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Essays, Opinion, & Commentary |
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October 24, 2007
by Gary North, Ph.D.
The brand will bump along for a while longer. It may even recover its lost profitability. But it is now owned by Whirlpool, which bought the Maytag company in 2006 for $1.7 billion. The show interviewed workers who had been with the company their entire adult lives. Their careers are over. They will soon be facing the harsh realities of a retirement based on fixed incomes and rising prices. What I found of much greater interest was this testimony from a more recent employee.
Here is a company that truly had things together for almost a hundred years. Yet in five years, it self-destructed. How? By cutting corners. Of all American companies, Maytag's management should never have cut corners.
In just five years, Maytag's senior managers squandered the company's reputation. There is a lesson here. MY MAYTAG EXPERIENCE Early in our marriage, in 1976, my wife bought a used Maytag for (I recall), $125. That was $460 in today's money. We moved that machine from Northern Virginia to North Carolina in 1977. From there, we moved to Texas in 1980. We still had that machine when we moved to Arkansas in 1998. It needed just three repairs in those 21 years, all minor. The paint had eroded off the settings dial, but the machine still worked fine. We left it behind when we moved to Arkansas in 2005. It still worked fine. We brought our back-up Maytag with us, bought used in 1998 for $200. It also works fine. That was Maytag's reputation. It was reinforced by one of the most effective ad campaigns in television history: the lonely Maytag repairman. The famous Maytag repairman was veteran character actor Jesse White. White had a widely recognized face, but only movie buffs (or Stan Freberg skit buffs) knew who he was. His face was almost timeless, from Harvey (1950) to the Maytag repairman job. He held the position from 1967 to 1988. He was not the first Maytag repairman, but he is the one my generation remembers -- and the generation that followed. Then, sometime around 2000, things began to slide. The Web spread the word: Maytag's Neptune front-loading washer was a stinker -- literally. The following story was posted in 2005. It is still on-line.
The short-sighted managers who ran the company thought that a bland public relations statement on its Website, which affirmed the good old days, would overcome the company's collapsing product quality, announced widely on the Web. A year later, the company was bought out. Here is a classic case of a deliberate violation of a USP: unique selling proposition. A unique selling proposition is that unique and original benefit that a product offers to consumers. If it can be encapsulated in a slogan, it becomes a cash cow. A famous USP is "Melts in your mouth, not in your hand." I don't have to identify the product, do I? Maytag's USP was reliability. It built its TV campaign around this theme from 1967 to 2007. But senior management decided to cut corners to save a few bucks. They allowed units to leave the factory that had major problems. They did this in the era of the Web. They did not perceive that a true revolution had taken place, 1996 to 2000. They did not perceive that the Web would allow bad news to circulate by word of mouse. They did not perceive that disappointed buyers now had a way to get out the message. The message was clear: Maytag had abandoned reliability -- its unique selling proposition. The speed of consumer retaliation was very fast. As the former employee said, "We was working 24/7 at the first plant I worked in. And we couldn't put out enough product. Life was good. Four or five years ago things were really good with the company. And when things started going down, they really spiraled." In a very brief period, the company became unprofitable. Whirlpool moved in to take advantage of the crisis. Whirlpool's management believes that the Maytag brand can be restored. This is a huge gamble. Once lost, a USP is very difficult to restore. CONSUMERS RUN THE SHOW The idea that a great ad campaign can create a silk purse out of a sow's ear is quite popular in tenured, market-immune academia, but sellers know better. Maytag's ads proclaimed the same old story after 2000, but consumers were not fooled. They walked away from the brand by the millions. Another classic case of consumers' absolute control over the profitability of a company is Schlitz beer. It was a mainstay of the beer industry three decades ago. It was second in market share only to Bud. It tried to save a few percentage points with a new, improved formula -- improved for the accounting department. David Aaker, a professor of marketing at Berkeley, describes what happened.
In 1982, Stroh's Beer bought out Schlitz. It had taken Shlitz's management less than a decade to destroy the company. "You only go around once in life," a famous Schlitz commercial had proclaimed. This turned out to be true. In 1999, Stroh's went out of the beer business after 150 years. It sold Schlitz to Pabst. Hardly anyone noticed. If there is a rule that must not be violated it is quality control. It is better to hike the price than reduce quality. Why? Because of brand loyalty. The secret of success is repeat sales. This of course is far more true of beer than washing machines. Repeat business is everything. The existing client base must be courted. Word of mouth starts with this base. Put the consumers' loyalty to the test for the sake of a few percentage points' profit, and you risk the survival of the company. The loyal brand users return because the product meets their tastes and is predictable. Call into question this predictability, and you risk everything. RECESSIONS AND COSTS The great temptation of recessions is to cut costs by cutting quality. Profits fall, sales fall, and advertising doesn't compensate for the decline. Word goes down the chain of command: "Cut costs!" The command is obeyed. Schlitz took the plunge with its new formula in 1974, just as a recession was beginning. Managers refused to understand that the immediate fall in sales and profits was due mainly to the shift in brand loyalty. They thought it was due to the recession. By the time the recession ended in 1976, the damage had been done. The company sold to Stroh's in the middle of the next recession. The same thing happened to Maytag. It cut quality just as the recession began or immediately before. The fall in profits could be blamed on the recession of 2001. By the time the recession ended and the economy clearly was reviving, the company had established its new reputation: poor quality. Its USP was finished. This practice is common. In January, 2003, I wrote an article about the lost vision at Dell Computer. I related the story of my experience with tech support, which Dell had moved to India. It was not a pleasant experience. The following November, Dell cancelled its contract with its Indian tech support firm. This got a lot of bad publicity. But Dell did not move customer support out of India. It just switched companies in India. The complaints are still coming from disgruntled buyers. As for Dell's share price, it is a bit less than half of what it was at the peak of the dot-com bubble in March, 2000. The company is unlikely ever to shake off its reputation for poor service. It gained this reputation years ago. Management seems to have factored consumer dissatisfaction into its business model. The share price reflects this. The company made its decision to shift its customer support center to India in October, 2000, a few months before the 2001 recession began. Its share price by then had collapsed by two-thirds. Management was pressured by this to find ways to restore the company's fortunes. The move to India came just as the 2001 recession hit. Cost-cutting was on the front burner. The result has been what seems to be a permanent set-back for the company. I found no mention on the Web of a stock split since 2001, which would have lowered the price without lowering total capital gains to investors. There had been four splits in five years, 1992-97. THE CASE FOR CASH The time to make gains in market share is during a recession. The competition is scared. Revenue is falling. Plans are being re-thought. The advertising budgets are cut because increases in the budget do not gain increases in profitability. When the competition moves into self-defense mode, an innovative firm with cash reserves can use advertising to increase its market share. This produces initial losses. Ad costs are not matched by rising revenues. But buyers will be attracted to the brand when they see the ads. In recessions, people keep buying. They just don't buy the same things as in booms. There is a shift from products that are desired when income is high to staples. Discretionary income shrinks. At this point, companies that sell high-end niche products to wealthy people have a great advantage over companies that sell price-competitive, mass-produced items at Wal-Mart. People do cut back, though not as rapidly as their income falls. They borrow to keep spending. Their tastes do not change as fast as their income does. In this shift from confident spending to cautious spending, the entrepreneur can make his move. He can secure a new customer at the expense of a competitor who did not see the signs of the recession. MISES SHOWED THE WAY When central bank monetary expansion ends, followed by slower growth in the monetary base, the economy slows. This is Ludwig von Mises' insight in his theory of debased money. I have written a chapter on his theory of the boom-bust cycle. We are now well into the disinflation stage on the cycle. Corporate managers who understand Mises should by now have moved from aggressive marketing to capital accumulation. Now is a good time to build cash, whether you are a corporate manager or an individual. The goal here is to have reserves when the fire sales begin. This will not take long. The setback has hit residential real estate. This has only just begun. If your employer has been in cash-building mode for the last six months, this is a good sign. You would be wise to take the signs of recession seriously. CONCLUSION There are no free lunches. There are no free booms. Booms are followed by busts. In good times, prepare for bad times. Lay up reserves. In bad times, the grasshoppers who sang "The world owes me a living" all summer start selling their banjos for food. If you're in the banjo business, you will get some great deals on inventory. Dr. Gary North earned a Ph.D. in history and is one of America's keenest economic analysts and commentators. He supports the Austrian school of economics and is a previous assistant to libertarian congressman Dr. Ron Paul. Visit his website at http://garynorth.com. To subscribe to Gary North's Reality Check go to http://www.dailyreckoning.com/sub/GetReality.cfm If you enjoyed this essay and would like to read more of Gary's writing please visit his website at http://www.garynorth.com or http://www.freebooks.com
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Enrich your life with a book about politics and current events...
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On
the October 21 edition of the CBS news show,
"Sunday Morning," there was
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