrow’s dud, adding volatility that Lego never faced in the past.

Indeed, unlike the Cabbage Patch Kids or Atari or the Beanie Babies, it was Lego’s seeming aloofness from the market that helped it endure, rather than ending up in the back of the closet like those toys of yesteryear.

For longtime Lego executives like Mr. Laursen, it’s a delicate issue, and his own comments echo Lego’s ambivalence over creativity and hallowed Lego traditions versus the appeal of more profitable, Hollywood-influenced toys.

He says that “we’re definitely more commercially oriented” and notes that licenses play a bigger role in the American market than overseas. But he says that “we’ve never sacrificed our values, and have never been a fundamentally profit-oriented company.”

In fact, he says that there is often a long debate about values when acquiring new licenses, and that “we’re far from always agreeing to take on new ones.” He won’t specify which movies or themes Lego has passed on, but says that “there are many licenses out there that represent a level of violence that is not suited to Lego and doesn’t fit with the trust of parents.”

As Lego ventures deeper into video games and virtual reality with Lego Universe, the question of violence, not to mention commercial temptations, will become only more charged.

One answer, Mr. Laursen says, is to make “violence not explicit, but humoristic.” For example, when a minifigure “dies” in a “Star Wars” or “Indiana Jones” video game, he dissolves into a pile of bricks and then springs back to life, cartoon style.

“We think kids really want to have this good-against-evil play; they want this fighting against each other,” says Charlotte Simonsen, a Lego spokeswoman. “But we want to do it with a wink.”

Analysts add that the recession has proved to be an unexpected boon for Lego, as parents favor spending more time at home with traditional toys instead of going out to the movies or taking trips with the children.

Even parents who won’t let video games in the house, like Alyson Richman Gordon of Huntington Bay, N.Y., say Lego has retained its innocence, especially when it comes to toys built around the traditional bricks. “It echoes back to a bygone era,” she said. “And I find as a parent that I’m drawn to things from my own childhood that inspired my creativity.”

Lester Munson, a father of two in Alexandria, Va., agrees, even though he sees a difference between the Legos of his own childhood and those favored by his 8-year-old son, Jonas. “The most exotic thing I could build when I was a kid was an ambulance,” he says. “Now Jonas can build the Death Star.”

“I still like Legos, and I’m 41,” he says. “Instead of watching TV or playing computer games, the kids are building something, and Jonas and I will build stuff together. The pieces and the sets are a lot cooler than they were 30 years ago, and if the price you have to pay is these tie-ins, that’s fine.”

IT’S not only children who fight over toys. John Barbour, a former top executive of Toys “R” Us, recalls “a series of truly frustrating meetings” with Lego officials in Billund and New York at the beginning of the decade, which climaxed when Mr. Barbour bluntly told them that Toys “R” Us cared more about the Lego brand than they did.

The most popular toys would run out, he recalls, and Lego was simply unable to ship more or manage the complex process of producing the plastic pieces for its most complicated sets.

That began to change in 2004, after Mr. Knudstorp took over in Billund and Mr. Laursen arrived at Lego’s regional headquarters in Enfield, Conn. Besides reaching out to top retailers and cutting costs, they untangled a supply chain that churns out 29 billion pieces a year.

The changes also filtered down to the ranks of Lego’s toy designers, says Paal Smith-Meyer, head of Lego’s new-business group. The number of different bricks or elements that go into Lego toys has shrunk to less than 7,000 from roughly 13,000, and designers are encouraged to reuse parts, so that a piece of an X-wing fighter from the “Star Wars” series might end up in Indiana Jones’s jeep or a pirate ship.

That’s very different from when Mr. Meyer joined Lego a decade ago. Though creating a mold to make a new plastic element might cost 50,000 euros. on average, he recalls that 90 percent of new elements were developed and used just one time.

Nowadays, Mr. Meyer says, “you have to design for Lego. If you want to design for yourself, go be an artist.”

For those would-be Lego artists out there, the company has created a Lego Certified Professional program, selecting adult Lego enthusiasts who don’t work directly for the company but whose creations are aimed at Lego’s vast population of adult fans as well as museum and gallery shows.

It’s part of another broad new effort at Lego — reaching out to those adult fans, who maintain thousands of Web sites and blogs, like GodBricks, which features Lego creations inspired by different faiths, and the Brothers Brick, which showcases all things Lego, whether a life-size Lego house, news, or advice on how to shine up yellowing bricks (hydrogen peroxide).

“There’s a huge community of people that treat Lego as an art form rather than just a toy,” says Andrew Becraft, a technical writer at Microsoft who created the Brothers Brick blog. His site pulls in 125,000 unique visitors a month, and Lego officials estimate that 915,000 people worldwide attended Lego conventions and other events in the first seven months of 2009. Five to 10 percent of Lego toys are snapped up by adults.

In the past, Mr. Knudstorp says, “we considered the adult fans like vintage cars, a bit bizarre.” But he called on another longtime Lego executive, Tormod Askildsen, to work with adult fans. Now Mr. Askildsen journeys to Lego conventions organized by adult enthusiasts, while working with 44 Lego “ambassadors” from 27 countries, seeking advice about new toys and heading off public anger when older lines, like Lego’s 9-volt train sets, are phased out.

Ultimately, Lego came up with a new, profitable train set, after inviting the 9-volt enthusiasts to two workshops in Billund to brainstorm and help design it. “If you rock the boat, people will notice,” Mr. Askildsen notes. “They were fighting furiously for us not to give it up, but we were able to turn tension into opportunity.”

The same might be said for Lego as a whole, as it navigates the fiercely competitive toy market and ventures into movies and virtual reality while clinging as best it can to the more innocent, Scandinavian values that made it so popular in the first place.

“In the end, you’ve got to go where your consumer is going,” Mr. Barbour says. “And the reality is that themes and movies are what kids want. There’s no point in developing the best product in the world if you can’t put it on the shelf.”

A "Space Truck Getaway" model from the Lego Space Police series sits in a display shelf at the Lego Store in Concord Mills Mall in Concord, N.C. Five years after a near-death experience, Lego has emerged as an unlikely winner in an industry threatened by iPods, the Internet and other digital diversions.


The Lego headquarters in Billund, Denmark. This private company has long had a very Scandinavian aversion to talking about profits, much less orienting the company around them.


Just as the toys are changing, so is the company. Jorgen Vig Knudstorp, 40, a father of four and a McKinsey & Company alumnus who took over as Lego's chief executive in 2004, made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was going to succeed.


Gitte Hedegaard Nipper, Lego marketing manager, prices new small products. The company has always taken pride in its toys. It was founded in 1932 on the principle of "play well," or "leg godt" in Danish, by a local carpenter, Ole Kirk Christiansen.


The Lego White House, part of the Architecture line.


Almost everything is automated in the Lego factory, and only two people work in every hall, ensuring that the machines function.


Thousands of Lego cubes for new toys. "There's a huge community of people that treat Lego as an art form rather than just a toy," says Andrew Becraft, a technical writer at Microsoft who created the Brothers Brick blog. His site pulls in 125,000 unique visitors a month, and Lego officials estimate that 915,000 people worldwide attended Lego conventions and other events in the first seven months of 2009.


Quality control of the finished Lego Star Wars sets before they can be shipped from the factory in Denmark. Hollywood themes are commanding more shelf space, a far cry from the purely imagination-oriented play that drove Lego for years.


Lego's headquarters isn't all work; it is common to find children playing there. The company hasn't entirely shed its Scandinavian sense of social mission when it comes to making toys. It kept quality high and never moved any manufacturing to China, avoiding the lead paint scare and grabbing market share when rivals stumbled amid multiple recalls.


Joanne Valentine, left, asks advice from a Lego store assistant manager, Irene Helms, in Concord, N.C. A similar store is to open near Baltimore this fall.


In the United States, Lego's biggest market and the biggest toy market in the world, games with themes like "Star Wars" and "Indiana Jones" were among the reasons Lego sales jumped 32 percent last year, well above the global pace. Boxes from the Indiana Jones Last Crusade series sit on a shelf at the Lego Store in Concord, N.C.


Last month, Lego opened a store in Concord, N.C., where parents can bring children for birthday parties and classes with master builders. Jason Anderson, an assistant manager at the store, helps Landon Mesimer, 5, in building a fishing rod during a class.

Copyright 2009 The New York Times Company

FT: Views you can use

Views you can use

By Jonathan Birchall

Published: September 2 2009 22:51 | Last updated: September 2 2009 22:51

The schoolteacher was not happy with the inflatable solar system set that was meant to be engaging and educating children in the classroom, and went on the supplier’s website to say so. “I opened the package, blew up the planets, hung them in my classroom, and came in the next day to find three blobs of rubber hanging from the ceiling,” complained the teacher last September. “Totally disappointed!!!!”

The blow-up solar system had been bought from Oriental Trading Company, a US catalogue and internet retailer, for about $18. The teacher was not alone: at the end of last year, other customers buying the set from Oriental were just as unhappy – and were going online to say so.

They complained in reviews on the company’s website that the sun, the eight planets and Pluto would often just not stay inflated.

With customers regularly giving the product low scores on its site, Oriental contacted the manufacturer. By January, its customer service team was able to an­nounce that it had worked with the makers to make sure the planets stayed inflated. A series of five-star reviews suggests the deflation problem is over.

The experience illustrates the evolution of a feature that is increasingly familiar in online transactions: originally seen as an aid to other potential buyers, on­line reviews are becoming a valued source of direct customer feedback for retailers and manufacturers.

Samsung Electronics started hosting reviews on its US website last year, using technology and processing provided by Bazaarvoice, which has become the dominant provider of third-party review services in the US since it started in 2005 in a single office in Austin, Texas.

Bazaarvoice now works with more than 500 brands belonging to companies including Wal-Mart, Home Depot, Boots, Argos, Lego and Procter & Gamble. It has 400 employees providing services in 25 languages, and offices in London, Paris and Singapore, says Brett Hurt, co-founder and chief executive.

At Samsung, using reviews as a source of feedback “has changed some aspects of the way we work, primarily because of the speed with which information comes in”, says Kris Narayanan, Samsung’s director of marketing. “It helps us look at issues as they arise. If there is a malfunction or a problem then we identify it very early.”

Honest and uncensored comments are key

Customers value reviews by other shoppers. Third-party services, which organise reviews on behalf of customers, monitor and analyse what purchasers are saying on brand websites, but insist that the credibility of the reviews and other user-generated content depends on their being uncensored. Rob Harles, head of Sears’s online community activities, says the retailer “really pushed customers to say if something is good or if it is bad ... it is really important to have honest reviews”.

However, Kris Narayanan at Samsung Electronics, notes that reviews of products on manufacturers’ own websites tend on average to be more positive than those of the same product on retailers’ sites – suggesting that manufacturers’ sites tend to attract more brand loyalists.

He also argues that customer- generated content about products tends overall to be balanced because manifestly unfair opinions on sites provoke a corrective response from other, better- informed and sometimes more sympathetic customers.

“The predominant type of discussion is reasonably informed people answering the questions of people who are not so informed,” he says.

The company has used reviews in this way for less than a year, but Mr Narayanan says Samsung has already changed products in response to the new kind of feedback. For instance, large flat-panel televisions were initially produced with speakers on the side. When customers pointed out in their reviews that the units were too wide to fit into conventional cabinets, Samsung put the speakers below the screen.

“It was certainly the product reviews that clinched the issue,” Mr Narayanan says.

The Container Store, a US home storage retailer, plans to introduce customer reviews on its website this year to help shape product development. Using customer feedback is not new, says Casey Priest, marketing communications vice-president. “But that was based on people writing on customer comments sheets. This will take it to a whole new level.”

Sears Holdings, which owns retailers Kmart and Sears, says it is increasingly passing on information from its online reviews to suppliers, says Rob Harles, head of Sears’s online community activities.

For Samsung, reviews are just one of several sources of consumer input it monitors, including specialised discussion boards on consumer electronics websites such as CNet, as well as the less structured discussions on social media sites such as Facebook, MySpace and Twitter.

With so much opinion to keep an eye on, the company tries to focus on analysing “qualified” input – opinions from customers who know what they are talking about. “We spend a tremendous amount of resources trying to parse through the qualified brand opinion,” says Mr Narayanan, rather than a spurious mention that does not truly represent meaningful input or opinion about the brand.

Sam Decker, chief marketing officer at Bazaarvoice, says brands’ interest in such “social commerce”, as he calls it, has ballooned because it is more measurable, in contrast to the efforts of brands to analyse the less focused input from open social sites. “For all the hype and impact social networks make, it is a really thin bridge to what a company cares about, which is bottom line impact. We are trying to make this a very broad bridge. Not only is it measurable with the same measures that you use today, but the contacts with the customers are going to endure.”

Internet shoppers are increasingly turning to reviews on websites. Nielsen, the marketing re­search group, says its twice-yearly global survey of more than 25,000 online consumers found in April that 70 per cent trusted product reviews posted online, an increase of 9 percentage points on April 2007.

Bazaarvoice says it is seeing interest from manufacturers in putting its review service on their websites and then “syndicating” the reviews to retail sites such as Walmart.com.

Brands have also begun using their most positive reviews in other marketing channels such as catalogues, or in-store marketing materials. Sephora, the cosmetics retailer, is testing in-store advertising that gives customers a code to access reviews on their mobile phones.

Just two years ago, Mr Decker says, opening up a site to potentially critical third-party reviews was a big decision for retailers, and usually had to be approved by the CEO. Now, some retailers actively solicit reviews: Sears Holdings recently offered customers the chance to participate in a sweepstake by submitting reviews to its new MySears and MyKmart community websites.

Argos, the UK catalogue retail­er, which started running customer reviews last year, found customers were 10 per cent more likely to buy products that had been reviewed on its site than those without them. When it e-mailed recent customers to ask them to submit reviews, the company received more than 200,000 in the first four months of 2009, with 70,000 in one day alone.

Copyright The Financial Times Limited 2009.

FT: Volvo takes a lead in India

Volvo takes a lead in India

By Joe Leahy in Mumbai

Published: August 31 2009 23:07 | Last updated: August 31 2009 23:07

When Volvo Buses appointed a youthful Akash Passey as its first employee in India in 1997 to develop its business in the country, he commissioned a consultancy to explore whether the idea was viable.

The consultancy returned with a 600-page report. Its conclusion? Do not bother. The price at which Volvo was looking to sell its buses – Rs4m ($82,000, €57,000, £50,000) – was grossly unaffordable in India. Locally made buses were selling for one-quarter of that.

“My response was simple – I took the report and went to the nearest dustbin and threw it in,” says Mr Passey, who wears frameless glasses and sports a neat black goatee that is just starting to show flecks of grey.

Volvo launched in India in 2001 anyway and within a few years created a new market. Today, “taking a Volvo” has become the generic term in India for riding an interstate luxury bus, no matter what make of vehicle it is.

The Indian market has become a rare picture of rapid growth for Volvo Buses despite the travails afflicting the industry globally during the economic crisis. To serve this growth, the company has opened a new coach-building factory in Bangalore, which has become its most efficient in the world. (See box)

Dash of colour

At Volvo’s new bus manufacturing plant in Bangalore, a stuffed toy tiger maintains a vigil perched on a rack at a gate on the edge of the plant.

The Hobbes-like tiger is there to scare away a troublesome group of monkeys that occasionally interferes with the plant by breaking lights and eating the seats of the buses.

This is the only monkey business that occurs at the plant, however. With a capacity of 1,000 buses a year and a workforce of 600, the plant has become Volvo’s most efficient, able to turn out a fully built-up bus in 20-25 days, down from 45-50 days when it opened in early 2008.

To increase efficiency, the plant is colour-coded. Operators wear blue, supervisors orange. Yellow lines outline the work areas. Tools are hung on boards that have the outline of each implement drawn on them – making it easy to see if any have not been put back.

There are also boards displaying mistakes made by the workers – bad welds or faulty parts. These are there to help workers learn from their errors and come up with innovations to avoid them in future.

“I noticed that Indian workers don’t want to show mistakes, they try to hide mistakes,” says a Swedish supervisor. “We see mistakes as treasures.”

Such has been the company’s success that it is hard to imagine the trials Mr Passey went through in those early days establishing the brand. In the process, he picked up some valuable lessons about introducing a luxury product into an emerging market, particularly in a country as cost- conscious as India.

“Even though globally we were a very big company here when we were starting, we were as good as nothing,” Mr Passey says in describing those opening years at the company’s headquarters on the edge of Bangalore, the information technology capital that is India’s version of Silicon Valley.

Before Volvo arrived, India’s luxury bus market had been little changed for decades. Most buses consisted of truck chassis built by domestic carmakers, Tata Motors and Ashok Leyland, with a rudimentary coach bolted on top. They were dirt cheap, selling for about Rs1.2m. And they were tough, rattling their way through the rutted roads of the Indian subcontinent from the Himalayas in the north to the lush jungles of Kerala in the south.

But they were uncomfortable. In spite of India’s soaring temperatures, they seldom had air conditioning. Baggage was often stacked on the top and exposed to dust, monsoonal rains and theft. The slow 110-120 horsepower engines roared and strained as they crawled up through mountain passes or tried to overtake on the crowded roads, radiating noise and heat through the passenger section. The open windows exposed passengers to dust and the cacophony of honking horns that characterises India’s roads.

For the business travellers who used these buses, it was difficult to turn up fresh at a meeting in their destination city the next day. That is if they turned up at all. The buses were maintained by the operators, mostly small “mom-and-pop” outfits, causing delays when they broke down.

Mr Passey, now managing director of Volvo Buses India, knew he had a vastly superior product. The Volvo’s 240hp-260hp engine, like all modern buses, was tucked comfortably away at the back, where it was less noisy and created more room for passengers.

It was twice as powerful as the conventional Indian bus, meaning the Volvo was fast. Business travellers could leave later and arrive at their destination earlier, making one-day business trips possible and saving on hotel bills.

The specially designed bus chassis meant the coach’s interior was spacious and could store luggage safely inside. The air conditioning and insulated body meant windows could be kept closed, keeping out road noise and dirt.

Volvo provided post-sale maintenance services, ensuring its buses had a working life expectancy of about 10 years compared with three years for conventional rivals. It also undertook to train drivers for its customers, so that they in turn could drive more safely and look after the bus.

The problem was Volvo’s high price tag and the increased fuel cost of running a bigger engine. When Mr Passey went around trying to sell his new product, operators laughed at him. Why spend more on a Volvo when passengers were willing to ride the inferior traditional buses? No one would agree to buy a Volvo.

“Of course, the resistance was very high. There were many places and many rooms out of which I was thrown,” Mr Passey says.

The only way to penetrate the market, he decided, would be to appeal directly to passengers. The reasoning was, once passengers had experienced a modern bus, they would never go back.

He decided to first seed the market. In 2001, Volvo supplied about 20 subsidised “trial” units to a selected group of operators.

The first step was to imprint on operators that Volvo’s promise of after-sales service was more than just words. Mr Passey quietly sent trainees to ride on each bus. When something went wrong, they would immediately report to him, allowing him to quickly deploy a service unit to the stricken vehicle. The operators began to realise the value of buying from a manufacturer that also maintained the vehicle. It enabled operators to forgo the usual investment in workshops and maintenance facilities and concentrate on selling tickets.

As word began to spread among passengers, operators found they were able to increase market share by using Volvos and they could charge 35 per cent more for tickets. To further stimulate demand, Volvo targeted that institution of the Indian small town – the cinema hall. Each time a Volvo service opened in a town, the company would run an advertisement at the local cinema during the interval.

“You had to do a lot of things to break the way business is done normally,” Mr Passey says.

After the initial years, Volvo rapidly began gaining market share. Today, India’s luxury bus market has become one of the world’s largest after China – with sales of 600-700 vehicles a year. Volvo has 60 per cent market share.

This market is attracting growing competition. Tata and Ashok Leyland have opened large new coach-building facilities for luxury buses, while international operators such as Isuzu and Mercedes are making inroads.

The challenge for Mr Passey is keeping market share. This year, he expects to increase sales by about 25 per cent, most of which will come from its new state-of-the-art plant in Bangalore, which has a capacity of 600 buses.

Volvo has also begun penetrating the intracity bus market, with sales to the governments of Bangalore and other metropolises. A government programme to procure 14,000 buses in the coming years under its Jawaharlal National Nehru Urban Renewal Mission is expected to provide further impetus.

He seems sanguine about the growing competition. As India builds more roads and its people get richer, he reasons, the overall pie for the bus market will only grow. “What you need for a bus is people, and we have no dearth of people in India,” says Mr Passey.

Copyright The Financial Times Limited 2009

WSJ: Coconut Water Bubbles

ADVERTISING
AUGUST 27, 2009

Coconut Water Bubbles

Drink Makers Ramp Up Ad Campaigns for Niche Market

By SUZANNE VRANICA

As the once-hot bottled water business loses steam, drink makers are starting to pour money into marketing campaigns for what they hope will be the next sector to come to a boil: coconut water.

Beginning this week the Zico coconut water's name and logo will be pasted onto pedicabs in New York City while O.N.E. coconut water will make an appearance on the new season of ABC's "Extreme Home Makeover."

Zico in Hermosa Beach., Calif., and Los-Angeles-based O.N.E. World Enterprises are the early stage of what marketers say will be a major marketing push over the next year behind coconut water. Coconut water is the clear liquid inside young, green coconuts and is different from coconut milk, which is pressed from the coconut meat.

Zico is starting to market its coconut water on pedicabs in New York.

A popular drink in Brazil, the water is now catching on in the U.S., thanks to its healthy image and athletes and celebrities such as Madonna who drink the product.

The goal now is to broaden the reach of coconut water drinkers beyond the athletically inclined.

That is becoming increasingly important for beverage makers of all sizes that have watched sales of bottled water -- their cash-cow in recent years -- get hurt by budget-conscious consumers and environmentalists who oppose the use of plastic bottles. For the past 52-weeks ended July 12, sales of bottled water dropped 6% to $7.6 billion, according to Chicago-based market-research Information Resources Inc., whose figures don't include sales from Wal-Mart Stores.

Meanwhile, sales of coconut water doubled this year to roughly $20 million, estimates Beverage Marketing Corp, a New York-based research and consulting firm.

"Although it's a very tiny part of the beverage business, it's growing fast because it's seen as a natural product, it's relatively low in calories and it has a lot of potassium," says John Sicher, editor and publisher of Beverage Digest. "Coconut water is on the brink of becoming significant."

The category's potential is now attracting the biggest players in the beverage business. Earlier this month, PepsiCo agreed to buy Brazil's largest coconut water company, which makes coconut water brands Kero Coco and Trop Coco. Terms of the deal weren't disclosed.

A spokesman for PepsiCo says the company has "no immediate plans" to sell its coconut water brands in the U.S. "Our primary focus is the significant opportunity we see to grow this business in Brazil," he added.

Even so, it's just a matter of time before coconut water brands from giants like Pepsi and Coca-Cola -- and attendant ad campaigns -- are headed to the U.S., say beverage industry experts. Coke and Pepsi have in the past used their marketing weight to muscle into niche markets.

For example, Energy Brands in 2005 spent $3.3 million on U.S. ads for its Glacéau Vitaminwater, according to TNS Media Intelligence, an ad-tracking unit of WPP. Then Coca-Cola bought the brand in 2007 and pumped in marketing money, shelling out $68.4 million last year and enlisted expensive pitchmen such as Shaquille O'Neal to promote the product.

O.N.E. plans to spend $1.6 million on marketing this year and says it will double its marketing budget next year while Zico, which spends about $1 million annually on marketing, says it will increase marketing outlays by 50% next year. Until now both companies have relied largely on sponsorships of niche sports and public sampling events.

Rodrigo Veloso, , O.N.E.'s chief executive officer, says the company is "ramping up its marketing" and intends to use product placement in movies and popular TV programs such as TNT's "The Closer" to promote its brand. It is also dipping its toe into traditional advertising and is planning to launch a billboard campaign within six to eight months.

For the past few years, Zico has relied largely on striking marketing alliances with Bikram Yoga studios around the country. Developed by yoga guru Bikram Choudhury, exercises in Bikram Yoga are conducted in rooms heated to 100 to 110 degrees. Zico gives out free samples, hung signage and sponsored events at many of the Bikram studios.

"Zico sponsors everything, our shows, parties and competitions," says Jennifer Lobo, co-owner of Bikram NYC, which owns several studios in New York.

It still sponsors yoga, but recently Zico has started moving into endurance sports such as triathlons. In June it signed on to sponsor marathon runner Pam Reed, who recently ran in Badwater Ultramarathon, a 135-mile race from between Death Valley to and Mt. Mount Whitney, Calif.

Zico says it won't do traditional advertising such as TV commercials. "The best way to build a brand, particularly a beverage, is to build an intimate relationship with consumers using one-to-one marketing," says Mark Rampolla, Zico's founder and chief executive.

The two companies are likely to face major competition from the beverage titans. The smaller brands have two choices: "get acquired or face increased competition," says Mr. Sicher from Beverage Digest.

But Maile Buker, vice president of marketing at Zico, say Pepsi's entering the field brings "legitimacy to the category," and adds that "the rising tide will lift all boats."

Write to Suzanne Vranica at suzanne.vranica@wsj.com

Printed in The Wall Street Journal, page B10

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

NY Times: Using 'Free' to Turn a Profit

August 30, 2009

Ping

Using ‘Free’ to Turn a Profit

By DAMON DARLIN

GIVING away a product has always been a great marketing concept. Even an unsavvy consumer can see a benefit in snatching free products. Free has also become a mantra for business gurus who advocate giving Web start-ups a shot at fast growth by bringing the price of most of their wares to zero.

But as a revenue generator, free can come up short. Sure, it attracts customers, but the challenge is to find someone to pay for it. Although thousands of businesses offer free services online — two of the biggest are the Flickr photo service from Yahoo and YouTube from Google — few can claim to be profitable. (Analysts say Flickr and YouTube are not.) While free is an enticing proposition, it is very hard to make it work.

Indeed, in just the last few weeks, eBay has been looking to shed Skype, the free Internet phone call service. And Sampa, a personal Web site creation service started by former Microsoft executives, folded.

Advertising was always the easy answer for making free pay. But that rarely covered expenses even before a glut of advertising space and a severe recession cut the revenue stream.

The fallback position is charging a few customers for premium service, in the hope that revenue from dedicated users will cover everyone else. A number of sites, like Flickr, do this.

Fred Wilson, the New York venture capitalist, codified this model and popularized a term for it: freemium. And he continues to receive an enthusiastic reception to the idea on his blog, A VC.

But the question remains. Just how does it work? Phil Libin, the chief executive of Evernote, a start-up in Mountain View, Calif., was kind enough to give me a tour of his privately held company’s financials to reveal the mystery.

The company gives away a Web application that saves data you accumulate. You can use it to keep a wide range of information: meeting notes and voice memos, for example, or even photographs of wines consumed or recipes found in magazines. The information is stored on the company’s computers so all the data can be synchronized on every computer the customer uses — and on smartphones as well.

Snap a picture of a business card with a smartphone like a Palm Pre or an iPhone and it shows up on the phone’s Evernote app — as well as on the Dell back at the office. It is searchable, right down to words in photographs. So if you type in “Samsung,” for example, every business card from that company pops up.

“It is a universal memory drawer,” says Mr. Libin, who has run and sold two other start-ups.

Evernote, of course, is free. That’s important because the company, which does no advertising, needs to acquire customers as cheaply as possible. “Our product is our marketing,” Mr. Libin says.

In 18 months, 1.4 million people have tried the service. An additional 4,500 try it each day.

“Free is not a loss leader,” he says. “If we can get a small percentage of users to pay we start to make money.”

How many times has a venture capitalist heard that? But Mr. Libin showed that the magic is not only that it takes just a small percentage of customers to turn red ink into black, but also that the longer they remain customers, the more profitable they become.

About 75 percent of the customers walk away within the first four months. That’s not worrisome, because the revenue from Evernote’s 500,000 active users is growing faster than the growth in the customer base. How? Customers discover that they need more than the basic storage space or want some extra features, like the ability to scan PDF documents for a particular word. Evernote charges them $5 a month or $45 a year for these and other benefits.

Mr. Libin studied the behavior of the earliest adopters and found that the longer customers used the service, the more likely they were to start paying for it. About 0.5 percent convert to paying customers in the first month. But after about a year, 4 percent have converted. (He says he thinks the figure will top out at about 22 percent.)

It makes sense. The shoebox of data is more valuable to the customer as it becomes larger. In addition, compelling uses — like photographing those business cards — quickly eat up the monthly allotment of memory, inducing a person to start paying. The longer the customer stays, the more valuable he becomes.

The company gets about 3 cents of revenue for each active user in the first month of use, but after a year that same cohort of customers is providing 35 cents each.

EVERNOTE made $79,000 from paying customers in July, Mr. Libin says.

That’s not enough to cover the cost of the engineers who design new features and the additional servers to store all the added data. But the cost of staffing doesn’t rise exponentially as more customers join, and the cost of adding storage declines because computing power keeps getting cheaper. (Electricity costs go up, but that is not a budget killer.)

The variable cost for each active user was about 50 cents a month when the company started, but has been dropping along a curve to 9 cents a month. By January 2011, Mr. Libin projects, the company will break even.

Mr. Libin’s model of freemium won’t work for every company. But it certainly could work for other companies who can retain customer loyalty and make their service more valuable over time while driving down costs.

It has convinced him and his investors that giving away the store is the right plan. “We are committed to being free,” Mr. Libin says.

Copyright 2009 The New York Times Company

NY Times: Mining the Web for Feelings, Not Facts

August 24, 2009

Mining the Web for Feelings, Not Facts

By ALEX WRIGHT

Computers may be good at crunching numbers, but can they crunch feelings?

The rise of blogs and social networks has fueled a bull market in personal opinion: reviews, ratings, recommendations and other forms of online expression. For computer scientists, this fast-growing mountain of data is opening a tantalizing window onto the collective consciousness of Internet users.

An emerging field known as sentiment analysis is taking shape around one of the computer world’s unexplored frontiers: translating the vagaries of human emotion into hard data.

This is more than just an interesting programming exercise. For many businesses, online opinion has turned into a kind of virtual currency that can make or break a product in the marketplace.

Yet many companies struggle to make sense of the caterwaul of complaints and compliments that now swirl around their products online. As sentiment analysis tools begin to take shape, they could not only help businesses improve their bottom lines, but also eventually transform the experience of searching for information online.

Several new sentiment analysis companies are trying to tap into the growing business interest in what is being said online.

“Social media used to be this cute project for 25-year-old consultants,” said Margaret Francis, vice president for product at Scout Labs in San Francisco. Now, she said, top executives “are recognizing it as an incredibly rich vein of market intelligence.”

Scout Labs, which is backed by the venture capital firm started by the CNet founder Halsey Minor, recently introduced a subscription service that allows customers to monitor blogs, news articles, online forums and social networking sites for trends in opinions about products, services or topics in the news.

In early May, the ticket marketplace StubHub used Scout Labs’ monitoring tool to identify a sudden surge of negative blog sentiment after rain delayed a Yankees-Red Sox game.

Stadium officials mistakenly told hundreds of fans that the game had been canceled, and StubHub denied fans’ requests for refunds, on the grounds that the game had actually been played. But after spotting trouble brewing online, the company offered discounts and credits to the affected fans. It is now re-evaluating its bad weather policy.

“This is a canary in a coal mine for us,” said John Whelan, StubHub’s director of customer service.

Jodange, based in Yonkers, offers a service geared toward online publishers that lets them incorporate opinion data drawn from over 450,000 sources, including mainstream news sources, blogs and Twitter.

Based on research by Claire Cardie, a Cornell computer science professor, and Jan Wiebe of the University of Pittsburgh, the service uses a sophisticated algorithm that not only evaluates sentiments about particular topics, but also identifies the most influential opinion holders.

Jodange, whose early investors include the National Science Foundation, is currently working on a new algorithm that could use opinion data to predict future developments, like forecasting the impact of newspaper editorials on a company’s stock price.

In a similar vein, The Financial Times recently introduced Newssift, an experimental program that tracks sentiments about business topics in the news, coupled with a specialized search engine that allows users to organize their queries by topic, organization, place, person and theme.

Using Newssift, a search for Wal-Mart reveals that recent sentiment about the company is running positive by a ratio of slightly better than two to one. When that search is refined with the suggested term “Labor Force and Unions,” however, the ratio of positive to negative sentiments drops closer to one to one.

Such tools could help companies pinpoint the effect of specific issues on customer perceptions, helping them respond with appropriate marketing and public relations strategies.

For casual Web surfers, simpler incarnations of sentiment analysis are sprouting up in the form of lightweight tools like Tweetfeel, Twendz and Twitrratr. These sites allow users to take the pulse of Twitter users about particular topics.

A quick search on Tweetfeel, for example, reveals that 77 percent of recent tweeters liked the movie “Julie & Julia.” But the same search on Twitrratr reveals a few misfires. The site assigned a negative score to a tweet reading “julie and julia was truly delightful!!” That same message ended with “we all felt very hungry afterwards” — and the system took the word “hungry” to indicate a negative sentiment.

While the more advanced algorithms used by Scout Labs, Jodange and Newssift employ advanced analytics to avoid such pitfalls, none of these services works perfectly. “Our algorithm is about 70 to 80 percent accurate,” said Ms. Francis, who added that its users can reclassify inaccurate results so the system learns from its mistakes.

Translating the slippery stuff of human language into binary values will always be an imperfect science, however. “Sentiments are very different from conventional facts,” said Seth Grimes, the founder of the suburban Maryland consulting firm Alta Plana, who points to the many cultural factors and linguistic nuances that make it difficult to turn a string of written text into a simple pro or con sentiment. “ ‘Sinful’ is a good thing when applied to chocolate cake,” he said.

The simplest algorithms work by scanning keywords to categorize a statement as positive or negative, based on a simple binary analysis (“love” is good, “hate” is bad). But that approach fails to capture the subtleties that bring human language to life: irony, sarcasm, slang and other idiomatic expressions. Reliable sentiment analysis requires parsing many linguistic shades of gray.

“We are dealing with sentiment that can be expressed in subtle ways,” said Bo Pang, a researcher at Yahoo who co-wrote “Opinion Mining and Sentiment Analysis,” one of the first academic books on sentiment analysis.

To get at the true intent of a statement, Ms. Pang developed software that looks at several different filters, including polarity (is the statement positive or negative?), intensity (what is the degree of emotion being expressed?) and subjectivity (how partial or impartial is the source?).

For example, a preponderance of adjectives often signals a high degree of subjectivity, while noun- and verb-heavy statements tend toward a more neutral point of view.

As sentiment analysis algorithms grow more sophisticated, they should begin to yield more accurate results that may eventually point the way to more sophisticated filtering mechanisms. They could become a part of everyday Web use.

“I see sentiment analysis becoming a standard feature of search engines,” said Mr. Grimes, who suggests that such algorithms could begin to influence both general-purpose Web searching and more specialized searches in areas like e-commerce, travel reservations and movie reviews.

Ms. Pang envisions a search engine that fine-tunes results for users based on sentiment. For example, it might influence the ordering of search results for certain kinds of queries like “best hotel in San Antonio.”

As search engines begin to incorporate more and more opinion data into their results, the distinction between fact and opinion may start blurring to the point where, as David Byrne once put it, “facts all come with points of view.”

Copyright 2009 The New York Times Company

Fast Company: Building Consumer Experience Value Using the Power of Metaphors

August 16, 2009

Tags: Design, beyond the widget, steve mccallion, ziba design

Building Consumer Experience Value Using the Power of Metaphors

By Steve McCallion

We were wrapping up a meeting with a client who was developing a new neighborhood. Through a combination of field research, trend studies and historical analysis we defined a story and collection of artifacts and experiences that would make this place meaningful to potential residents as well as the neighboring community. After the meeting our client said, "I finally understand what you guys do. You orchestrate the obvious."

At first I resisted the idea. Innovation must include more than orchestrating "the obvious." But then I shifted my attention away from the "obvious" to the "orchestration." In an orchestration it's the collection of things that create value, not necessarily the things themselves. It's not the individual notes in the song, but the collection of those notes. When creating meaningful experiences, it is often this orchestration that is the primary source of value creation. Our client was able to put this into sharp focus.

A lot of companies struggle with the idea that this orchestration can create significant value. They are often looking for a silver bullet--a single product concept that they can patent and protect. But with experience innovation, the organizational device that holds a collection of products and services together is critical to value creation--the silver bullet is often a metaphor. A metaphor creates value by transferring associations from a previous experience to a new one. It functions as shorthand to help people understand the offering and what it means in their lives.

Only a handful of companies embrace the value creating power of metaphor. While other retailers were focusing on rearranging shelves and picking new colors and finishes, Apple, Whole Foods and REI redefined their respective categories by leveraging the power of metaphor to create a meaningful experience. In the Apple Store, the metaphor of a learning center helps you feel comfortable returning for help even after you purchase your computer; in Whole Foods, an outdoor bazaar shifts the shopping experience from being a chore to being fun.

At the outdoor retailer REI, an outdoor industry expo invites you to test and try gear before you buy. The elements within these stores are often obvious and shared by competitive stores. But, by orchestrating these obvious elements around a metaphor helped Apple, Whole Foods and REI redefine their categories and win in the market.

It's difficult for many companies to respect that something as intangible as a metaphor can create real value, but the numbers don't lie. In 2006, Apple's annual sales per square foot was $4,032, compared with Best Buy's $930, Neiman Marcus' $611, and luxury store Tiffany & Co.'s $2,666. On average Whole Foods and REI stores deliver two times the annual sales per square foot than that of the typical stores in their category.

Companies that are successful at delivering consumer experiences understand the value of metaphor. Are you using metaphors to create value?

Over the last several years the innovation discussion has shifted from a focus on product and business innovation to consumer experience. Companies are increasingly interested in creating value by delivering better consumer experiences, but many are not quite sure how to get there. The results have ranged from a proliferation of Apple-like Genius Bars to frustrated project teams whose projects never make it to market. These companies are finding it surprisingly difficult to deliver great consumer experiences. This week, Steve McCallion explores some of the challenges companies face when trying to deliver consumer experience innovation.

Read Steve McCallion's blog Beyond the Widget [1]
Browse more blogs by our Expert Designers [2]

Steve McCallion is a skilled innovation architect and brand strategist with a rare balance of design sensibility and strategic thinking. He has led groundbreaking work including redefining Umpqua Bank's role as an anchor for community prosperity, creating Sirius Satellite Radio's award-winning experience for the "iPod fatigued" and working with real estate developers Gerding Edlen to create more meaningful neighborhoods. His other clients include Xerox, Black & Decker, Whirlpool, FedEx, McDonald's, Coleman, Kenwood, and Compaq.

Steve's primary charge is to foster Ziba's consumer experience practice. He founded the company's award-winning Design Research and Planning practice group which has developed many proprietary research and design planning methodologies that have helped numerous clients understand the essence of their customers, win design awards, obtain patents and succeed in the market. He was named as one of Fast Company's Masters of Design in 2006.

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Article location:http://www.fastcompany.com/blog/steve-mccallion/beyond-widget/creating-consumer-experience-innovation-building-value-metaphors

FT: Shopping habits of China's 'suddenly wealthy'

Shopping habits of China’s ‘suddenly wealthy’

Published: August 21 2009 14:41 | Last updated: August 21 2009 14:41

In the past decade China has become the workshop for the world, its low-cost labour force toiling in factories to churn out cheap goods destined for western consumers. Many of the raw materials needed to feed this industrial juggernaut have to be imported from other countries and today China is the biggest driver of markets in commodities such as copper, oil and iron ore.

But as well as a multitude of low-paid factory workers, the country’s manufacturing boom has also ­created a large and growing number of baofahu – literally, the “suddenly wealthy”. Their shopping habits and changing tastes are reshaping global trade flows at the other end of the production chain.

The rise of the Chinese consumer has ­provided unprecedented opportunities for enterprising global corporations and many now look to the country as their biggest growth market for the indefinite future. And while China’s nouveaux riches share many of the tastes of their counterparts in any other part of the world, there are also a number of customs and cultural legacies that have ­created new markets for ­products that have little value elsewhere. This has encouraged global companies to invest an increasing amount of time and money in understanding what makes the Chinese customer special and how best to market or customise products.

In some cases, traditional Chinese tastes, combined with the explosion in wealth during the past decade, have created a rapacious and unsustainable call for the body parts of endangered species. The manufacture of ­traditional delicacies, ornaments and medicinal ingredients has helped to cut swathes through populations of sharks, elephants, seahorses and other species across the world – and that demand is only expected to increase.

Jamil Anderlini, FT deputy Beijing bureau chief

. . .

Big cars, flashy cars

In the US, cars need giant cup-holders, but in China, it’s chauffeurs that are de rigueur. So when Porsche recently decided to launch a four-door sedan in the midst of financial Armageddon, it chose to do so in China – perhaps the last place on earth where anyone still has RMB2.5m (£200,000) to spend on a chauffeur-driven sports car.

At the Shanghai auto show in April, the Porsche Panamera – which offers the ample legroom required by China’s back-seat-riding bosses – premiered alongside the Geely GE, otherwise known as the Baby Rolls-Royce (much to the displeasure of the real Rolls-Royce). Then came news that China plans to buy Hummer and make it greener. China’s love affair with big, flashy autos is clearly just beginning.

The newly wealthy everywhere love to flaunt their money, but China’s rich are even more shameless than most: cars are not a means of locomotion for the affluent Chinese, they are a symbol of success, status and the naked power of the internal combustion engine over the bicycle or pedestrian.

According to Friedhelm Engler, director of design for GM’s Shanghai-based Pan Asia Technical Automotive Center, cars in China are all about “face”. He says the bulky, “three-box” shape that is still overwhelmingly popular is deeply embedded culturally in a country where the rich traditionally rode in palanquins. To western eyes, that makes many Chinese cars look old-fashioned, especially on the futuristic streets of Shanghai, with its space-age skyscrapers. And parking such cars – not to mention parking a “Baby Rolls” – is a nightmare in the city’s congested, narrow streets.

China needs smaller cars, and some younger consumers are leaning toward hatchbacks; but in a country where grandpa or dad is often footing the bill, four doors still often win out over five (not least because grandpa or dad may not know how to drive, so they rely on the younger generation to squire them around at weekends in the three-box). This is a world where the young can start their motoring life with a Buick, not a 2CV or Beetle; Buicks are more popular in China than they have been in the US for decades.

But western car manufacturers are betting that things will change, as China’s budding love affair with the automobile matures. The country is on track to become the world’s largest auto market this year – several years ahead of expectation – and car styles could be transformed at the speed of light. “Chinese consumers are used to moving quickly, from no TV, to a flatscreen,” says Engler. Their auto style may be dowdy today – but in China, tomorrow is always just around the corner.

Patti Waldmeir, FT Shanghai correspondent

. . .

Gold

China loves gold in all its forms: as a reserve currency, jewellery, an investment – even gold that is not real at all, or “virtual gold”, the internet commodity used as currency in online games such as World of Warcraft. The Chinese government is trying to crack down on trade in virtual gold, which is “farmed” by online gamers in China and sold to online gamers in the first world.

But when it comes to the real stuff – gold jewellery and gold bullion, for either adornment or investment – trade in China has risen sharply. Beijing recently revealed that it had been secretly buying gold for years in order to diversify its foreign reserves, and had almost doubled its bullion holdings. But they are not the only ones: the rising tide of wealth among middle-class Chinese has made China the second-largest gold jewellery market in the world since 2007, behind only India. Sales of gold and silver jewellery in China rose by an astounding 28.7 per cent in May year on year – proof, if any more were needed, that Chinese consumers have certainly not stopped spending money during the financial crisis. Total gold demand in China last year was nearly 400 tonnes, up by 21 per cent from 2007.

But Chinese people like their gold purer than their western counterparts: 24 carat, rather than 18 carat. The reasons for that, says Shi Heqing, gold analyst at Beijing Antaike Information, are partly historical: “Chinese people have gone through several wars in the last century, and the memory of those is still fresh, so they like secure ways of keeping their money. In the west, people seem to use gold more for decoration or beautification.”

The recent rollercoaster ride in the mainland stock market – which at one point last year had fallen by 70 per cent from its 2007 height, but has since crawled back to half the peak level – has also prompted more investment interest in gold in bullion form, gold market analysts say.

Mr Yu, a 55-year-old antiques trader in Shanghai who declined to give his first name, says he bought 500g of gold in 2007 and increased his holding to 2,000g at the end of last year. “I know people who are still buying stocks at this moment … but gold may be better for people my age who are more risk-averse.”

Or as Shaun Rein, managing director of China Market Research in Shanghai, puts it: “In China, the banking system has only recently become stable. Chinese people like gold: you can always melt it down and it’s easy to carry.”

Patti Waldmeir, with additional reporting by Yan Jin, former FT Shanghai news assistant

. . .

Barbie

No one knows more about shopping than the women in the Shanghai typing pool: all those one-child babies have grown up into over-indulged 20-somethings with office jobs and 100 per cent disposable income. Their parents or grandparents pay for rent, food, healthcare and every other human need; all the rest goes on clothes, shoes, make-up and … Barbie?

Mattel is banking on Shanghai’s girlie-girls to revive its flagging fortunes. The biggest Barbie store in the world recently opened on the city’s Huai Hai Zhong Lu shopping street, where all six floors are infused with the spirit of that 1960s model of female perfection, the blonde and cinch-waisted doll whose brand must rank as one of the greatest successes in the history of world marketing.

But in China, Mattel is breaking that brand mould in a big way: Barbie is supposed to transform herself from a doll into a lifestyle. Nearly a whole floor of the store is devoted to Barbie clothing in grown-up sizes – exorbitantly priced sequined tops that my American eight- and nine-year-old girls would not be caught dead in because Barbie (to them) is a little kid thing. But Shaun Rein of China Market Research says “cute sexy” is what the typing pool wants, and judging from the huge popularity of the Hello Kitty character in that age group, it might just work.

Jinky Gu, spokeswoman for the Shanghai store, has another perspective altogether. “Chinese parents won’t stop investing in their children’s education even during the economic crisis.” The notion that Barbie is an educational toy might horrify the feminists among us, but it just might work among the stiletto-heeled Shanghainese. It would not be the first time that a jaded western brand got a new lease of life in China.

Patti Waldmeir, FT Shanghai correspondent

. . .

Spirits and fine wine

Shanghai White is the latest product offering from Diageo, the UK drinks business behind such brands as Johnnie Walker and Guinness, and its launch this summer gave the world a glimpse of how the tastes of China’s new rich are changing the liquor landscape.

Shanghai White is being marketed as premium vodka but it is produced in a venture with a Chinese baijiu distillery, combining the distilling process of both vodka and baijiu. The “but” in there is because baijiu is the national firewater in China, with a taste sometimes described as a mixture of tequila and dirt.

Of the roughly five billion litres of spirits consumed every year in China, the vast majority is baijiu; the combined consumption of all foreign spirits is estimated at less than 1 per cent of the total. The allure of such a large market has convinced Diageo that it needs to adjust its product line.

In the wine market, meanwhile, bottles of Château Lafite and Louis XIII are indispensable accoutrements for display in the gleaming new mansions of China’s super-rich, although such badges of wealth are more likely to be seen as investments. The cachet of ordering an expensive bottle also still far outweighs the pleasure derived from drinking it, and Chinese nightclubs are filled with wealthy people ordering top-shelf cognac then mixing it with gallons of sweet, green-tea-flavoured soft drinks.

Only around 5 per cent of grape wine consumed in China is currently imported but this is changing and at numerous recent European wine auctions the winning bidder has been Chinese. While European winemakers have not yet contemplated changing their products to suit Chinese tastes, the marketing strategies of wine dealers are already shifting eastward.

Jamil Anderlini, FT deputy Beijing bureau chief

. . .

Ivory

For more than 7,000 years, Chinese artisans have been crafting elephant ivory. Favoured by the Imperial household as far back as the Qing dynasty (1680), ivory has an illustrious reputation and an association with the wealthy and elite. But in 1989, the trading of ivory was banned worldwide through the Convention on International Trade in Endangered Species (Cites), after more than half of Africa’s 1.3 million elephants were poached in a single decade. And yet, with a carving trade established in antiquity and a burgeoning middle class who, for the first time, can afford to buy ivory, China remains its biggest importer.

As Asian elephant herds dwindle, African elephants have become the only source of ivory. In late 2008, Cites authorities allowed China to bid with Japan for tusks from official stockpiles – consisting of ivory collected from elephants that had died a natural death – in four southern African countries. In an open declaration of a continuing demand, 12 Chinese traders bought 62 tonnes at an average price of $144 per kilo. Since this legal purchase, more than 11 tonnes of illegal African ivory have been impounded en route to China.

Elephant poaching largely takes place in central Africa, where poverty and political instability are rife. Chronic unemployment, the availability of firearms and corruption all facilitate the illegal ivory trade. These regions are also home to unregulated domestic ivory markets, where carved items are bought and sold. According to ivory expert Esmond Martin, the majority of buyers are Chinese. In a scramble for Africa’s minerals and resources, the continent has seen a recent influx of Chinese workers – a presence that is visibly reflected in the illegal retailing of ivory. On a recent trip to Addis Ababa, Ethiopia, Martin recorded 1,433 items of ivory openly displayed in the city’s main streets and central market. Among these were 149 pairs of freshly carved ivory chopsticks, selling for $16 each – in sharp contrast to a Chinese retail price of $139 – and signature stamps and jewellery. All of these items were small enough to potentially smuggle through customs.

Martin had previously estimated that 4,900 to 12,000 elephants from central Africa were killed each year to supply tusks to the craftsmen of Africa, China and Thailand. Conservationists are deeply concerned. According to Barbara Maas, CEO of Care for the Wild International: “With the number of Chinese nationals resident in Africa rising, and poaching on the increase, the frontline between supply and demand for ivory is now perilously close, with a disastrous outcome for elephants.”

Rose Gamble, freelance journalist

. . .

Dairy

The Chinese have become the second-biggest consumers of milk globally, after Indians. Demand has been helped by Beijing bombarding the populace with health messages about the benefits of dairy, by urbanites adopting more western diets and by rising incomes. Dairy consumption in China has doubled since 2000, and reached some 30 million tonnes in 2007, according to Rabobank, the food- and agriculture-focused bank.

International dairy producers got a further boost last year in the form of China’s milk and infant formula contamination scare, which led to two death sentences for men involved in deliberately tainting the country’s milk supply with the chemical melamine. “China’s milk powder imports have more than doubled since the melamine crisis,” says Tim Hunt, senior dairy analyst for Rabobank. “It played a huge role in shoring up market prices for internationally traded products in the first half of 2009.”

Nevertheless, at just 22kg per head each year, China’s dairy consumption falls well short of wealthier Asian countries such as Japan (where people eat some 75kg of milk, cheese, ice cream and yoghurt each year) and is piddling next to European Union residents, who consume 223kg each year. Still, foreign dairy groups see potential in the Chinese market. Although consumption fell in the wake of the melamine scare, it is expected to return close to pre-crisis levels by the end of the year.

Meanwhile, MilkLink, the UK dairy co-operative, this year became the first British cheese maker to export Stilton to China, targeting urban Chinese as well as western expats. The company’s cheeses, which will soon include English cheddar, are being sold in supermarkets along the country’s east coast, including branches of Tesco and Wal-Mart. Simon Mercer, head of export at The Cheese Company, part of MilkLink, claims natural cheeses will be the next big growth story in China’s dairy sector, a forecast backed up by research group Zenith International. It says cheese consumption, currently less than 4 per cent of the country’s dairy market, will rise alongside the expansion of fast food chains such as Pizza Hut and McDonald’s.

As the dairy sector grows, Mercer forecasts China will “suck in” imports, but warns that the UK – where milk production is in decline – is not in a position to meet demand.

Jenny Wiggins, FT consumer industries correspondent

. . .

Dried seahorses

The aphrodisiac counter is always the most arresting section in the menageries that are Chinese medicine shops. Among the eyes of newts and toes of frogs are mounds of dried seahorses. In traditional Chinese medicine, consuming seahorses is thought to be beneficial for human kidneys, improving memory, reducing swelling, helping women give birth, treating arthritis and even curing breast cancer. But the most important function of the humble hippocampus is the treatment of impotence. Maybe it has something to do with the fact that seahorses are the only known vertebrate species for which males rather than females give birth. Or maybe it’s just because they are so exotic.

For most of the past 1,000 years, only the richest Chinese patients could afford to include seahorses in their love potions. But with industrialisation, rapacious modern fishing techniques and China’s economic renaissance, dried seahorses have become widely available and are even sold pre-packaged by the dozen in supermarkets across the country.

Chinese consumers demand up to 250 tonnes of dried seahorses annually, but populations in China’s own territorial waters have been so depleted that only 10-20 tonnes a year can be sourced domestically. The remainder is imported from places such as Vietnam, the Philippines, India and Africa. And because dried seahorses weigh so little, 250 tonnes is equivalent to tens of millions of seahorses killed every year for Chinese aphrodisiacs – figures so enormous that even some in the Chinese medicine industry have started to voice concern that this precious ingredient will soon be fished into extinction.

The obvious answer? Farming seahorses. But attempts to do so on a commercial scale have so far had little success.

Jamil Anderlini, FT deputy Beijing bureau chief

...............................................................................

“Penny pinching, ruthless, suspicious shoppers”

Hail the Chinese consumer, putative saviour of the global economy, writes Sameena Ahmad. China is still growing, at an enviable 8 per cent clip, and within that retail sales are rising by 15 per cent and more each year. The country now boasts more millionaires than the UK and glossy malls to serve them are springing up even in tawdry third- and fourth-tier cities. Parched of profits at home, a growing number of multinational corporations are betting on China’s billion-strong army of shoppers to bail them out and the rest of the world.

But in order to sell successfully to the Chinese, you have to understand them – and too many international companies (still) don’t. While the country is growing richer rapidly, the absolute numbers remain relatively small. Total consumer spending in China reached $1,700bn in 2007, according to the most recent figures available, compared with $12,000bn in the US. In new research on the Chinese consumer to be published next month, McKinsey, the management consultancy, classifies just two million households out of a population of 1.3 billion as “wealthy” and that is based on fairly modest annual earnings of more than $30,000. The mass middle class is certainly growing and numbers some 70 million urban households, but these still earn just $5,000-$10,000 a year. That buys western shampoo, Ikea furniture and a television, but not many cars or diamonds.

The current healthy growth in retail sales is also not as good as it looks. Government purchases at retail stores are included in the figures and in many cities, including Beijing, the government has also been helping indirectly by handing out vouchers to finance purchases of anything from computers to weddings. The big spender in China, in years past and even more so today, is the state: private consumption as a percentage of gross domestic product has fallen from 60 per cent in 1968 to 36 per cent last year and could be as low as one-fifth in 2009 as the government ramps up capital investment.

In fact, the Chinese, who already have a world-beating savings rate of nearly 40 per cent of their income, tend to become more frugal when times are tough. As bank deposit rates decline, most of us spend more. The Chinese tend to stash away even greater sums to make up for the lost interest. The reason for this conservatism is the lack of a social safety net in China – citizens have to provide for their own medical care, old age and possible unemployment.

This makes them “penny pinching, ruthless, suspicious shoppers”, says Tom Doctoroff, north Asia director of advertising agency JWT and a writer on Chinese consumer trends. In a recession this behaviour only grows worse. “The downturn has made people keener on finding the cheapest deal,” says Yuval Atsmon, an associate principal in McKinsey’s Shanghai office. Even when they can easily afford it, buying a PC typically involves six visits to a store, and more often than not, customers will wait six months before making their decision after consulting blogs, online comparison sites and – the most important source of information in China – friends and family. Sales of copycat mobile phones, with all the functions of top models but a lower price, have soared from 17 million units in 2006 to 62 million units last year.

Brand consciousness is high, at least in the big cities, but brand loyalty is much lower than in the west. A price cut or good in-store promotion can often sway shoppers. And for cultural reasons, appealing to an individual’s taste or personal comfort typically doesn’t work, Doctoroff points out. A purchase either has to publicly signal status or wealth, like a flashy car does. Or provide a practical benefit: the latest craze in China is chocolate with added calcium, eaten not for pleasure but for the health benefits. The growing appeal of diamonds to women is not based on romance, but as a financial signal of a man’s commitment. Trust is another key issue in a country where so many consumer products are faked. Chinese mothers, for example, will pay 30 per cent more for safe baby milk – and this should favour foreign brands.

But foreign retailers and manufacturers have to cope with vast regional differences in demographics, language and culture that make it hard to plan a single marketing strategy – indeed treating China like a single country is usually a mistake. Natives of Zhejiang on the east coast like “toilet roll as rough as sandpaper”, the former head of Wal-Mart China liked to observe, a penchant thankfully absent elsewhere. Atsmon points out that cities even an hour apart can be entirely different: in southern Shenzhen, more than four-fifths of the population consists of migrant workers, mostly under the age of 35, who speak Mandarin and drink in bars. In nearby Guangzhou, migrants number just over a quarter, more people are older, enjoy watching Cantonese TV and go out to restaurants to drink with family members. Adequately addressing such niches requires an army of local suppliers, costly infrastructure and several layers of wholesalers and intermediaries. Even then, success may remain as elusive as it always has been: “No matter what you may be selling, your business in China should be enormous, if the Chinese who should buy your goods would only do so,” lamented Carl Crow, an advertising executive in Shanghai and author of the original book on how to sell to the Chinese … more than 70 years ago.

Sameena Ahmad is a business writer for The Economist

Copyright The Financial Times Limited 2009

BusinessWeek: The Web Knows What You Want

Innovation & Technology July 16, 2009, 5:00PM EST text size: TT

The Web Knows What You Want

By dissecting behavioral data, e-marketers are creating sites armed with predictive technology

By Stephen Baker

Every once in a while in most Web surfers' lives, a suggestion pops up on the screen that leads them to wonder: How did they know that about me? The moment can seem magical, and a bit creepy.

Consider this one. A shopper at the retail site FigLeaves.com takes a close look at a silky pair of women's slippers. Next a recommendation appears for a man's bathrobe. This could seem terribly wrong—unless, of course, it turns out to be precisely what she wanted. This type of surprising connection will happen more often as e-marketers adopt a new generation of predictive technology. It's fueled by growing rivers of behavioral data, from mouse clicks to search queries—all crunched by ever more powerful computers.

Why the bathrobe? ATG (ARTG), a Cambridge (Mass.) e-commerce software company that crunches data for FigLeaves, has found that certain types of female shoppers at certain times of the week are likely to be shopping for men. Like all Web recommendations, this one will be wrong a good portion of the time. But as marketers scrutinize shoppers in greater detail, they're edging closer to their ultimate goal: teaching computers to blend data smarts with something close to the savvy of a flesh-and-blood sales clerk. "In the first five minutes in a store, the sales guy is observing a customer's body language and tone of voice," says Mark A. Nagaitis, CEO of 7 Billion People, an Austin (Tex.) startup that competes with ATG. "We have to teach machines to pick up those same insights from movements online."

This dissection of online shopping comes amid growing fears about invasions of privacy online. But unlike the most controversial advertising technology, which tracks Web surfers' wanderings from site to site, many of these "preference prediction" methods limit their scrutiny to behavior on a retailer's own Web page. Much of the analysis looks simply at the patterns of clicks, purchases, and other variables, without including personal information about the shopper. In most cases, personal details are incorporated only if customers register on sites such as Amazon.com (AMZN) and Walmart.com (WMT) and supply them.

In the early days of e-commerce, most of the analysis focused on simple buying patterns among shoppers. Amazon and others introduced so-called collaborative filtering in the late '90s. They found, to no one's surprise, that people who bought the same book were likely to share interests in other books.

Now the science is growing far more sophisticated. Three years ago, Netflix (NFLX), the movie rental powerhouse, dangled a $1 million prize before anyone who could plow through data from millions of anonymous users and improve Netflix predictions of what movies customers would like by 10%. Last month an international team of computer scientists reached that goal by introducing deeper analysis. The winning team factored loads of details into its algorithm. It attempts, for example, to compensate for the shifting sentiments of a movie watcher over time. If one reviewer pans a number of movies in a row, are they all really so terrible? The algorithm might allow for a stretch of the blues—and take those ratings with a mathematical grain of salt.

Introducing this level of complexity into a calculation requires computing muscle that until recently was beyond the range of most companies. "What we do today would be impossible on the machines we had in 1999," says Bruce D'Ambrosio, vice-president and chief architect at ATG. He says his company is crunching ever greater amounts of data as it attempts to map out the most likely path for each shopper on a site.

SHOPPERS' SIGNALS

ATG quantifies the crazy quilt of relationships between every item in its customers' stores, whether Tommy Hilfiger or Body Shop International. It analyzes which type of customer buys each product, and what else they buy or look at. This adds up to hundreds of billions of relationships. But it's through such analysis that ATG finds connections such as the one between silky slippers and men's bathrobes. ATG also studies the shifts in Web surfers' behavior over time. Shoppers, D'Ambrosio says, tend to be in a big hurry when dropping in from work and have more leisure time on weekends. Ideally, the site adjusts to their rhythms, leading shoppers on a leisurely stroll on Saturday afternoon, and sending them hurtling toward checkout on Monday morning.

The algorithms used by 7 Billion People attempt to mimic the human feedback loop in a brick-and-mortar store. While a sales clerk can see a shopper is in a hurry, the Web site must pick up that insight from other signals, such as rapid-fire clicks of the mouse. The trick then, says CEO Nagaitis, is to fit the site to the customers. Those who dally over reviews and related products find themselves transported to Web pages with more features to explore. Shoppers who are more likely to be swayed by demonstrations, for instance, may find videos to click.

Such adjustments can prove very valuable, say customers. Doug Scott, who heads Web strategy at ASAP Ventures, a British e-commerce incubator, says he used to optimize sites he controlled to his own tastes, with lots of details and choices. But after running tests with 7 Billion People, Scott learned that only about one-third of its users shared his tastes. Others wanted to read testimonials or simply to hurry up. "We could fine-tune for one-third, but then we would upset the other two-thirds," he says. Adjusting for the different types, based on their behavior, has lifted the conversion of Web site visitors to buyers by 30% to 50%.

Another competitor of ATG, San Francisco's richrelevance, is dusting off theoretical algorithms from before the computer age to see if they can be used to predict customer behavior. "If someone's looking at a Dell (DELL) computer at Wal-Mart (WMT)," says CEO David Selinger, "is he more likely to be interested in a more expensive PC, a cheaper one, or a warranty?" Well, the answer depends on the individual, the time of day, and a few hundred other variables.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

The Netflix Prize

Three years ago, Netflix offered $1 million for an algorithm to improve movie recommendations by 10%. This unleashed a global race among mathematicians and computer scientists. The Netflix Prize site links to the various teams and explains their different approaches to predicting consumer tastes and opinions.

For more stories on predictive tech, go to bx.businessweek.com/data-mining/reference

Baker is a senior writer for BusinessWeek in New York.

Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.

Creativity Online: Insight and Intuition, Rigor and Process

Insight and Intuition, Rigor and Process

I've always loved research. When the chips are down and I'm looking for the edge that will take a half-baked theory and make it into a concept, research can help to give shape to the fuzziness that is a hunch. Although I always strive to deeply understand any subject matter for which I'm designing, I don't have a formal design research background; most of what I know is the product of working with some really talented individuals at frog. They taught me rigor and process, and the value of solid, explainable underpinnings to my work. By Nick de la Mare

By: Nick de la Mare, Published: Aug 04, 2009

 

Nick de la Mare, Frog Design

The problem with rigor and process, however, is that both can easily become a crutch, or worse, used to defend the status quo. Research, like any field with trained professionals, becomes an end in itself; the process becomes more important than the insights and concepts that derive from it. When that happens we must reexamine the practice itself, and better understand where, when, and how it should be used.

Design is changing rapidly, and we need our tools to keep up. The pure streams of many creative fields—design research, industrial design, and graphic design for example—have become largely commoditized and internalized within organizations. The practice of shopping around in order to get the greatest bang for the buck has become commonplace. Most of the organizations we work with have their own research facilities, and many will ask us to use findings they've already generated. In their eyes, consultancy-driven design research is redundant to what they're already doing. From the perspective of the design researcher, who naturally has a stake in being included in the knowledge gathering process, and has deep levels of skill and pride in their chosen craft, the leveraging of internal research often doesn't seem to be the best solution. They know best how to gather and process design-specific insights; their methodologies are tried, true and commonly understood.

The traditional arc of a project puts research up front, defining the problem, touching upon all relevant areas and coming up with opportunities that track back to that defined problem. From those insights, designers start designing and eventually something gets made. Ideally, months later, the end result still correlates to the research that started the project. Often times, however, a game of telephone has occurred and the researchers' opportunity areas have transformed into something very different.

This waterfall approach goes back to the industrial revolution; it's battle tested but increasingly untenable. Clients want to see progress, things happening, concrete examples that give them confidence in the partner they've chosen. Unwilling to sacrifice time and money for something they think they already have, they chop research from the plan and the end result becomes based on the designers' intuition and little else.

My sense is that we need to reexamine HOW and WHEN we use research. At frog, we've been testing the waters with highly iterative spin-cycle programs that begin with a hypothesis design being created, then tested with users, over and over until we're happy with the results. We don't do focus groups. They're a great way to generate group-think and pack mentalities, but the end result is often missing the nuance we're looking for. We do ask users to look at our designs and suggest ways to make them better. Frequently, in one-on-one interactions, we encourage them to design the ideal product for themselves. We ask the same people to come back again and again; they act as our conscience and hopefully, eventually, advocates for the end product. At every level, the insights we gather are directly tied to the thing we're trying to design.

This kind of user-research isn't totally open-ended. We have a hypothesis already, but it occurs early enough in the process that we can radically alter the end result before it migrates too far from relevance. We'll cycle through that process a number of times, getting closer and closer to the final objective. Which is, of course, to design the best possible solution for any given problem set.

Rigor and process are still core elements of the design practice, but now are more flexible. Intuition and preexisting knowledge are always going to be a part of the design process, only now they are leading the charge. Insights are gathered along the way and we no longer have to hope that the things we were looking at at the start of a program are still relevant at the end. As is demonstrated so clearly in the digital realm, we've moved from a world of waterfall processes to one that exists in near-perpetual beta. Why not adopt that thinking for design research as well?

Source: http://creativity-online.com/news/insight-and-intuition-rigor-and-process/138289

BusinessWeek: How Whirpool Puts New Ideas Through the Wringer

How to Innovate August 3, 2009, 1:58PM EST text size: TT

How Whirlpool Puts New Ideas Through the Wringer

The appliance maker has formalized the process of evaluating and testing the thousands of notions that bubble up

By Jessie Scanlon

In 1999, Whirlpool's (WHR) then-Chief Executive David R. Whitwam set a goal: He wanted the leading maker of big-ticket appliances to be No. 1 in innovation as well. Whitwam's pronouncement kicked off a flurry of ideas. Not all of them were sensible. "There were some wacky ones—bicycles, tennis shoes," recalls Moises Norena, director of global innovation. Whirlpool needed a system to evaluate and screen ideas, advancing promising concepts and culling out those that were better forgotten.

Today, the maker of such brands as Whirlpool, Maytag, and KitchenAid has formalized a process to sort through the thousands of ideas that, at any one time, are percolating up from product groups, new business development teams, and i-mentors—employees trained in innovation who have been deployed throughout the organization to identify promising ideas. From that first grab-bag of concepts, managers green-light several hundred for study, giving each a slice of an innovation budget that Norena ballparks at "several million dollars for North America" this year.

Ultimately, almost half of those flow into its innovation pipeline, which currently numbers close to 1,000 products. On average, 100 are introduced to the marketplace. "Every month we report pipeline size measured by estimated sales, and our goal this year is $4 billion," says Norena. With Whirlpool's 2008 revenue totalling $18.9 billion, that would mean roughly 20% of sales would be from new products.

Beginning Affresh

The process has helped Whirlpool find such innovations as Affresh, a hockey puck-shaped tablet that consumers can toss into front-loading washers for a cleaning cycle. In less than two years, Affresh, which works with any brand of appliance, has grown into a line of four products that Whirlpool expects to be an $80 million to 100 million business by 2015. Taking Affresh as a guide, here's a look at how the Benton Harbor (Mich.) appliance maker evaluates new ideas.

Affresh came out of regular consumer research a few years ago: Water and chemical residues caught in the seal of the door of front-load washing machines, customers told Whirlpool researchers, were causing odor problems. (Not all of Whirlpool's concepts emerge from customer research; Gladiator GarageWorks—a line of storage containers and appliances for garages and workshops—was conceived in a sales and marketing brainstorm about how Whirlpool might develop products for rooms beyond the kitchen and laundry room.)

For an idea to be considered for development, it has to meet Whirlpool's three-pronged definition of innovation: It must meet a consumer need in a fresh way; it must have the breadth to become a platform for related products; and it must lift earnings. (Add-on innovations are expected to deliver results within months, while new-to-the-world ones are given three to five years.)

Charles Martin, director of strategy and marketing for new business development, who led the Affresh development, already knew there was a consumer need. Four to six weeks of research and concept development convinced him he could clear the second hurdle too, by expanding into kitchen appliances too. And Whirlpool had good reason to expect profits. Sales of front-loaders are on the rise—1.91 million will be sold this year, according to IBIS World—and the machines are expected to eclipse top-loaders in three to five years.

Clearing the Hurdles

Research findings are written up in a document Whirlpool calls an "opportunity brief." The brief is reviewed by a 15-member panel of innovation experts and regional managers from across the organization, including marketing, sales, customer service, and engineering. This i-board meets monthly to review potential projects, and allocate funding. Martin's team was granted several thousand dollars to continue development of the Affresh idea.

Roughly 40% of ideas that make it to this stage end up in the innovation pipeline. Those that don't get tripped up by the next hurdle: the i-box, a three-page scorecard that forces innovation teams to be very concrete about expected factors such as revenues, technical feasibility, relevance to the brand, and market trends. "The i-box needs to make the case that there is a consumer need, that the concept meets it, that it does it better than existing products, and so on," says Norena.

The i-panel then reviews the i-box, with each member scoring how well the concept meets each criterion on a scale of 1 to 5, with 5 being the strongest. The averaged scores determine whether a concept will be funded (at which point it officially enters the pipeline) or shelved. "Everything checked off," says Martin of the Affresh i-box.

Whirlpool currently has some 1,500 projects shelved for a variety of reasons. An idea to create an "on the move" appliance for campers, for instance, was held because it strayed too far outside of Whirlpool's home-focused comfort zone.

Thumbs-Down on a Steam Dryer

Ideas can also be held simply because of overall resources and priorities. Every year, Whirlpool sets a goal for innovation-related revenue for each product team. "We might say we want 80% of new revenues to come from innovations to core products, 15% from innovations that leverage or expand the core, and 5% from totally new innovations," says Norena.

A concept for a dryer with a steam function, proposed in 2004, ended on up the shelf because it didn't match up with that year's priorities. Three years later, when the fabric care team began working on a relaunch of Whirlpool's Duet line, the innovation manager for the laundry team reviewed the shelved concepts for features to include in the new machines. Duet dryers came to market in 2008 with the steam function. (Concepts can also be resurrected by the i-board, which reviews all active innovation projects and shelved ideas during an annual pipeline cleanup.)

Once Affresh and other new concepts officially enter the innovation pipeline, they go through Whirlpool's standard stage-gate process. Affresh's development differed only in that it was developed in partnership with an outside partner, a chemical company that Whirlpool won't identify, one of Whirlpool's first open innovation projects.

The first Affresh product—a three-pack of tablets for cleaning front-load washers—showed up in appliance stores in September 2007 at a suggested retail price of $6.99. Whirlpool won't reveal specific numbers, but says that first-year sales exceeded Martin's estimates by 200% and were robust enough for the company to expand distribution to national grocery chains such as Kroger (KR) and Publix Super Markets. Building on that, Whirlpool developed a more efficient product for service technicians and, coming next month, an Affresh-branded dishwasher and disposal cleaner.

What can executives learn from Whirlpool's approach to screening ideas?

• Define Innovation A brief, concrete definition of innovation will help employees evaluate new concepts at the front end, screening out those that just don't fit. As a concept progresses, keep returning to the definition to make sure that the idea still clears the bar.

• Never Kill Good Ideas A concept that might not be worth pursuing today—because of limited resources, for instance, or the lack of a partner—might be next year's innovation. Don't kill projects. Shelve them, and annually review all concepts for possible resurrection.

• Adjust Your Criteria Early in the process Whirlpool concepts are required to meet the basic definition of innovation. As projects progress, the evaluation criteria become more rigorous. Begin with easier requirements to avoid killing off concepts before they can be developed.

• Link Idea Screening with Strategy A concept might be innovative but still not smart for a company to develop because it would take the company too far afield. Make sure that the people evaluating ideas do so in the context of the company's strategic goals.

Jessie Scanlon is the senior writer for Innovation & Design at BusinessWeek, where she covers the intersection of design and business.

Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.

Fast Company: Little-Known Redbox Proves the Power of In-Between Techology

July 1, 2009

Little-Known Redbox Proves the Power of In-Between Technology

By Farhad Manjoo

If you were a Hollywood casting agent and the squat, garishly decorated Redbox DVD kiosk came in to audition for a role as the newest disruptive force in the entertainment industry, you'd send the poor fellow home. This sorry contraption doesn't run peer-to-peer software; it doesn't do Blu-ray; it won't stream anything straight to your house. It's a vending machine in a supermarket -- as old school as you can get without actually involving vacuum tubes.

Yet despite Redbox's antiquarian image, the kiosks are a sensation. Redbox -- founded in 2002 as a division of McDonald's and purchased by Coinstar this year -- runs 15,000 machines in stores across the country and plans to have about 20,000 in place by the end of the year. Reed Hastings, founder of Netflix, the innovative darling of the movie-rental business, has called Redbox one of his most challenging rivals. "It's really scary," Hastings told The Hollywood Reporter in March.

Redbox is convenient and it's cheap, but the company's fortunes also rest on a more sophisticated calculation about the marketplace. Ask any entertainment bigwig where the movie-rental business is going and you'll hear one thing: digital streaming. Amazon, Apple, Netflix, the cable companies, and many startups are gearing up to send every movie to your home on demand. But Hollywood's byzantine licensing structure precludes that from happening anytime soon. Redbox has positioned itself as the perfect in-between technology -- the next best thing to on demand. It's winning by being in more places than Blockbuster and faster than Netflix.

"Two-thirds of all films for rental are selected between 4 and 9 in the evening," says Mitch Lowe, Redbox's president. The other thing people look for during those hours: dinner. Redbox brings these twin impulses together, typically at your supermarket. Its siren song is emblazoned in large type across the front: $1 dvd rentals. Customers pay a buck per movie per night, a price low enough to encourage people to take risks on films they're not sure about, or to keep a movie an extra night. "It expands movie consumption in the same way Netflix's all-you-can-eat program does," Lowe says. "Almost all the time, half of new releases are in consumers' homes." As a result, a new Redbox kiosk becomes cash-flow positive within four to six months.

What's surprising, though, is how much wizardry goes into making Redbox work. Each machine is connected to the Internet via DSL or a 3G cellular modem. This lets customers browse and reserve movies at their local Redbox through the Web, and return movies they rent from one Redbox to any other. Each machine packs a sophisticated inventory-management system that determines how many copies of different new titles to order based on past performance of similar movies at that location. The kiosks send their inventory orders up to the mother ship every week, and Redbox's technicians fan out to each kiosk to stock it with new DVDs. "That's the most interesting part -- where technology meets old-fashioned field distribution," Lowe says.

Redbox's success is instructive. In industries where shifts in technology dictate market conditions, why plan for the next big thing when you can make money with the little steps along the way? By the time GM launches its plug-in Volt, Toyota will have been selling the gasoline-based Prius for a decade. Sure, it's unlikely Redbox will survive the transition to streaming; its chief assets -- all those kiosks -- will suddenly become a liability. Until then, it'll take what it can get.

Farhad Manjoo covers technology for Slate and is the author of True Enough: Learning to Live in a Post-Fact Society. 

Article location:http://www.fastcompany.com/magazine/137/tech-edge-box-tops.html

NY Times: Calculating Consumer Happiness at Any Price

June 30, 2009

Findings

Calculating Consumer Happiness at Any Price

By JOHN TIERNEY

Could it be that humans are not quite as gullible as advertised?

For a couple of decades now, social psychologists and behavioral economists have been amusing themselves manipulating consumers into doing odd things. They’ve delighted in debunking the notion of homo economicus, that theoretical creature who rationally seeks maximum economic utility.

Old-fashioned cost-conscious consumers would react to a price increase by lowering demand for the product, but we sometimes do just the opposite. We want to buy more of it because we assume it must be a better product — and we’re so thoroughly fooled that our bodies even respond differently to it.

If you give people a placebo and tell them it’s a painkiller costing $2.50, they can withstand painful shocks better than if they’re told the pill costs a dime. Give them an energy drink at a discount price, and they’ll perform worse on subsequent tests than if they pay full price. If you tell them the wine they’re tasting costs $90 a bottle, then the reward centers of their brains will light up more than if you tell them it’s a $10 bottle.

But suppose, instead of scanning people’s brains as they’re sipping wine in a laboratory, you tested them in a more realistic situation: a restaurant where they’re spending their own money. That challenge was undertaken at an upscale restaurant in Tel Aviv by two behavioral economists, Ori Heffetz of Cornell and Moses Shayo of the Hebrew University of Jerusalem, who expected to be able to manipulate diners’ choices by changing the prices on the menu.

Unbeknownst to the diners or to their waiters, the economists monitored the choices of people who ordered from the prix fixe menu. The three-course meal cost included a choice of five entrees: shrimp gnocchi, pork shank, red mullet fillet, sausage or stuffed artichoke.

Next to each of these entrees on the menu, in parentheses, was the cost of what it would cost to order that entree from the à la carte menu. These prices didn’t affect the cost of the prix fixe meal, which was the equivalent of $30 no matter what the entree, but the researchers expected just the sight of the prices to make a difference. If the mullet were listed at $20 and the other entrees were $17, more people would presumably be enticed into ordering the seemingly more valuable fish.

But after three months of testing various combinations of prices, the researchers found they couldn’t sway the customers. Putting a higher price on the shrimp or any other entree didn’t make people more likely to order it.

This same stubbornly independent streak was manifest in another food experiment by the same researchers. This time they let people sample two kinds of candies — peanut butter bars and caramels — and varied the sticker prices for each one.

Superficially, the manipulation seemed to work, because people said they would be willing to pay more for a candy if it had a higher sticker price, but that was just in answer to a hypothetical question. When people were given a chance to pick a bag of candy to take home, they pretty much ignored the sticker prices and chose what they liked.

Why weren’t people duped into favoring the high-priced candies and entrees? Why did they follow their own tastes?

“Maybe, sometimes, old-fashioned economics is just about right,” Dr. Shayo says. “Maybe when it comes to food, people do have reasonably stable preferences. Some people like shrimp and some don’t, even if it’s worth a lot of money.”

The researchers don’t deny that consumers can be swayed by variations in sticker prices in laboratory experiments. But they question how significant that factor is in real-world settings where prices can’t be inflated so extremely, like the Tel Aviv restaurant. “Size is everything,” Dr. Heffetz says. “Our findings remind us that knowing that ‘A has a positive effect on B’ is not enough. The effect may simply be too small to matter.”

The size-matters effect seemed to show up in a much less rigorous bit of research conducted at my TierneyLab blog with the help of Geoffrey Miller, an evolutionary psychologist at the University of New Mexico. In his new book, “Spent: Sex, Evolution and Consumer Behavior” (Viking), he argues that humans often waste money because of the unconscious — and mistaken — belief that our costly stuff will signal our intelligence and sterling personality traits to potential mates and allies.

As an exercise, Dr. Miller asked readers of the blog to list the 10 most expensive things they had ever bought, and then list the 10 purchases that had brought them the most happiness. More than 200 responded. As we expected, many people rued spending lots of money for stuff that hadn’t brought them joy. Boats seemed to have particularly low utility in delivering happiness per dollar; many cars fit that category, too, and so did many expensive weddings.

But we were struck by how much overlap there was between the most-expensive list and the most-happy list. People repeatedly included on both lists their homes, their college education, their vacation trips, their high-priced electronics (large-screen televisions, Blu-Ray player, audio equipment, computers) and certain models of cars (BMW 325, Audi A4, Jaguar, Subaru WRX, Toyota Prius, Honda Civic).

Indeed, the first trend that Dr. Miller identified was the match between the happiness and expense lists. Some of this may have been because of postpurchase rationalization, but a lot of buyers seemed to be suffering anything but remorse. As one reader, Janet Hubbs, put it:

“The three things (not necessities) I have spent the most money on in the past ten years are: my cottage at Cape Cod, my Lexus, and my Rolex — and I LOVE all three, in the order of their cost. And I don’t care what that says about me.”

Copyright 2009 The New York Times Company

FT: Brands left to ponder price of loyalty

Brands left to ponder price of loyalty

By Andrew Edgecliffe-Johnson in New York

Published: June 21 2009 22:31 | Last updated: June 21 2009 22:31

Big brands’ best customers have been defecting in droves since the beginning of the US recession, according to a study. By this year, more than half of a typical US brand’s most loyal shoppers in 2007 had switched to rival products.

A two-year analysis of 685 grocery and pharmacy-stocked brands, using data from 32m consumers’ supermarket loyalty cards, found that in 2008 the average brand lost a third of its formerly highly loyal customers.

The study will alarm packaged goods groups, as the most loyal customers – those choosing one brand for more than 70 per cent of their purchases in a category – should also be their most lucrative.

“Defection is top of mind for brand managers now because they’re the most profitable customers,” said Eric Anderson, associate professor of marketing at Kellogg School of Management, Northwestern University.

“Price and promotion have become so salient at retail, that what we thought was the loyal customer can be moved with discounts,” he added.

EDITOR’S CHOICE

Venture asks students to offer business advice - Jun-21

Gillette ads promote closer shave - Jun-22

Past recessions have seen similar defections from top-tier national brands to stores’ private-label goods, Mr Anderson said. Academic research showed that customers could be quickly persuaded to switch by a cheaper price but took far longer to switch back.

The study was conducted by the CMO Council, which represents chief marketing officers, and Catalina Marketing’s Pointer Media Network, which has equipment in 25,000 stores analysing buying behaviour. Catalina can provide a two-year anonymous purchasing history on individual customers. Brand managers and retailers who had seen the data had been startled by it, said Todd Morris, senior vice-president at Catalina.

“They’ve always known there was churn but could never put their finger on how big the issue is.”

The study comes as marketers are leaning more heavily on research and on targeted advertising, as they seek to improve on the “spray and pray” approach of mass media marketing formats, such as 30-second television advertisements.

Copyright The Financial Times Limited 2009

FT: Out to launch in a downturn

Out to launch in a downturn

By Jonathan Birchall

Published: June 3 2009 20:42 | Last updated: June 3 2009 20:42

Brad Casper, the head of Henkel’s US consumer products business, says he can get core customers of his Purex detergent brand to spend more on their laundry – even in a deep recession.

The company has an idea it believes could shake up the market: a souped-up version of the anti-static fabric sheets used in American tumble dryers. Henkel’s version is put in at the start of the washing cycle and includes concentrated detergent and fabric softener.

Purex, a low-cost brand, has about 10 per cent of the US market. Its Complete 3-in-1 Laundry Sheets are about 20 per cent more expensive per wash than buying the Purex versions of the three ingredients separately.

Mr Casper says the recession could even help the launch of a product that has taken five years to develop. “It’s absolutely the right time because your share of voice is so much larger,” he says. The launch includes national television advertising and race-car sponsorship. In addition to lower media marketing costs, there are fewer new products to compete against as other companies cut back on spending.

Henkel is not alone: other big brands are bringing out products at an apparently unpromising time. Colgate-Palmolive has launched four-packs of disposable mini-toothbrushes and mouth freshener, called Wisp, which it says address the “currently unmet need of on-the-go tooth cleaning” – but which cost more than breath-freshening strips.

­Kimberly-Clark has launched a premium “pure and natural” version of its Huggies baby products. Procter & Gamble’s recent recession-era innovations include Olay Pro-X, a range of “clinical” anti-ageing products that sell for about twice the price of its regular Olay anti-ageing creams.

Pioneer that served up a treat in recession

Can a new product succeed in a recession? Lynn Dornblaser, who tracks new product trends at Mintel, the consumer market research company, likes to cite the launch by ConAgra foods of its Healthy Choice frozen dinners in 1989 – just as the US was entering a three-year slowdown.

The 14-item line set out to create low-fat, low-salt versions of foods that people habitually eat. It was a wild success, with the brand’s sales hitting $350m and taking 10 per cent of the market in two and a half years. “It is so obvious now that it was such a seminal product, because it changed the frozen-meal market in the US completely,” says Ms Dornblaser.

The Healthy Choice launch, she says, also showed the importance of having a senior executive behind a big innovative step in a tough market.

Charlie Harper, the chief executive who built ConAgra into a multibillion-dollar business, had suffered a heart attack in 1985. When a colleague praised his wife’s tasty chilli stew – made with low-fat turkey rather than beef – he realised there were hundreds of thousands of people in the same position, and championed tasty low-fat “lifestyle” food.

Tony Palmer, chief marketing officer of Kimberly-Clark, argues that economic conditions are less important to a product’s success than whether it is aimed at genuine customer needs. “If you do those things, chances are you’ll be successful whether you are in a recession or not, or whether you have a premium product or not,” he says.

The company’s Scott’s brand launched its first cardboard roll of paper towel in 1930, in the middle of the Great Depression.

But while the central principles of identifying and marketing an attractive innovation remain the same, Mr Palmer says, “the consumer is changing”. As a result, “maybe the decisions we make as a result of the work we are doing are varying” – such as the use of ­coupons and free samples to encourage customers to try new products, and changing the marketing mix.

Purex decided to retest consumer acceptance for the new product in January, after the collapse of the stock markets and the surge in economic anxiety, Mr Casper says. A positive response “led to the conclusion that there was no reason we shouldn’t do the launch”, the largest of its kind undertaken by the brand.

In spite of the consumer mood for saving money, Purex will not use free sam­ples to encourage people to try it. The company believes the product is attractive enough to allow Henkel to direct marketing funds to other advertising efforts to build consumer awareness.

Michael Kuremsky, general manager of the Olay brand at P&G, says the Pro-X product, which costs at least $42, is markedly more expensive than other Olay products. But it is aimed at a more prosperous customer, who would be used to spending $100 or more on similar products in department stores rather than in drug stores.

“The prices are, yes, high and up-price for the mass channel, but actually they are a value for this particular consumer,” he says, describing the product as one of the company’s “big ideas”.

Aware that the economic mood could deter some customers from trying the product, P&G offered a money-back guarantee and high-value rebates to drive sales while trying to maintain the product’s premium status. A customer who spent more than $50, for instance, would qualify for a $25 voucher to spend on future purchases.

“We had a lot of conversation about this ... We knew we had to take the economic crunch seriously,” says Mr Kuremsky. P&G decided it would have to focus on persuading consumers to try the product.

Some product launches, in contrast, have unexpectedly found they are aligned with the current recessionary consumer mood. Purex’s tests of its laundry sheets indicated that consumers, while cutting back in many areas, were receptive to something new that could introduce some excitement into their shopping, as a small domestic luxury.

Overall, however, product launches slow during a recession. In the US food industry, Mintel, the consumer research firm, has data showing that the number of food and drink products introduced in the first three months of 2009 was down 51 per cent on the previous year, and down 32 per cent on the previous month.

As for those that go ahead, Lynn Dornblaser, who tracks new products at Mintel, says for some companies it can be “very hard to turn the ship around” on a planned product launch, even if they want to. Some, she says, try to focus on their biggest ideas, particularly if a product is close to launch. “Instead of having 10 or 12 things going on at once, they focus on one or two really big ones,” she says.

But initial results from some of the larger product launches suggest that if you make the right product, consumers will come, even in a recession.

­Colgate-Palmolive has reported strong initial sales of its Wisp mini-toothbrushes – 7 per cent of the toothbrush market in the first week of April.

Olay’s Pro-X has taken about 5 per cent of the anti-ageing clinical market, says Mr Kuremsky at P&G, which is “right on track for what we were planning”.

As the Purex product hits the store shelves, Mr Casper is optimistic that the laundry sheets have the potential to become a $100m brand in their first year.

Copyright The Financial Times Limited 2009

WSJ: Look at This Article. It's One of Our Most Popular

Most-popular lists have become standard on Web sites. But following the herd can make you wonder about the wisdom of crowds.

===

THE NUMBERS GUY
MAY 20, 2009

Look at This Article. It's One of Our Most Popular

Top-Ten Lists Abound Online, but Following the Herd Can Make You Wonder About the Wisdom of Crowds

By CARL BIALIK

Popularity is, unfortunately, still all the rage.

The Internet has facilitated an outbreak of popularity contests as online news providers rank the top 10 most-read, -emailed or -commented articles on their home page.

These rankings have become a standard feature on news sites for the last two years, including this newspaper's, and sites continue to expand the features: The New York Times is adding a most-viewed list, Fox News (owned by News Corp., as is the Journal) introduced most-shared this week and a most-commented list is coming to CBSNews.com this month.

These lists are among the byproducts of the Internet's knack for being instantly quantifiable. Purchases on Amazon.com update the online retailer's sales rankings and their people-who-bought-this-also-bought-that recommendations. Yahoo continually updates its top 10 user searches on its home page, and the iTunes Store does the same with its list of top songs.

Using popularity rankings to make decisions, however, has downsides. These online rankings are public, creating a positive-feedback loop. The more popular something becomes, even if just from a random burst of interest, the more likely it is to grow ever more popular. And that has troubling implications about the effects of all sorts of popularity rankings, from bestseller charts to election polls.

Frequently, popularity rankings speak less to the merits of what's being observed and more to the fact that crowds are observing it. In other words, peer pressure. "If you see a crowd around a building, you pop over and see what everyone is looking at," says Jimmy Leach, editorial director for digital at the Independent newspaper in the U.K.

Psychologist Stanley Milgram demonstrated that people pop over even if everyone is looking at nothing, by sending a group of experimenters into the street to stare upwards. With a large enough group of gapers, passersby stopped to stare, too.

A more-recent study demonstrates that popularity in the music world, even unearned, breeds more popularity. Researchers enlisted more than 12,000 volunteers to rate and download songs from among 48 chosen for their relative obscurity. Some of these volunteers were lied to: At a certain stage in the experiment, popularity rankings for this group were reversed, so the least-downloaded songs were made to appear most-downloaded.

Suddenly, everything changed. The prior No. 1 began making a comeback on the new top dog, but the former No. 47 maintained its comfortable lead on the old No. 2, buoyed by its apparent popularity. Overall, the study showed that popularity is both unstable and malleable.

Numbers Guy Blog

• The Growing Popularity of Popularity Lists

Deducing merit from popularity "can lead to self-reinforcing snowballs of popularity, which can become decoupled from the underlying reality," says study co-author Matthew Salganik, a Princeton University sociologist. These snowballs can grow much larger than their competitors, leading to winner-take-all markets.

And maybe it doesn't matter so much if the most-deserving entrant wins, whether it's Britney Spears ruling pop, or a gossip item leading a list of most-read news articles. "If we view the role of cultural products as giving us something to talk about, then the most important thing might be that everyone sees the same thing and not what that thing is," Prof. Salganik says.

Other recent studies have quantified the popularity of popularity in other settings. Signs telling guests at a hotel in the Phoenix area that towel reuse was the No. 1 choice among their peers increased the rate of this practice by 34%, compared with other signs with messages stressing the impact on the environment. Arizona State University psychology Prof. Robert Cialdini and colleagues found that rates went even higher when the signs specified that most prior guests in the same room reused towels.

"To the extent you can convince that, not just a lot of people are doing this, but a lot of people like [them] are doing this," you'll get greater buy-in, Prof. Cialdini says.

Another group of researchers demonstrated this with restaurant diners in Beijing. Table cards at Mei Zhou Dong Po, a Szechuan restaurant chain, touting the five most popular items boosted ordering of these items by 13% to 20%, according to a forthcoming paper by a team from Peking University and Duke University. "Part of it is reassurance that something is good and worth buying," says Bill Paul, a restaurant-menu designer.

Calling these items popular is crucial, the researchers found, because other table cards that highlighted five sample items but made no claim on their popularity had little effect on sales. And the diners liked following the pack: "Diners who were exposed to the popularity information treatment are more satisfied," says co-author Hanming Fang, a Duke economist.

That's been a key finding of news sites that are willing to share some of their results with rankings -- it's not just that these articles are highlighted, but that they're being labeled popular, that makes the lists effective. Restaurants would never publicly shame their least-popular items, and few news sites do, but AOL's Digital City has since its debut last September. While the site's most-popular list "usually becomes self-fulfilling," articles designated as least-popular don't get such a bump, says James Fletcher, editor in chief of the site.

The Denver Post's relatively robust most-popular lists, which include subrankings for Denver suburbs and arrows signifying which stories on the charts are climbing or falling, account for 3% to 5% of clicks on denverpost.com, according to the site's senior developer, Joe Murphy.

At Yahoo News, the various popularity rankings drive 10% of all traffic to articles, according to Mark Walker, region business leader for Yahoo News, which started publishing such rankings in 2000, well before most of its peers. "What began for Yahoo News as one engineer's way of exposing interesting consumer data and insight has now become industry standard for news outlets everywhere," Mr. Walker says. "The lists enable users to shape news in real time and provide a filter for mainstream journalism."

Users are shaping news by voting up popular-culture coverage and gossip on many sites. "Celebrities, sex and anything Jon Stewart-related" rise quickly to the top of the list at the news-aggregator Newser, according to Chief Executive Patrick Spain. "This is at odds with what people tell us about what they want in their news -- serious, important stories," Mr. Spain says.

Perpetuating the popularity of relatively frivolous news -- or of unworthy bands, or Kung Pao chicken -- isn't a grave crime. But these suggest how unearned popularity numbers may be unduly influencing people in weightier choices, such as for presidential candidates. Political scientists have often noted that polling numbers, particularly early in the race, can create a feedback loops as leaders gain press coverage and credibility, which widens the gap in polls.

Popularity should never be confused with importance. "If you've written horrific stories of downtrodden people in Afghanistan, and those get battered by a story about a piece of battery-operated equipment, it can be quite dispiriting," says Mr. Leach of the Independent.

DeLaurentiis Entertainment Group/Everett Collection

King Kong Lives (1986)

Write to Carl Bialik at numbersguy@wsj.com

Printed in The Wall Street Journal, page A13

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NY Times: Message in What We Buy, but Nobody's Listening

May 19, 2009

Findings

Message in What We Buy, but Nobody’s Listening

By JOHN TIERNEY

Why does a diploma from Harvard cost $100,000 more than a similar piece of paper from City College? Why might a BMW cost $25,000 more than a Subaru WRX with equally fast acceleration? Why do “sophisticated” consumers demand 16-gigabyte iPhones and “fair trade” coffee from Starbucks?

If you ask market researchers or advertising executives, you might hear about the difference between “rational” and “emotional” buying decisions, or about products falling into categories like “hedonic” or “utilitarian” or “positional.” But Geoffrey Miller, an evolutionary psychologist at the University of New Mexico, says that even the slickest minds on Madison Avenue are still in the prescientific dark ages.

Instead of running focus groups and spinning theories, he says, marketers could learn more by administering scientifically calibrated tests of intelligence and personality traits. If marketers (or their customers) understood biologists’ new calculations about animals’ “costly signaling,” Dr. Miller says, they’d see that Harvard diplomas and iPhones send the same kind of signal as the ornate tail of a peacock.

Sometimes the message is as simple as “I’ve got resources to burn,” the classic conspicuous waste demonstrated by the energy expended to lift a peacock’s tail or the fuel guzzled by a Hummer. But brand-name products aren’t just about flaunting transient wealth. The audience for our signals — prospective mates, friends, rivals — care more about the permanent traits measured in tests of intelligence and personality, as Dr. Miller explains in his new book, “Spent: Sex, Evolution and Consumer Behavior.”

Suppose, during a date, you casually say, “The sugar maples in Harvard Yard were so beautiful every fall term.” Here’s what you’re signaling, as translated by Dr. Miller:

“My S.A.T. scores were sufficiently high (roughly 720 out of 800) that I could get admitted, so my I.Q. is above 135, and I had sufficient conscientiousness, emotional stability and intellectual openness to pass my classes. Plus, I can recognize a tree.”

Or suppose a young man, after listening to the specifications of the newest iPhone or hearing about a BMW’s “Servotronic variable-ratio power steering,” says to himself, “Those features sound awesome.” Here’s Dr. Miller’s translation:

“Those features can be talked about in ways that will display my general intelligence to potential mates and friends, who will bow down before my godlike technopowers, which rival those of Iron Man himself.”

Most of us will insist there are other reasons for going to Harvard or buying a BMW or an iPhone — and there are, of course. The education and the products can yield many kinds of rewards. But Dr. Miller says that much of the pleasure we derive from products stems from the unconscious instinct that they will either enhance or signal our fitness by demonstrating intelligence or some of the Big Five personality traits: openness, conscientiousness, agreeableness, stability and extraversion.

In a series of experiments, Dr. Miller and other researchers found that people were more likely to expend money and effort on products and activities if they were first primed with photographs of the opposite sex or stories about dating.

After this priming, men were more willing to splurge on designer sunglasses, expensive watches and European vacations. Women became more willing to do volunteer work and perform other acts of conspicuous charity — a signal of high conscientiousness and agreeableness, like demonstrating your concern for third world farmers by spending extra for Starbucks’s “fair trade” coffee.

These signals can be finely nuanced, as Dr. Miller parses them in his book. The “conspicuous precision” of a BMW or a Lexus helps signal the intelligence of all the owners, but the BMW’s “conspicuous reputation” also marks its owner as more extraverted and less agreeable (i.e., more aggressive). Owners of Toyotas and Hondas are signaling high conscientiousness by driving reliable and economical cars.

But once you’ve spent the money, once you’ve got the personality-appropriate appliance or watch or handbag, how much good are these signals actually doing you? Not much, Dr. Miller says. The fundamental consumerist delusion, as he calls it, is that purchases affect the way we’re treated.

The grand edifice of brand-name consumerism rests on the narcissistic fantasy that everyone else cares about what we buy. (It’s no accident that narcissistic teenagers are the most brand-obsessed consumers.) But who else even notices? Can you remember what your partner or your best friend was wearing the day before yesterday? Or what kind of watch your boss has?

A Harvard diploma might help get you a date or a job interview, but what you say during the date or conversation will make the difference. An elegantly thin Skagen watch might send a signal to a stranger at a cocktail party or in an airport lounge, but even if it were noticed, anyone who talked to you for just a few minutes would get a much better gauge of your intelligence and personality.

To get over your consuming obsessions, Dr. Miller suggests exercises like comparing the relative costs and pleasures of the stuff you’ve bought. (You can try the exercise at nytimes.com/tierneylab.) It may seem odd that we need these exercises — why would natural selection leave us with such unproductive fetishes? — but Dr. Miller says it’s not surprising.

“Evolution is good at getting us to avoid death, desperation and celibacy, but it’s not that good at getting us to feel happy,” he says, calling our desire to impress strangers a quirky evolutionary byproduct of a smaller social world.

“We evolved as social primates who hardly ever encountered strangers in prehistory,” Dr. Miller says. “So we instinctively treat all strangers as if they’re potential mates or friends or enemies. But your happiness and survival today don’t depend on your relationships with strangers. It doesn’t matter whether you get a nanosecond of deference from a shopkeeper or a stranger in an airport.”

Copyright 2009 The New York Times Company