With the tools from Chapters
29, 30, and 31 from Hoover’s Vision in hand, let’s take a look
at a few of the most important and, I think, interesting industries in the
US and the world today. The thoughts on the following pages are presented
mainly to trigger thinking on your own part – not only about these
industries, but about others as well, including your own.
In each case, we’ll try to
put the industry in some perspective, then look at the ways the key
companies are serving customers – or failing to serve them. And I’ll
speculate a little on where things might go in the future, and where
entrepreneurial thinkers, at big enterprises or small, may find
opportunities.
You can learn a lot by
examining the best and worst industries at work today. As I travel the
world speaking, I attend a lot of conventions. Walking onto the
floor of a trade show can be a great learning experience. You almost
immediately begin to sense whether the industry is locked in the past,
zooming into the future, or (as most are) somewhere in between. Some
industry conventions still feature swimsuited models out of the 1950s
pointing to shiny new products. Others have scannable convention badges
and interactive online demonstrations. Some industries are in the
forefront of change, while others seem stuck in the backwaters of history.
When we look at the weak
industries, we can sometimes learn why they have gone astray and therefore
things to avoid. Most important for an entrepreneur like myself, we can
see unmet customer needs, opportunities for new products or new
enterprises. When we look at the strong industries, we can see how things
are done right. We can find ideas to inspire us in our own industries.
Of course, we could debate
at great length which industry is the best and which is the worst. It is
not a cut-and-dried affair. In the following pages, I give it my best
shot. But the purpose of this discussion is less about picking the best
and worst than it is about how to look at any industry – what to look
for, what are the good signs and what are the bad signs.
My nomination for today’s
best industry, the one that does its job most effectively, is the food and
beverage distribution industry. As you might expect, I define this
industry very broadly, including every business that participates in the
process whereby food travels from the farm, fishery, or factory to the
mouths of hungry people. It includes supermarkets, convenience stores,
candy stores, health food stores, gourmet shops, restaurants, fast food
joints, neighborhood taverns, vending machines, roadside farm stands, and
Starbucks. Add in the huge range of distributors, wholesalers, and other
middlemen that help make it happen, and you have a sense of the diversity
and size of the food distribution industry.
Last year I spoke at the
Texas Restaurant Association convention. I had trouble tearing myself away
from the trade show floor. I’ve never attended a convention that was
more stimulating, more brimming with excitement, new ideas, and new
technologies. Brainstorming with the industry leaders I met there helped
me realize why the food industry is so strong.
First, the industry is
intensely competitive. There are few government regulations except for
health issues, and there are few government protections for the
established competitors. Each participant must start each day anew in his
or her efforts to satisfy customers. None can rest on their laurels.
Second, the
industry is extremely diverse. My dad once owned a couple of tiny grocery
stores in small Indiana towns; forty years later, I had the privilege of
serving on the Board of Whole Foods Market, the Austin-based company that
leads the natural foods grocery industry. From the corner store in the
small Idaho town to Wal-Mart, from the Main Street luncheonette to
McDonald’s, there is room for all. Many of the entrepreneurial
immigrants to the US start out with convenience stores, produce markets,
or small cafes. The next great idea in the food business could come from
anywhere.
The enormous diversity of
the food industry has given us a system that provides literally millions
of choices, at all price points, available at all hours in every corner of
the nation and even the world. Prices are low, efficiency is high. And the
industry’s overall safety, as indicated by the low number of illnesses
and deaths, is amazing given its size and diversity.
At the same time, it is
important to realize that, at least in the US, this is a very mature
industry. The share of our spending that goes to food continues to decline
each year as we get wealthier and wealthier. In 1970, US spending on food
was 32.5% of total retail spending. In 1999, the figure was down to 24.8%,
an enormous shift. If this trend continues, the number will be 15% by
mid-century.
Even more
striking, over time we are moving away from food “at home” –
purchased through stores – to food “away from home” – restaurants
and the like. In 1970, eating and drinking places were 26% of the food
spending. By 1999 they were up to 38.4%, an even more dramatic shift. If
this rate of change continues, Americans will be spending more in bars and
restaurants than they will be in grocery stores within 20 years. While
this means that “food at home” is one of the slowest growing parts of
our economy (under 4% per year), it is still an enormous business. 1999
revenues were $458 billion. The retail grocery business in the Chicago
metropolitan area alone is about 5 times as big as Amazon. For anyone with
a new idea, even the slightest twist on the formula, the upside potential
is huge. And, if your idea is in the “food away from home” area, with
sales of “only” $285 billion but annual growth in excess of 6%, the
upside is substantially greater. Chicago’s foodservice sales are almost
4 times those of Amazon.
Of course consuming food is
not a solely American predilection. The trends mentioned above are
indicative of the other wealthy nations. Beyond those nations, among the
most visible features of the world economy is the pervasiveness of people
selling food to each other. In Bangkok, I watched the woman approach the
main train station with a long stick across her shoulders, a bag hanging
at each end. Where could she be headed? Turned out she was going to plop
down on the lawn in front of the station, pull a wok from one bag and
fresh veggies from the other, and start cooking – for whomever wanted
some good, cheap home-cooking.
Whether it be the fellows
grinding sugar cane in the streets of Mumbai or the teenagers chopping
open fresh coconuts on the street corners of Rio, people are everywhere
and at all levels in the food business. Often in front of the McDonald’s
or under the Coca-Cola sign.
Most of the nations of the
world are well behind the western world on the “food curve” – they
spend a lot more than 24.8% of their “retail spending” on food. While
the percent will come down, as it has in the US, the total dollar volume
spent on food will rise dramatically. And most of that growth will be
“food away from home.” The big fast food empires like McDonald’s
must now look away from the mature US market for their future growth. But
the opportunities around the world are staggering. And they are just as
staggering for other food enterprises of all sizes, both the
well-established and the embryonic.
Within the wealthy nations,
there is still a great deal of opportunity left. While hamburgers may have
run their course (in terms of increasing market share), international
cuisines have only scratched the surface. Today there are only a handful
of Brazilian restaurants in the US. Korean BBQ is still in the early
stages. We may think of Italian food as Northern Italian or Southern
Italian – but if you go to Italy, the food is Florentine or Bolognese of
Venetian. It is unlikely that pizza will remain the only delivered meal in
most US communities. In these dimensions and more, the US restaurant
business has not scratched the surface. On the grocery store front, many
of the world’s great eats – from Amazonian fruits to Japanese seafood
– are not yet widely available in the US.
In addition, Americans are
famous for their snacking. At least I am. Check the sales and profits at
Nabisco and Frito-Lay. And yet our foodservice industry has not yet jumped
into this game. In Spain, you will find Tapas bars selling small bites, in
Italy you will find bars that sell more food than whiskey. Such concepts
have huge potential when it makes it to the US.
Whether taking the
best of Europe and the Americas to the people of the world, or taking the
best from around the world to the people of the “first world,” the
food distribution industry has a stunning future, beginning from an
admirable base. Would your enterprise be able to compete in such a
competitive and innovative world?
If the food distribution
business is the best industry in America today, which industry is the
worst? In my opinion,
furthest behind the curve is the consumer banking industry. Let’s look
at why.
Lack of customer focus.
There is little evidence that traditional bankers really care about
individual customers. I was talking to a friend in the banking industry,
and I referred to the enormous business potential of consumer banking. He
didn’t understand what I was getting at. I said, “You know, car loans,
home loans.” My friend responded, “Oh, you mean originations.” My
mind was on customers, but his mind was on managing a loan portfolio,
yield spreads, and selling tranches of loans to other companies.
Of course, these technical
things matter. Wal-Mart excels in such technical matters as deciding where
to build warehouses and what type of accounting systems to use. But they
never forget that the technologies exist to support some person standing
in line waiting to pay for underwear. By contrast, most bankers have
become far removed from the reality of the customer.
Dearth of innovation.
With the single exception of the ATM, banking is one of the few industries
that has scarcely changed (from the customers’ side) in the past thirty
years. The experience of walking into a bank and handling a routine
transaction is exactly the same as it was in 1969 when I spent a summer as
a teller. Back office technology has changed, but not the banking we see
from the front of the counter.
If you’re a banker, you
may disagree with this point. You may believe that banking has changed
dramatically in the past thirty years. But if you’d spent your life
working in the movie industry or the semiconductor industry or even the
car industry, you’d have a better idea of what real change feels like.
Size for the sake of
size. The banking industry is obsessed with big mergers, few of which
even pretend to promise better customer service. The only change most
customers experience as a result of these mergers is that we have gone
from being merely a number to being merely a number, but with more digits
in it.
The giant banks have swollen
well beyond any conceivable economies of scale. When a multibillion-dollar
bank merges with another multibillion-dollar bank, the only real saving
they experience is that they have one overpaid management team rather than
two. The worst symptoms of elephantiasis have long since set in, like
those automated telephone systems: “If you are a former customer of
National Bank, press 1. If you are a former customer of First Bank, press
2. If you would like to speak to a human being, you have the wrong
bank.”
Weak branding.
Exactly what is the difference, to the average consumer, between Bank of
America and Wells Fargo, between Bank One and Comerica? Industry
“leaders” invested millions in creating and building the NationsBank
brand and then just flushed it away.
Citibank appears to be the
only bank that is truly committed to building a brand. They are expanding
their global network of ATMs (readily identifiable by their blue signs)
and doggedly pursuing the individual consumer with a strongly unified
identity. Beyond Citibank, there is a near-total lack of serious brand
building and differentiation among the major banks.
Note that many of the same
indicators are equally grim for other financial service companies,
including the big insurance companies and stockbrokers. In no industry is
“me-tooism” more prevalent. Television is littered with
financial-industry ads that say, in effect, “We are the place you should
come to because we are the place you should come to.” There are
exceptions: Charles Schwab comes to mind. But don’t hold your breath
waiting for real differentiation or innovation to sweep the industry. Many
of us have been waiting for decades.
Having laid down this
indictment of the financial services industry, look at the other side –
the opportunity. Financial services is already one of the largest
industries in the wealthier nations of the world. As the baby boom ages
and retires, the industry will only grow bigger. In the middle-income and
poorer nations, the demand for basic financial services like checking
accounts will skyrocket in the coming decades, followed by demand for more
sophisticated services. Today’s car loan customer is tomorrow’s mutual
fund buyer. The use by many countries of privatized “social security”
systems will only add to the demand.
One of the few recently
announced acquisitions in banking that makes sense to me is Citibank’s
move to become one of the top bankers in Mexico by acquiring Banacci. On a
global basis, consumer financial services is a highly promising,
still-embryonic industry.
While government regulations have historically limited the
financial services banks can offer, those regs are gradually dying off.
Alert industry leaders are now preparing to compete in the entire arena of
financial services, at home and abroad. But at the same time, they should
learn an important lesson from retailing. Most markets can support only a
few department stores, but many specialty stores. While Wal-Mart and
K-Mart are duking it out for leadership in the general-merchandise
category, you may prefer to be Home Depot or Office Max or even Dave’s
Bridal Shop. In the same way, most of the companies that will profit from
the global rise of financial services will be specialists.
Today the most interesting
companies in the industry include a “small-town broker” (Edward
Jones), an innovative auto insurer (Progressive), two companies that began
by serving government employees (USAA and Geico), two independent
information providers (Morningstar and—ahem! – Hoover’s), and two
bold innovators (Charles Schwab and Vanguard).
Most of the companies today
being built as “financial supermarkets” will not stand the test of
time. The few that do survive and prosper will be characterized by
customer-centered innovation, powerful branding, and merging only when the
payoff goes beyond cost reductions.
I believe today’s
financial-industry environment, with the lack of leadership on the part of
the biggest companies, offers tremendous opportunities for new entrants
and smaller competitors. It’s a great time for all types of outsiders,
including specialized niche service providers, new companies from abroad,
and ambitious local banks, brokers, and insurers. These types of companies
can enter the market with a clean slate and flexibility.
For example, HSBC (formerly
Hong Kong and Shanghai Banking) is forging a global brand, unburdened by
the baggage and negative traditions of the big US competitors. Specialty
companies like Edward Jones, Morningstar, and Progressive can grow in the
direction of their choice.
Meanwhile, most of the innovation is coming from local banks. Vernon
Hill’s Commerce Bank (Commerce Bancorp) of Cherry Hill, New Jersey,
keeps its branches open seven days a week and models its business on
successful retail chains. It acts like a service company that cares. When
the Wall Street Journal ran a cover story on Commerce in May 2000, the
bank had assets of $ 7 billion. Its stock and deposit growth were among
the highest in US banking. Even so, in this era of giants, they were not
even among the top four banks in their home state of New Jersey. But today
the company is up to $8 billion in assets, and still growing. With its
positioning line of “America’s Most Convenient Bank,” this is a much
more promising enterprise than the giants which make headlines with giant
deals.
Alabama-based Compass Bank is aggressively investing in convenient local
bricks-and-mortar branches when others are not, especially in fast-growing
areas (they must be studying their geography!). Both Compass and Commerce
use technology aggressively, but they use it in addition to personal
service, not in place of service.
I believe
that most of the so-called industry leaders in financial services are in
the same position today that Sears, AT&T, and GM were in 30 years ago
– or the headline-making Continental Airlines of 15 years ago – they
have nowhere to go but down. For more agile and alert competitors, nothing
beats being in a boom industry with weak leadership. If you ran a bank,
would you follow the big firms like a lemming, or would you pioneer a new
concept like Commerce Bank?
