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Comeback Companies

If 2009 was a year of business disaster, 2011 offered opportunity for recovery. Here's how GM, Starbucks and Whole Foods have engineered turnarounds-- along with some of the lessons they learned.
Jim Motavalli

GM: Returns From the Brink

How bad did it get at General Motors? In winter 2008, then-CEO Rick Wagoner flew to his showdown with the Senate Banking Committee in the company’s $36 million G4 jet. When asked by one senator why GM wasn’t making money, Wagoner couldn’t give a straight answer. He instead declared, “We want to continue the vital role we’ve played for Americans for the past 100 years, but we can’t do it alone.”

That wasn’t going to happen by maintaining the status quo. Gasoline was $4 a gallon, and GM’s gas-guzzling SUVs and trucks stayed parked on dealers’ lots. The company spent at rates fluctuating between $500 million and $2 billion a month—$19.2 billion from its reserves just in 2008, when it recorded a $30.9 billion loss.

GM officials said they needed another $30  billion from the government to finish their costly restructuring. Not surprisingly, the new Obama administration and its auto czar, Steven Rattner, didn’t think Wagoner and his crew were up to the task. “GM Collapses into Government’s Arms” was The Wall Street Journal headline when the company, no longer led by Wagoner, filed for Chapter 11 bankruptcy in early summer 2009. This was the company, fueled by 25-cents-a-gallon gasoline, that held a 48 percent U.S. market share during the 1960s but fell below 20 percent by 2009.

The bankruptcy did the company huge favors by shedding crippling labor and legacy costs. Today’s GM is much leaner and more efficient than the bloated giant commanded by Wagoner. Gone are Pontiac, Hummer, Saab, Oldsmobile and Saturn. GM also has finally become the international operator it always wanted to be: The company sells more Buicks in China than in the United States.

In mid-January, GM’s return to health became a big applause line for President Obama in his 2012 State of the Union speech. “Today, General Motors is back on top as the world’s number one automaker.”

In 2011, GM sales—led by the Chevrolet Cruze (the kind of high-quality, fuel-efficient compact the company was once clueless about)—rose 13 percent, with 2.5 million cars and trucks finding new owners. GM made a $1.73 billion profit in the third quarter of 2011, and a likely $8 billion for the year.

Many factors helped GM rebound. New leadership, especially the dynamic Ed Whitacre (who reportedly reconfigured GM’s top management in four hours), freed the talented engineers and designers who had been there all along to create cars and trucks that consumers wanted. (It didn’t hurt that GM’s chief rival, Toyota, suffered from recalls, a badly handled unintended acceleration debacle, a tsunami in Japan and flooding in Thailand.)

Today, as Ward’s Auto notes, GM has learned “a new production discipline and a more sober approach to inventory management.” In other words, it no longer builds cars without buyers simply to keep open more factories than it needs; in 2005, for instance, GM had 1.3 million unsold vehicles, and to move them off lots it offered steep end-of-year discounts that wiped out any profits. Now every executive with an interest in inventory attends monthly meetings with North American President Mark Reuss, and production forecasts are revised based on shifting sales expectations. The meetings proceed with freewheeling give-and-take not previously encouraged in GM’s buttoned-down culture. Dealers now get ironclad 60-day marketing plans that replace last-minute wish lists designed to move certain products.

Sam Jaffe, an analyst with IDC Energy Insights, applauds the company’s progress as a “more flexible and nimble competitor” under current CEO Dan Akerson, a former board member and Carlyle Group money manager who took over in the summer of 2010. Whitacre could have stayed, but he missed Texas. Akerson is widely perceived as smoothly continuing Whitacre’s work, but he says the company can’t get complacent. “GM has set the foundation for a sustainable and durable recovery,” Jaffe says. “But it still faces several prominent risks. First and foremost is the impact that an oil shock might have on it.… GM North America is still top-heavy with… SUVs and trucks.”

And GM is dependent on sales in China, which could be disrupted by protectionist government policies. It’s too early to tell whether the company’s bet on the plug-in hybrid Volt will pay off, but the car symbolizes a completely different GM than the one that came calling via G4 in 2008.

GM tactics:

• Designed with attention to marketability

• Dropped product lines

• Expanded in Asia

• Managed inventory carefully

 

 

Starbucks Reclaims Its Mojo

McDonald’s likes to answer its own questions. In an online Q&A, it asks, “Why are the McCafé coffees [which include an espresso with ‘a rich, roasted flavor and chocolatey notes’] so expensive?” The answer encourages consumers to “look at similar gourmet coffees, and compare taste, size and price.” That’s a shot across Starbucks’ bow. And the “$4 is Dumb” McCafé billboards in Seattle hit close to home, too.

Competitors always go after the market leader, but Dunkin’ Donuts took aim because Starbucks was a wounded giant in late 2007. Just as Apple lost direction without Steve Jobs at the helm, Starbucks reported dismal results without Howard Schultz. In summer 2008, Starbucks posted its first quarterly loss since going public in 1992. In the fourth quarter of 2008, its profits declined 97 percent.

Clearly the company’s store-opening binge was a problem. As Harvard Business School marketing professor John Quelch put it: “Starbucks is a mass brand attempting to command a premium price for an experience that is no longer special. Either you have to cut price (and that implies a commensurate cut in the cost structure), or you have to cut distribution to restore the exclusivity of the brand.”

Starbucks closed 600 stores to cut distribution in 2008. It also cut 6,700 jobs.

And in early 2008 Schultz returned. Before his chair was warm, Schultz said he was coming back “to share with you my personal commitment to ensuring that every time you visit our stores, you get the distinctive Starbucks Experience.” He admitted many company problems were “self-induced”—not resulting from McDonald’s and Dunkin’ Donuts’ hardball tactics.

Schultz’s recovery strategy: Develop exciting new products, close underperforming stores (it had many among the 14,000 outlets in the United States) and grow internationally. He showed fanatical attention to detail. He complained in a letter to Jim Donald, the CEO he replaced, that the company’s new coffee machines blocked the customers’ views of baristas in action. And worse: The stores didn’t smell of coffee because the product was shipped in sealed aluminum bags.

Starbucks also launched the instant coffee product Via, sharpened its approach to social media, and drew in customers with more focused music offerings such as a love-themed compilation and, in 2009, an exclusive charity CD (featuring U2, Dave Matthews and John Legend) that was free with a $15 purchase at Starbucks’ North American stores.

The biggest improvement came from cutting Starbucks down to size. By the beginning of 2010, Starbucks tripled its quarterly profit to $241 million, beating expectations on the Street. Sales increased 4 percent to $2.7 billion. In the second quarter, profits were up more than eightfold, as more people visited Starbucks stores and spent more while there.

Expansion in Asia was a natural path because it has a middle class four times the size of that of the United States, or 1.4 billion consumers. The company announced it would triple its Chinese outlets, to 1,500, by 2015.

The turnaround wasn’t limited to coffee. Starbucks acquired, for $30 million in late 2011, the natural juice company Evolution Fresh, announcing its plan to reinvent the $1.6 billion super-premium juice segment. That put the chain in supermarket competition with players such as Odwalla (Coca-Cola) and Naked Juice (PepsiCo). The Wall Street Journal pronounced it “a deal that pushes Starbucks well beyond its coffee roots and shows how serious the company is about transforming itself into a consumer products player with a large presence outside its own stores.”

Schultz tells SUCCESS, “I think one of the most vital things that came out of our transformation was the confidence we gained knowing we could preserve our values despite the internal and external challenges we faced. For Starbucks, the key to our success has always been finding a balance between profitability and social conscience. It is easy to abandon ideals when a ship is sinking and just row. But our values steadied us when our stock, our reputation and our performance were all at their lowest points.

“Our belief in our purpose as a company—in the knowledge that how we do business matters to customers as well as shareholders—gave us the courage and will to turn the ship around. Values are not luxuries for prosperous times. They are necessities in all times.”

In the 12 months ended in October of last year, sales grew by 9.3 percent and net income by 31.7 percent.


Starbucks tactics:

• Closed underperforming sites

• Trimmed payroll

• Added and improved products

• Expanded in Asia

 

Whole Foods: Reborn as a Price Chopper

In 2009, Whole Foods Market suddenly found its famously meteoric growth slowing to a crawl. In the company’s annual report that year, outspoken founder and CEO John Mackey conceded the recession’s toll. “For the first time in 30 years [the chain was founded in 1980], we experienced a decline in our comparable store sales,” Mackey wrote. Average weekly sales per store decreased, too.

In late 2008, Whole Foods sold 17 percent of itself to Green Equity Investors to raise $425 million. The cash would help the company through what Mackey called “these difficult economic times.”

For many consumers, shopping at “Whole Paycheck”—with displays of perfect-but-pricey organic apples and racks of Fiji Water—became an unaffordable luxury.

Mackey further hurt the company. In mid-2007, he acknowledged that for years he’d put up anonymous postings on a Yahoo! financial forum disparaging the management of competitor Wild Oats (which Whole Foods bought that same year). And in 2009, he earned the enmity of many customers by writing an op-ed attack on Obama’s health-care plan in The Wall Street Journal.

Many longtime Whole Foods customers swore they’d take their cloth shopping bags elsewhere, and the Whole Foods website was besieged with calls for a boycott. “Here’s a thought,” wrote Brian Beutler at Talking Points Memo. “If you own a major supermarket chain that caters to a great deal of liberal-minded people with money, don’t rail against the evils of health-care reform in The Wall Street Journal.”

Mackey has been the public face of Whole Foods since its founding, so his acceptance of longtime senior executive Walter Robb as co-CEO in 2010 surprised some observers. There was at least some aspect of reducing Mackey’s role as a lightning rod there, but the decision also grew out of a culture that was and is more groupthink than traditionally hierarchical.

Dating to the 1990s, Whole Foods has had a team of five senior staff that, according to the Austin American-Statesman, has functioned “as a sort of CEO committee, collectively making decisions on strategy, finances and other company matters.” As Mackey put it, “I’ve made a valuable contribution to Whole Foods, but so have thousands of other people. That’s one of our secrets, the fact that we really do have a team approach to the organization, an empowerment approach.”

The hydra-headed Whole Foods is ginning along again. By mid-2010, the economy improved. Whole Foods reported the second quarter was its best in several years, and same-store sales went up. Sales rose 13 percent to $2.1 billion.

But Whole Foods didn’t just sit around waiting for the economy to perk up. Spokeswoman Libba Letton told SUCCESS, “We took action immediately. The first step was to regain some financial control. For instance, we suspended our dividend to shareholders, we instituted a hiring freeze, we asked people to cut out unnecessary travel, and we started to look with extreme scrutiny at expenses across the board—we cut wherever we could.”

In addition, an image makeover reinvented the store as a place for at least relative bargains. Whole Foods promoted sales and money-saving coupons, and called shoppers’ attention to 365 Everyday Value, its store-brand bargain line.

As Marketwatch’s Matt Andrejczak reported, “With a competitive focus on price, Whole Foods is shedding an image of stores teeming with snooty foodies, too expensive for anyone reliant on a weekly paycheck.”

The company also communicated the health value of its natural foods and in 2009 added “healthy eating” as its seventh core value. Whole Foods pledged awards to its 60,000 team members for maintaining good health, as measured by blood pressure and cholesterol numbers. That’s a good thing for a company that pays 100 percent of members’ health-care costs, which helps keep its workplaces happy and union-free.

Whole Foods thrives today, with fourth-quarter 2011 sales of $2.4 billion, up 12 percent from the previous quarter. Sales topped $10 billion for the year, which also saw a 38 percent rise in the stock price. The dividend is back and growing. Some 6,000 jobs were created in 2011.

The company is expanding far beyond the 186 stores it had in 2006. Whole Foods now has 317 stores, including outlets in Canada, England and Scotland. The company hopes to open 24 to 27 stores in fiscal 2012 and another 27 to 32 in 2013.

The company is definitely out of the red zone. “They have purpose and vision,” says Doug Rauch, and that’s significant coming from him—he retired in 2008 as president of fierce competitor Trader Joe’s.


Whole Foods tactics:

• Publicized less-costly products and recipes

• Froze hiring

• Reduced travel

• Promoted products’ health value

 

After Well-Publicized Stumbles, Two Companies Revitalize


The New York Times

In early 2009, The New York Times—approaching deadlines on paying down some of its $1.1 billion debt—borrowed $250 million from Mexican billionaire Carlos Slim Helú. The loan carried a 14 percent interest rate, and the paper had already agreed to borrow $225 million against its new, eco-friendly headquarters in New York and put its share of the Boston Red Sox on the block.

The Times and other printed newspapers have long faced declining advertising revenue as readers moved online. The Times operated the most widely read online newsroom in the world, but readers got the content free.

The newspaper launched digital subscription fees in early 2011, and by the end of the third quarter the paper had 324,000 paying customers, up from 281,000 at the end of the second quarter. The paper also reported a $15.7 million profit (compared to a $4.3 million loss in the third quarter of 2010). Circulation revenue also grew 3.4 percent, although total advertising declined 8.8 percent.

In a sign of returning health, the company repaid Helú’s loan more than three years earlier than expected. The company focused on its core product, which meant selling, for $143 million, its regional newspapers. To boost profitability, The Times raised prices of the Monday to Saturday printed editions by 50 cents.

Full disclosure: The author is a longtime contributor to The New York Times “Automobiles” section and its “Wheels” blog.

 

Netflix

The video service Netflix lost 800,000 subscribers after it decided last June to separate its DVD and streaming customers, effectively raising prices 60 percent. Gone was the $9.99-per-month plan (one DVD at a time and unlimited streaming); to duplicate that level of service would now cost $16.

Netflix claimed it was a good deal, because you could now buy a DVD-only service for $8. “[By] offering our lowest prices ever for unlimited DVD, we hope to provide a great value to our current and future DVD-by-mail members,” the company said in a news release.

Customers disagreed, and CEO Reed Hastings and CFO David Wells were forced to admit in a letter to investors, “Many of our long-term members felt shocked by the pricing changes, and more of them have expressed that by canceling Netflix than we expected.” Netflix recognized its mistakes and soon abandoned plans for a stand-alone Qwikster DVD service. But Netflix also saw its mutually agreeable content deal with Starz fall apart, which is one reason its stock lost 70 percent of its value at the end of last year.

In 2012, the company is at a crossroads. DVD and CD formats are probably doomed in favor of streaming and cloud content, but DVD mailing is where Netflix actually has made money. And Netflix faces increased competition from services as diverse as Time Warner’s HBO Go, Amazon Prime, Hulu Plus, Verizon VZ and Comcast’s XFinity on Demand. Redbox, with more than 50 million rentals a month, is also a big headache.

Netflix admits it is likely to lose money this year but has a strategy for the future by betting on exclusive content. The company will launch three series, including the revival of Arrested Development and an all-new crime comedy set in Norway.

Netflix sees a bright future overseas and has launched streaming services in Canada, Latin America and the Caribbean; it’s also attempting an ambitious expansion into England and Ireland. But it has competition, especially from Amazon’s LoveFilm, which has a plethora of content deals as well as DVD and streaming services.

Netflix hasn’t finished its comeback, but it’s trying mightily to reinvent itself in the rapidly shifting world of home entertainment. So far, it’s working. In late January, Netflix reported adding 610,000 subscribers (to 24.4 million) in the fourth quarter of 2011, nearly bringing the company back to where it was before adopting the disastrous pricing plan. Revenue increased 47 percent, and if profits fell, it’s because Netflix is spending heavily to expand overseas. And the company continues an inexorable march to streaming content.

Post date: 
Mar 12, 2012

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