July 24, 2012
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Good morning.
Thanks to all of you for coming out for this conversation, especially at this early hour.
I've had a chance to spend time with RILA's leadership: Sandy Kennedy, Casey Chroust, and many of you here today.
It's been great talking to all of you over the last few days.
And those conversations only reinforced the reason we used Professor Rubik's cube to open this presentation.
As the reactions from the video show what makes solving a Rubik's cube so difficult is the interdependence of all six sides.
Just like business in a changing economy, your brilliant solution in one part of the puzzle can completely undo your success in another.
Some companies are frozen by the complexity of the challenge this economy poses.
Some frantically try multiple solutions, hoping that one works.
Others take short cuts that have the appearance of a solution, but those shortcuts often create more problems than they solve.
Some companies keep their heads down and simply plow ahead, continuing to do what they have always been doing, hoping that the solution will just materialize.
As we pass through one of the most uncertain times in the history of commerce, we've seen all of those reactions.
No business has escaped this punishing economy.
And few sectors have felt the pain of this economic downturn more than retail, which depends so directly on consumers - consumers whose mood is uncertain and whose confidence is damaged.
At UPS, we have a special interest in retail's well-being.
Why?
Because, at this very moment, 6% of U.S. GDP and 2% of global GDP is moving around the world in our network. And retail represents the largest single percentage of that volume.
So when I say, "We feel your pain."
Trust me; we really do feel your pain!
I was the CFO of UPS during the period from 2005 to 2007 BC.
BC to us simply means Before Collapse.
We now have a special name for that retail period.
We call it "The good old days!"
House-rich and free-spending consumers generated great cash flow and solid growth, which combined with cheap money to create larger and more powerful retail players
In 2008 I became CEO of UPS.
I've often been complimented on my timing.
In 2008 and 2009 AD, which means After Defaults, just about every business came face to face with unimaginable economic challenges, and for many businesses, the unthinkable became real.
Many companies were on their financial knees. Others went bankrupt.
The question now is: what happens in 2010 and beyond?
We're all hungry for good news.
And even though we're still defining better as "less bad" the indicators are clearly going in the right direction.
I believe the recession is over.
But for tens of millions whose lives were disrupted, saying the recession is over is like saying Katrina was over when the rain stopped.
We still have a long way to go and it will be many years before companies return to their pre-recession performance.
As I look at the results of the last few years, I see three kinds of companies:
Some didn't make it.
Some were so badly damaged financially, that survival is still a question.
But others not only survived, they are positioned to grow.
Let's talk about what made the difference by examining two questions.
First, why did so many companies fail?
And second, how do companies win?
I want to discuss what exceptional companies are doing to not only survive, but to thrive.
I want to talk about both questions today.
But that discussion requires some context. Let's look at how the economic winds are blowing.
Some economic projections are cause for confidence, others are cause for concern.
And frankly, a few make you want to bury your money in the back yard.
So I'd like to add your opinion to the mix.
I'm curious to hear the perspective of supply chain leaders for businesses that are so important to our country's economic direction.
I'll pose a question on the slide.
You answer using the audience response button.
Then we'll look at how your thoughts match up with what the economists are saying.
First question ...
How much will U.S. GDP improve in 2010?
1) 0 to 2%
2) 2 to 4%
3) 4 to 6%
[Recap audience results]
Next question...
Maybe the most important question to you is, how will your company's revenue fare in 2010?
Will it be ...
1) Negative
2) Flat
3) In line with GDP growth (2-3%)
4) Beat GDP growth (3% or more)
[Recap audience results]
Next question...
Which of the following countries will grow as fast - or faster than - the U.S. in 2010?
1) Canada
2) Mexico
3) Australia
4) Chile
[Recap audience results]
So, what does all of that mean?
Economists tend to follow the laws of physics.
For every opinion, there's an equal and opposite opinion.
But while the numbers vary, the trends are all going in the same direction.
And it looks like you agree.
The good news... Armageddon seems to be off the table.
With that economic perspective, let's go back to the question I posed at the beginning of my presentation ... why did so many companies fail during the last few years?
Many good companies, and many great brands, didn't survive the past three years.
With the clarity of 20/20 hindsight, and without judgment, let's take a look at some of the published theories on what went wrong with some of the failed companies.
Certainly, every story of a failed company has a unique combination of factors.
But you could preface virtually every one of them with the words "When consumers stopped buying..."
That was the catalyst.
A free-spending consumer covers a lot of problems.
When the music of the cash registers stopped, we found out who didn't have a chair.
In my view, there are several explanations of why some companies failed:
For some, it was simply a matter of too much debt combined with not enough revenue.
For example, a leveraged buyout left KB Toys with a huge debt load. That made it difficult to expand, and to compete with the price and selection of the big box retailers.
Linens n' Things had a similar debt problem. When buyers disappeared, it was unable to complete a major overhaul of its merchandising.
Another explanation for the failures:
In the rush to expand, some companies lost their brand connection.
For years, shoppers saw a visit to Filene's basement in downtown Boston as a shopping adventure. They could go underground and sort through piles of goods to find great bargains on high-quality merchandise.
But rapid expansion led to mistakes.
They made an unsuccessful entry into private label offerings. And they moved into cities where consumers weren't familiar with their name ...and didn't relate to the adventure.
So this place that had a special meaning for consumers - a special brand if you will - became just another outlet competing on price.
Other companies that failed were victims of changing consumption.
Very few people - me included - could walk past a Sharper Image store at the mall, and not go in to check out what's new.
But then the downturn hit, and consumers cut back on things they might have wanted but could live without.
Clearly, that created a bad situation for a company that sells high-end, non-essentials.
Finally, some companies failed for a pretty simple reason: too little credit.
Somewhere along the way, the rules of the game changed.
As the economic winds shifted, nervous suppliers began to change credit terms.
They became more stringent, and some of the weaker banks started shutting off credit altogether and calling in loans.
This created a severe credit crunch, which resulted in uncertainty for many retailers, and spelled the demise of many others.
All of those companies illustrate some of the reasons companies fail.
But no company represents the highs and lows of retailing better than Circuit City.
The company was a classic success story.
It went from a small storefront in Richmond, Virginia in 1949 to the largest retailer of brand name electronics.
Circuit City pioneered the warehouse-style showroom concept.
It expanded in cities across the country and had an average annual stock price gain of over 50% in the decade after going public in 1983.
Jim Collins even featured it in his best-seller, Good to Great.
But then it encountered a "perfect storm" of problems.
Circuit City went from good to great ...to gone.
Why?
Even company insiders have been very candid about what went wrong.
There were a number of factors.
First and most important, they were slow to see Best Buy as a formidable threat.
They had too many stores in older, less attractive locations, assuming that consumers wouldn't care.
Best Buy was opening in newer and growing parts of town.
Second, Circuit City felt that market saturation would eventually limit growth, so they diversified into far-reaching areas, such as:
Analysts say those experiments caused them to take their eyes off the core business.
Finally, they were slow to get into video games and software, which is a high-traffic, loyalty-building segment that Best Buy was able to own.
When they did get into games and software, they dropped appliances, losing revenue and older customers that they never replaced.
The rest is a very sad history that ended in Circuit City finally closing its stores for good.
Alan Wurtzel, the son of the founder and CEO from 1972 to 1986, summed it up this way...
"At some point along the way, we were too focused on making a profit short-term... rather than building value for customers long-term."
I think this slide sums up the reasons that many companies have failed over the past three years.
These factors dramatically changed the retail field of play.
And as a result, the field is a lot less crowded.
There's a really old joke about two men being chased by a bear.
One says...
"We're dead - we'll never outrun a bear."
The other says...
"I only have to outrun you."
Ok... maybe it's a really, really old joke. But it makes a point.
Natural selection is at work here.
One amazing and sobering fact comes from the International Council of Shopping Centers.
In the last two years alone, there were nearly 12,000 retail store closings... 12,000!
And what are the financial consequences of these closings?
Deutsche Bank analyst Bill Dreher estimates that closed or out-of-business retailers account for about $21 billion in annual sales.
I've seen other estimates as high as $30 billion.
The good news – when the consumer comes back, so will a good portion of those sales.
That can only mean very good things for those who outran the bear.
But enough with the doom and gloom.
Let's turn our focus to the future and look at the second question ... How do companies win?
What's it going to take for companies to make that critical transition from surviving to thriving?
Every industry and business will confront the coming months in its own way.
I'll share my thoughts with you as someone who leads a company that depends on the growth and well-being of retail, and makes its living facilitating the flow of global commerce.
I think there are four factors that must be part of the game-winning strategy for any retail company.
Like the sides on a Rubik's cube, each of these factors is unique, but each impacts the others.
First, every company must create clear value.
And as you know, value is what the customer says it is, not what you think it is.
Value in the eye of the consumer is the only thing between a company and the curse of commoditization.
There is only one defense to commoditization: create value, as your customer defines it, and then be prepared to constantly redefine what value means to your customers.
A recent Yankelovich report said we all compete in the Inside Out Economy, where marketers take direction, and control belongs to the consumer.
That shift of power from the inside out is why we buy single songs on iTunes rather than buying a CD full of other songs we don't like.
It's why we can go to Nike's website and design the exact pair of shoes we want, right down to the style, color, width and size.
It's why, online, we can personalize M & Ms or design a BMW - and change our mind six days before production.
Value is the performance of the product and everything around it, especially convenience.
That's why UPS is investing a lot of time and money in reverse logistics.
I know that marketers look at reverse logistics and see creating value, and supply chain leaders will look at it and see increased costs.
Either way, the customers not only want it, they increasingly expect it.
We see our job as taking complexity out of the return process for both our customer and the consumer.
And today, this shift in control is why we've all had to pivot – from feeding an insatiable appetite for consumption, to aligning with buyers who are more conservative in their spending and more frugal in their saving.
In all key respects, creating customer value is critical. It's the consumers' world. We just work here.
Second, winning companies will successfully balance bricks and bytes.
We've all been talking about digital commerce for well over a decade now.
And many companies are still working to get it right.
We don't know the exact balance of conventional and digital strategies that will be needed to drive growth.
The challenge is framed by what IDC Retail calls "the omni-channel" shopper.
These are buyers who don't have a preferred way to shop – they use all channels simultaneously.
It might be a day-long shopping trip or a quick jump online to meet a specific need.
More consumers are making their decisions on the move and using an array of mobile technologies.
Mobile is becoming increasingly important to UPS.
For instance, applications are now available to allow customers to ship and track packages around the world - anywhere, anytime.
Of course what mobile gives, it also takes away.
Just as it drives people into the store, it can also drive them out.
Either way it is a seismic shift in consumer behavior and buying habits,
and it is growing faster than most of us ever imagined.
The winners in the growing economy will find creative ways to keep pace with these trends.
Third, winning companies will have a relentless focus on efficiency.
I don't have to spend a lot of time with this audience on the subject of tight margins.
For all businesses, cost pressures are everywhere, and the days of easy price increases are long gone.
And those pressures will continue to grow.
The last two holiday seasons, for example, showed very clearly the importance of tight inventory management.
The retail trade magazines are saying that for all the bad things this recession has brought, one of the good things is a new awareness of the importance of supply chain excellence.
At UPS, we've been talking for a long time about a concept called "time-in-trade," which means that each component in a value chain arrives at the right place at the right time, at the right cost, anywhere in the world.
If you can gain a single day in the supply chain, then you have gained a direct and measurable competitive advantage over another supply chain that has wasted that day.
You are the most important leaders in creating that advantage for your companies.
You have shown the world what supply chain efficiency means and what it can do.
And the impact is still evolving.
The final factor for winning companies: They will be able to capitalize on international opportunity.
Much of the retail industry is learning about international expansion, a test that UPS faced in the 70s and 80s.
The path to seizing international opportunities comes with costs, setbacks, slow progress, and oftentimes frustration.
Many retailers are well into the process of going global.
And with a weak U.S. consumer, more are following.
Consider the numbers.
Some 95% of all consumers and 70% of all retail sales are outside the U.S.
In reality, many countries' retail sales are growing much faster than the U.S., as I mentioned earlier.
The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.15 billion in 2030.
This growing middle class is hungry to make discretionary purchases and is driving market trends in every developing country.
We've become used to talking about the new global consumers in Brazil, Russia, India and China.
But coming behind the BRIC countries are Vietnam, Bangladesh, Egypt and others that Goldman Sachs has defined as the Next Eleven, or "N-11", countries.
They will all increase the momentum of global trade.
In ten years, I expect that the business model for any major retailer will combine big developed markets with small developing markets - creating a balance that helps generate returns and manage risk around the world.
The companies that win, the companies that really thrive in the coming years, will capitalize on these four key factors.
In closing, we've passed the collapse, we're into the recovery.
Full recovery will take time.
And the trajectory will be uneven.
The scenario is much like two concepts often used in engineering: "Tame problems" and "wicked problems."
Tame problems are complex.
But you can solve them with standard analysis and proven methods.
Wicked problems are different.
Like the Rubik's cube, they are difficult to solve because they have contradictory and changing demands based on incomplete and changing information.
Solutions are interdependent.
Progress in one area can cause setbacks in others.
We are still in the grips of a wicked problem of historic proportions.
The companies that win will be those that
... understand value
... balance conventional and digital business
... drive efficiency
... and think globally.
They will learn, adjust, and evolve as the markets dictate.
The companies that can solve the Rubik's cube - the challenges this economy presents – will THRIVE!
Those are the companies that will win!
Now I'd be happy to take your questions.
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