Lululemon Athletica, More Than Sportswear

lululemon-Vancouver

A healthy lifestyle, which includes eating right and working out, is becoming more and more needed as well as advertised in today’s society. This boom of working out has frequently impacted people’s health, along with athletic wear. Popular athletic apparel companies such as Nike, Under Armor, and Adidas have been the go-to products for comfortable, stylish, clothing to workout in. However, there is a unique athletic apparel company making an impact on consumers in new ways than just style. Lululemon Athletica is a billion dollar company that has established its brand as a top yoga apparel wear and is also influencing the industry in a positive way.

An Established Brand

Lululemon Athletica , also known as LULU, is yoga-inspired apparel which also includes running, dancing, and other athletic pursuits. Its mission statement is creating components for people to live longer, healthier, fun lives. Lululemon’s primary target customer is sophisticated and educated women who understand the importance of an active, healthy lifestyle. They have recently expanded in men’s and youth apparel. LULU creates the athletic clothing to offer performance, fit and comfort while incorporating both function and style. According to Hoovers, it operates some 250 company-owned stores primarily located in North America. The popularity and expansion of its clothing is making the company a competitor in the sportswear industry.

The Canadian company was founded in 1998 by Chip Wilson and the first retail store opened in November of 2000, by the beach area of Vancouver BC called Kitsilano. The distinctive name was voted in a survey of a 100 people and includes a logo which is a stylizing “A” that represent the first letter in the name “athletically hip,” one of the names that was up against Lululemon.

According to LULU’s website, the main idea of the first store was for it to be a community hub where people could learn and discuss the physical aspects of healthy living from yoga and diet to running and cycling as well as the mental aspects of living a powerful life of possibilities. However, the popularity of the store grew, making it too busy for employees to help the customers with this concept. This was the determining factor that the company needed to grow.

The Revenue and Expansion

As of February 2015, there are 211 stores in the United States, 57 stores in Canada, 26 stores in Australia, and five in New Zealand. This year Lululemon opened its first store in the United Kingdom and one in Singapore. The company plans on expanding more stores in the UK and Singapore along with opening new ones in Germany and Asia. About 95% of Lululemon’s revenues came from North America in fiscal 2014, which is about $1.5 billion. As the company expands in Europe and Asia the international revenue will begin to climb.

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Lululemon has grown rapidly since its creation in 1998. The growth has influenced expansions for more stores in North America along with global expansion. According to its annual report, the net revenue has increased from $40.7 million in fiscal 2004 to $1.8 billion in fiscal 2014. Also in 2014, the company had an annual growth rate of 13%. Increasing from $1.6 billion in fiscal 2013 to $1.8 billion in fiscal 2014. The net revenue was $1, 797,213 billion in February of 2015.

The apparel company is definitely affected by seasonal trends and receives the most profit during its fourth quarter, which are from the strong sales during the holiday season. However, operating expenses are more equally distributed throughout the year. With this being the case, Lululemon’s substantial portion of its operating profits are generated in the fourth quarter of its fiscal year. For example, during the fourth quarter of the 2014 fiscal year, they generated approximately 42%, 39%, and 41% of its full year operating profit, making holiday shopping an important factor in its overall revenue.

Marketing a Community

The marketing structure of Lululemon is very unique. Mentioned earlier, their number one target is adult women who pursue exercise to achieve physical fitness and inner peace. Over the last couple years the company has designed clothing for men and athletic female youth who also exercise to achieve the same goals. The increase of the Baby Boomer generation seeking more longevity should also help lead to longer-term growth in the athletic participation. The company believes their consumers’ needs are driven by desire of a functional product and the wanting to create a particular lifestyle. Thus, Lululemon trusts their authentic brand is more than just for athletes, but for people who want to lead an active, healthy, and balanced life.

The community in which Lululemon operates in is an important factor for their business. The core of its marketing approach is very community-based and store-centric. LULU has no marketing team and is against advertising, very rarely will you see the brand in a commercial. The company wants to build loyalty and by doing this it creates local initiatives like its ambassador program. The ambassador program is evolved of 1,500 people and extends to unique individuals in store communities who provide the characteristics of the company. As other sportswear companies use star-athlete endorsements, Lululemon relies on the ambassador program in the same way. World-class athletes are a part of the program as well, such as cyclist Ryan Leech and 25 other Olympians. All ambassadors communicate with each other and the stores through an online forum. Social media is also another initiative that allows the company to market its brand.

There are three main channels in which the products reach customers. Corporate-owned retail stores, direct-to-consumer sales, which includes online sales, and wholesales. 80% of sales come from company-owned stores while 15% account from online sales and wholesales bring in the rest.

Lululemon’s mission is to provide technically advanced fabrics with a design team who works closely with their suppliers to incorporate innovative fabrics that create the particular product. Some of these product include shirts, tank tops, sports bras, spandex, long tights, leggings, and head bands.

LULU and Competitors  

The sportswear industry is definitely a competitive market. Lululemon competes against many large competitors with powerful worldwide brand recognition that also target women, such as Nike, Inc., Adidas, The Gap, Inc., and Under Armor, Inc. They also compete with other apparel sellers because of the uneven nature of the sports apparel industry. Many of the competitors have advantages because of their longer operating history, larger and broader customer bases, greater brand recognition, and other resources.

Competitors use traditional ways of advertising that are faster than Lululemon, which creates more sales for the competitive companies. This is a down side for LULU. In addition, the company does not own a patent or exclusive intellectual property rights for its products, which makes it easier for its competitors to sell products that have similar styles to LULU’s merchandises.

However, according to Lululemon’s annual report, the company is more profitable than its peers. The company’s retail-oriented model is a factor in the advantage, compared to other athletic goods sellers like Nike, Under Armor, Adidas, and VF Corporation. Sales are very marginal, products sell either through retail outlets or through its websites and phone sales.

Here is a graph that compares Lululemon Athletica with its peers:

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The information provide from the graph shows that LULU has mostly outperformed its peers based on price-to-earnings ratios, except for Nike.

 

 

 

 

 

 

A Happy Work Environment

Working at Lululemon is a distinctive experience compared to other sportswear companies. The goal of the company is to train its people so well that they could in fact positively influence their families, communities and the people walking into its stores.

An employee for Lululemon named Jade Grace went into detail about how the company and its work atmosphere are positive and different from normal retail stores. “Lululemon sets you up to follow your own passion and not necessarily the passion and goals of the company,” Grace said, “They encourage you to follow your own goals and what you want and are looking for in life. No other company does that.”

Grace also went into detail about how in the corporate world LULU has the highest fire and hire turnover rate because so many people are following their own passion. They get the opportunity to be part of a corporate business and then apply that to whatever life adventure they wanted to actually go on. “The company really encourages you to follow your own dreams and not theirs,” Grace said, “In return there is loyalty and compassion the employee will have for the company.”

She also believes attention to small detail is what sets them apart from other big sportswear companies. They always want customer feedback and will actually make changes to its products to make customers happy. It gives freedom and comfort to consumers who wear the clothing. LULU listens to what people want and creates better versions of a product instead of just coming up with an idea that consumers may want.

Positive vibes are constantly promoted throughout the store for consumers and employees. “Lulu believes that happiness is a choice,” Grace Said, “they believe people who chose to be happy are going to be happy.”

Continuing to Grow

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The popularity and demand of Lululemon is forcing the company to make changes and expand. One revenue driver that the company is hoping to rely on in the future is Ivivva, a dance-inspired brand for young girls that was launched in 2009. These stores have increased aggressively and is a key growth driver for the company going forward.

LULU has had a tremendous impact on the US market and will continue to expand. Sales have increased in US stores because of improving labor market and lower energy prices. IN 2017, the company plans on opening 20 new stores in Europe and Asia.

However, as the rapid pace of growing continues, it could be a risk for the company. They may not be able to adapt to the demand and constant complexity of the business. If this were to happen, LULU may result in a loss of market share and a decrease in net revenue and profitability.

Lululemon heavily relies on its brand and the reputation and value it expresses. Though expanding may produce risks that can affect the company, the brand of LULU is what keeps it strong and moving forward in the competitive market. It wants to remain a positive influence in athletics and have an impact on people by being more than just athletic wear, but a way of living.

The Movie Theater Industry isn’t Dying, it’s Evolving

AMC Downtown DisneyThe American movie theater business is in a state of flux. Theaters are scrambling to come up with fresh ideas and marketing strategies aimed at attracting more people to their establishments. Digital technologies like 3D and IMAX formats have pushed theaters to increase ticket prices over much of the last decade. Finally, the growing popularity of streaming services, like Netflix and Amazon Prime, have given people across the country easier access to entertainment. Before the advent of new and emerging entertainment platforms, movie theaters provided many people with an escape from reality. Today, it remains questionable whether the industry has the same influence it once had over the entertainment world. Major chains like Regal Cinemas and AMC now face the challenge of updating their business plans and reminding the public why the movie theater experience is not going anywhere.

The Old vs. New Business Models

The relationship between the movie studios and the distributors remains somewhat strict when it comes to how much money each party receives from the films being shown in theaters. David Mumpower, a financial writer for the website Box Office Prophets, explains how most people assume the studios and distributors split the box office gross down the middle. In the past, film studios actually had deals with distributors to gradually give bigger slices of the revenue to the theaters over time. For example, in the opening weekend of a new movie release, the theaters would receive 10 percent of the profits and the following weekend they would receive 20 percent of the profits. This business practice shows how much Hollywood banks on distributing hit movies on a weekly basis. It also demonstrates how volatile the industry can be, especially for the theaters which have unfavorable circumstances when it comes to their revenue.

Today, movie theaters get a standard cut of the profits no matter which week the movie is in theaters. The third quarter income information provided by Regal Entertainment Group, the largest movie theater operator in the country, suggests a growing consistency with how much revenue their theaters get from tickets sales and concessions. In September 2014, Regal Cinemas made $2.19 billion in total revenue, but paid $1.1 billion in film rental and operating costs, which means the theaters received about 50 percent of the profits that year. Similarly, in September 2015, ticket admissions were $2.28 billion and film rental costs were about $1.17 billion, making the theater profits about 49 percent.

In both years, ticket admissions do make up most of the revenue, but the high costs of even renting out theaters for different movies takes away a lot of that revenue. Since the standard revenue for theaters remains fixed, they now depend more on their concessions alone for most of the revenue they actually get to keep. For example, Regal Cinemas made $575 million in concession revenue, which, out of the revenue remaining after the film studios got their cut, was about 49 percent. The cost to operate their concessions falls much lower, which means half of their profits usually come from their concession stands and the other half comes from ticket sales. Despite how nice this sounds for the theaters in theory, movie theaters are now facing problems which are undermining this system of compromise with the film studios.

Trends: Attendance and Ticket Prices

Screen Shot 2015-12-08 at 9.28.10 PMIn 2002, the average American went to a movie theater 4.9 times per year. In 2014, the number dropped to 3.6 times per year. Decreasing attendance has been a major factor in the decline of the old movie theater business model. According to CEO Randy White of the White Hutchinson Leisure and Learning Group, the last twelve years of per capita movie attendance had a steady drop of over 25 percent. The 2014 calendar year had only 1.26 billion consumers buying movie tickets which comes dangerously close to the 1.24 billion consumers seen in 1994. Overall, theater attendance does fluctuate every year, but the steady decline paints a negative picture of attendance in the long term.

What caused attendance to reach a twenty-year low last year? The National Association of Theater Owners point to the underwhelming performances of most tentpole movies and franchises in 2014. The Amazing Spider-Man 2 made nearly $60 million less than its predecessor and Transformers: Age of Extinction made nearly $107 million less than its predecessor.

Screen Shot 2015-12-09 at 10.26.40 AMIn its most recent annual theatrical statistics report, the Motion Pictures Association of America emphasizes the dramatic decline in 3D movie attendance as another culprit. On average, 27 percent of the population went to a 3D movie in 2014, but the numbers for different age groups have all dropped between 5 to 10 percent since 2010. Since the arrival of Avatar in 2009, the U.S. film studios have hoped to replicate its success; however, the push to make more films in 3D might be losing steam mainly because it costs too much to make, which has an adverse effect on ticket prices.

In a 2012 interview with technology site CNET, CEO of 3D digital production company 3ality Steve Schklair explained how studios rely too much on the expensive post production conversion process to transform their movies. He thinks this affects the experience the audience receives in the theater and, therefore, the willingness for people to continue spending more money. In the chart below, ticket prices have never been higher with a steady increase of 25 percent from $6.41 in 2005 to $8.17 in 2014. 3D movies might have their moments of greatness on the big screen, but since they are more expensive to make, they have had a negative effect on both 2D and 3D ticket prices. Earlier this year, consulting firm PricewaterhouseCoopers took a survey of over 1,000 consumers in fall of 2014. The company asked consumers the main reason why they stayed away from movie theaters; approximately 53 percent said admission prices were too high .

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What Else Is Hurting the Business?

Beasts-of-No-Nation-Poster-1It is hard to avoid the rise in online streaming services as a major reason why movie theaters are scared about the future. In October of this year, streaming giant Netflix released its own feature-length film called Beasts of No Nation. This film marked the second time the company released a movie online as well as in the theaters, which did not make exhibitors very happy. In an article from Variety, the four largest theater chains – Regal, AMC, Cinemark, and Carmine – announced they would not show the film because it did not follow the ’90-day delay rule’ between theatrical and home release. They do not see the the release of the film on various platforms as fair to any theater chain around the country.

Amy Kaufman, a producer on the film, noted the multiple ways people can get their content now and how that is shifting the film business in a different direction. Online streaming services like Netflix, Hulu, and Amazon Prime continue to have a large influence over the viewing habits of the average consumer. First, the convenience of renting or buying a movie through a subscription service from the comforts of your own home appeals to large portion of the population. Streaming services remove the whole ordeal of having to drive to a theater, pick up expensive tickets, buy expensive food, and deal with distracting people in a movie theater. As of April 2015, Netflix boasts over 60 million subscribers. Second, digital technology continues to evolve and audiences continue to crave more interactive experiences. In their 2014 report, the MPAA looked at how many devices moviegoers own and about 26 percent of them own at least 5 different devices. Therefore, theaters are not only competing for attention with television shows anymore, but also with computers, smartphones, and tablets.

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Why are Movie Theaters still Relevant?

amc-recliner-seatsDespite all of these issues, the movie theaters still have certain attributes that are difficult to replicate elsewhere and theater chains have started enhancing the moviegoing experience for they customers. AMC Entertainment, for instance, showed how it would lead the improvement in customer experience by spending over $230 million to upgrade some of their theaters in 2014. Some of the upgrades include replacing some of the smaller seats with cushy recliner chairs, increasing the variety of food and beverages available including the installation of bars for adult customers, and expanding their multiplexes by building more screens. In an interview with Deadline, CEO Gerry Lopez hoped the overall relaxing atmosphere the company is striving for will improve revenue per customer visit. Cinemark, the third largest theater chain in the country, had a decent start to the year even with a 2 percent drop in ticket revenue during the last three months of 2014. Their success, according to their CEO Timothy Warner, came from a growing demand for food and drinks after the company installed self-service concessions stands. Warner said in his interview with the Washington Post the food and drink sales had increased five percent since the new concession stands were installed.

This seems to have paid off for AMC and Cinemark this year when their stocks increased 24 percent and 9 percent in the first three months of 2015 of this year respectively.  Film business analysts say successful films premiering or in theaters during the non-peak seasons, like Fifty Shades of Grey and American Sniper, have changed how theater companies view the normal business model. Fifty Shades of Grey premiered in February and made about $94 million during President’s Day weekend. American Sniper opened in January with $107 million in its first weekend. Both movies had a large social media following before their respective premiere date, which suggests the identity of movie theaters as a place to have a social experience remains strong and the business does not have to limit itself to certain times of year or certain blockbuster films.

Screen Shot 2015-12-09 at 4.09.29 PMThe revenue trends from the last twelve years, courtesy of analysts from Bloomberg, show how film business experts project revenue for the movie theater business to reach approximately $11.5 billion this year. The business seems to still be alive and companies are starting to notice what makes the average consumer want to come back again and again: incentivization.

Incentivizing and Why It Works

Screen Shot 2015-12-09 at 9.24.03 PMThe MPAA says 11 percent of people in the U.S and Canada were frequent moviegoers in 2014, yet those same people made up over 51 percent of tickets sold. This information correlates with the increasing price of tickets: Film buffs are the people most willing to pay to see multiple movies over the course of the year, so they would likely make up a sizable amount of the tickets sold.

In December 2014, AMC Entertainment took this information to heart when they started beta-testing a new subscription service called MoviePass. The movie geeks dream app allows subscribers to pay a fee to see as many movies they want each month. Subscriptions differ based on specific cities people live in and subscribers can only watch one movie per day. The average subscription fee in the U.S. is currently about $30, which means avid moviegoers have the ability to see more movies at a lower aggregate price. This seems nice for the cinephiles around the country, but the downside for most people could be underusing the subscription. Since ticket prices continue to rise, the MoviePass subscription service means AMC and other theater chains might have found an alternative method of making profits by taking a note from their current competitors like Netflix.

Other options theater chains have already started exploring to boost ticket sales include loyalty programs. As of 2013, the Regal Cinema Crown Club offers discounts up to $1 off tickets at various locations in five different states. According to the 2013 Loyalty Census conducted by research firm Colloquy, loyalty programs across the entertainment sector rose 35 percent in 2012 reaching a total of 30.5 million people.

Towards The Future and Beyond

Movie theaters are not only thinking about financial changes, but also aesthetic changes. The audio company Dolby launched a new project called Dolby Cinema in 2014, which aims to compete with and move beyond the IMAX theater format by transforming entire theaters into interactive experiences. Some of the features include acoustic panels surrounding the speakers which are meant to immerse the audience in the movie. The official website shows the company will partner with AMC Prime theaters to begin bringing the premium moviegoing experience to people around the country.

Sources

http://www.boxofficeprophets.com/column/index.cfm?columnID=16796&cmin=10&columnpage=2

http://investor.regmovies.com/phoenix.zhtml?c=222211&p=irol-newsArticle&ID=2103033

http://www.hollywoodreporter.com/news/box-office-2014-moviegoing-hits-760766?

http://www.boxofficemojo.com/franchises/chart/?id=spiderman.htm

http://www.boxofficemojo.com/franchises/chart/?id=transformers.htm

http://www.mpaa.org/wp-content/uploads/2015/03/MPAA-Theatrical-Market-Statistics-2014.pdf

http://www.cnet.com/news/why-3d-movies-are-a-waste-of-money/

http://natoonline.org/data/ticket-price/

http://deadline.com/2015/01/movie-ticket-prices-high-summer-2014-box-office-1201349337/

http://variety.com/2015/film/news/major-theater-chains-to-boycott-netflixs-beasts-of-no-nation-1201445636/

http://www.forbes.com/sites/samanthasharf/2015/04/15/netflix-subscriber-count-crosses-62-million-sending-stock-above-500/

http://deadline.com/2014/09/amc-entertainment-accelerates-theater-upgrades-836097/

https://www.washingtonpost.com/news/business/wp/2015/02/23/forget-netflix-movie-theaters-are-on-track-to-have-their-best-year-yet/

http://business.time.com/2012/10/02/moviepass-goes-national-unlimited-trips-to-the-movies-from-25-per-month/

http://www.cnbc.com/id/100814464

http://www.dolby.com/us/en/platforms/dolby-cinema.html

The Milk Rush of China

In China, the bourgeoning market of liquid milk and dairy products has transformed into a fierce battlefield packed with domestic and international milk producers fighting aggressively for the market share. This situation seriously challenges the status quo of a long-standing milk duopoly in China, and more importantly, unveils great market potential of the under-saturated and under-estimated liquid milk demand for foreign brands.

 

Money, Milk, and Media

It was not a long time before Chinese consumers were bombarded with flooding milk commercials and dazzling dairy product placement in variety shows and movies. In November, Yili, the largest dairy firm in China, pledged $470 million U.S. dollars in its TV advertising campaign for the year of 2016. With $171 million dollars on exclusive naming rights for two of the most-watched Chinese reality shows, Yili also bought exclusive primetime advertising slots for CCTV’s 2016 Rio Summer Olympics Scoreboard and other leading entertainment shows.

Not to be eclipsed its most ambitious competitor Yili, Mengniu also marched on with its advertising campaign. The firm generously invested hundreds of millions of dollars in naming TV programs that are major rivalry with those sponsored by Yili. During the media sponsorship auction season this year in China, in TV advertising alone, Mengniu sponsored $120 million dollars with competition show Run for Time and Summertime Sweetheart Season 1, a reality show that is even still in its brainstorming stage.

There has been a long history of Yili and Mengniu’s competition in the Chinese milk industry. Unlike baby formula market where foreign brands completely outplay Chinese domestic sellers and claim 54% of the market, liquid milk consumption is a different story.

Yili and Mengniu, counterparts of Apple and Android in the cell phone industry, dominate significant market shares of liquid milk in China. Both milk giants account for 21.7% and 18.8% of Chinese liquid milk sales respectively, followed by WaHaHa of 9.6% and Bright Dairy of 6.9% in 2013. Yili earned a profit of $652 million dollars in 2014 while Mengniu claimed its profit at $360 million dollars.

The overwhelming advertising strategy employed by dairy companies guarantees that if a television show consumer turns on his TV during prime time, this target consumer would be very likely exposed to milk advertisements, either kids drinking milk with smiling faces or young professionals trying a solve her digestion problem with premium-priced yogurt.

The aggressive marketing approach, along with the considerable amount of advertising money that is more than 80 percent of the annual profit, exactly reflects how desperate Chinese milk companies are in order to capture the ever growing market of liquid milk. But the duopolistic situation is about to change, when foreign competitors come into play and try to get a share of the huge cake.

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(Yili and Mengniu’s TV ad campaigns with reality shows Where Are We Going Dad? Season 3 and Run For Time Season 1.)

The Next Growth Point

If there is anything that deserves attention in the Chinese milk industry, it’s the exuberant and growing demand that dictate the liquid milk market. As the Chinese government abandoned its controversial one-child policy, China will implement its two-child policy starting from next year. For dairy firms around the globe, the good news is that in the next decade, millions more children will be accompanied with cow milk during their childhood and adolescence. In the future, those who grow up with milk consumption behavior can be core customers that help support sustainable growth of dairy companies in the long run.

Even if the new two-child policy may bring more babies, the sales increase in the baby formula market has remained comparatively weak. A Nielsen report shows that in the first half of 2014, dollar sales of baby milk powder in China jumped by 7 percent, however unit sales slumped by 4 percent. As the competition in milk powder market intensifies and the market gets saturated, price wars can become a normal state in the industry, making it harder for firms to grasp the market share. While the sales of baby milk are likely to face its bottleneck in the near future, liquid milk, in contrast, has a brighter prospect.

Thanks to the continuing urbanization and shifting consumer behavior in the Chinese rural area and third- and fourth-tier cities, more people are switching from drinking soy milk to cow milk for their breakfast. In 2012, a Chinese consumes only 32 pounds of milk a year on average, whereas an American drinks 168 pounds per year and the figures for neighboring Japan and South Korea are 75 pounds. A ten percent annual increase of discretionary income over the past decade enables Chinese consumers to spare more money on their groceries, thus creating huge potential for liquid milk consumption.

However, the 2008 melamine scandal left long-lasting aftershock on Chinese domestic milk brands. Eighteen local dairies were found adding melamine into raw milk in order to fake high quality cow milk. Consumer confidence has never recovered from deep suspicion against local milk companies since then. In an effort to appeal to those who have lost their faith in domestic milk, foreign companies seized the chance and launched its marketing campaign. The result proved to be a huge success.

In the past decade, the amount of imported liquid milk in China have grown exponentially, from less than 4,000 tons in 2005 to 200,000 tons in 2014, according to the U.S. Department of Agriculture. As of 2015, firms from 27 countries, including the U.S., Germany, and Australia, have been exporting liquid milk to Chinese market with more than 100 brands. The confidence in safety and quality is the major driver behind the growth.

Since the baby formula market has already been dominated by international brands, Chinese firms are now fighting hard to prevent its liquid milk business from being taken away by foreign competitors. Unfortunately, it seems that both Chinese and international companies are primarily targeting the same group of consumers.

 

Target the High-End Market

Milk has always been a luxury in China for thousands of years until 1980s, when the economy went back on track after the end of the disastrous Cultural Revolution. A large part of Chinese population is intolerant to lactose, making it hard for them to digest milk, cheese, or other dairy products. Chinese never in their history used milk, so when milk companies attempted to create demand in the 80s and 90s, they marketed milk as a necessary source for strength, nutrition, and energy, as well as a symbol for better living standard. “A pound of milk a day, keeps Chinese strong,” slogans similar to “an apple a day keeps the doctor away” could be heard on TV and radio on a daily basis.

As milk consumption steadily rose since 2000, Chinese firms shrewdly sensed the huge potential purchasing power of Chinese middle class families. That’s why Yili spent hundreds of millions of adverting budget on reality TV shows like Where Are We Going Dad? to broadcast visuals of celebrities’ children drinking its QQStar, a flavored milk product that is designed for kids under 12 and priced at a premium. QQStar comes with a small 4-ounce carton, meaning lower packaging costs compared to regular milk packaging. By targeting millions of middle- and upper-class parents of spoiled only-child, Yili managed to generate more profit margin from selling milk in smaller size.

In the liquid milk market, international firms price their products at even higher premium to attract high-end customers in Chinese market. Australian milk firms like Pauls, Harvey Fresh, and Lemnos mostly sell their merchandise through online stores. By branding themselves as the gateway to high-quality lifestyle, they successfully drew attention from urban wealthy families that don’t care much about money but instead put more weight on the product quality they receive. German brand Oldenburger, for instance, even put German flags and huge “product of Germany” banners on goods shelves in some stores to signal its German origin.

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(Imported milk products in Chinese stores.)

Historically, because of the perception that imported goods are usually superior in quality, Chinese consumers are willing to pay more than do global customers. Merchandise that is not native to the Chinese market – coffee, cherries, pistachios – are generally well accepted at higher prices in anticipation of higher value. Imported milk is no exception. An imported product typically doesn’t require massive advertising campaign to push sales, because its country of origin is a good selling point in itself.

It’s difficult to predict whether international companies will occupy larger shares than do Chinese brands in liquid milk market. However, it can be foreseen that in the near future, Chinese firms are likely to undergo more intense competition from each other, because international companies have overall greater and more trustworthy brand images. For Chinese milk giants Yili and Mengniu, they might lose their leader status if they failed to grapple opportunities to cater to customer needs and to rebuild their brand images.

They are working hard on it. Perhaps it may seem awkward sometimes, especially when you see a 15-second close-up shot of Yili milk carton held in American actor Stanley Tucci’s hand, in the 2014 Transformers: Age of Extinction movie.

 

Sources:

China Milk and Dairy Market Report 2015, KPMG China, May 2015

Peoples Republic of China Dairy and Products Semi-annual Report 2015, U.S. Department of Agriculture

 

Dressing up

One of the biggest mysteries of women clothing is how a woman weighing roughly the same as she did 20 or more years ago wears smaller-sized clothing than she used to. The explanation is “size inflation” AKA vanity sizing. This phenomenon is described as: clothes with the same size label have become steadily larger over time.”

Measurements vary by brand, but research by the Economist finds that the average British size-14 pair of women’s pants is more than four inches bigger at the waist today than they were in the 1970s, and over three inches wider at the hips. A size 14 today fits like a former size 18, and a size 10 fits like an old size 14. The same “downsizing” has happened in America where, to confuse matters further, a size 10 is equivalent to a British size 12 or 14, depending on the manufacturer.

So, why do clothing brands do this? It makes shopping for clothes more difficult when manufacturers don’t use the same standards for labeling, and no doubt increases return rates when products don’t fit as expected. The simple answer is that the downsized labels make customers feel good.

A study in 2013, published in the Journal of Consumer Psychology found that smaller sizes boosted the self esteem of the customers, while larger size labels (for the same actual size clothing) negatively affected the customer’s self esteem which transfers badly on the brand and leads to lower sales.

Though size inflation mainly affects women’s clothing, men are not immune to this. Even though most of mens pants are sized in inches rather than in arbitrary units, studies in America and Britain have shown that some brands of men’s pants labelled “waist 36 inches” are infact up to 5 inches larger.

Imagine this in a real world situation, if a consumer was originally a size 8 but has been gradually adding a few pounds, she may be unaware that in the world of standardized accurate fitting dresses she would now fit better in a size 10 dress. In the store, she tries on a dress from 2 brands, A and B. A keeps their clothing sizes consistent and the measurements haven’t changed in decades. While B, has gradually expanded the measurements for each size to the point that what might have been a size 10 dress years ago is now labeled a size 8.

So when the customer tries on a size 8 dress from A it is uncomfortably tight and will need to go up to a size 10. She finds a size 8 dress from B and it fits just fine.

So if the customer keeps finding that only larger sizes of brand A’s fit her then it is likely that her perception of that brand will decline. Is it any surprise that brands are building a few extra inches into their clothing?

In fact, clothing sizing has increased so much that in 2001, the clothing industry introduced size 0 and in 2011, they had to invent size 00 to ensure slimmer individuals could find clothing that fit.

Despite the desire of consumers for honesty and transparency in the marketing process, it seems that they may be willing for brands to lie a little when it comes to telling them their size. This is an important message for all brands: if you give the customers a product that makes them feel good about themselves, they will like the product more and you will sell more. And if your product makes them feel worse, they might as well spend their money elsewhere.

Deregulation Dejavu

DEBATE_FIRST_PIC_3442872k 2

There was a lot that was confusing about the November Republican debate, when the economy took center stage as a topic.

Senator Rand Paul said he would like for the U.S. to get ride of the Federal Reserve. A couple candidates trotted out the idea of returning to the gold standard. But equally as puzzling was the consensus among the candidates that what America really needed to spur job growth was deregulation.

The candidates’ parroting the virtues of deregulation was puzzling for at least one major reason: a lack of federal oversight, according to many financial and policy experts, was one of the major causes of The Great Recession.

The deregulation that set up the financial crisis of the late aughts didn’t fall under the purview of any one administration. Under President Bill Clinton’s administration, for instance,  the Glass-Steagall act was repealed — regulations that served to keep the business of main street (that is, things like mortgages) from the business of Wall Street (investment).

But Gramm-Leach-Bliley toppled those walls, allowing companies like JP Morgan and Goldman Sachs to use mortgages as a financial product, able to be packaged into CDO’s, bought, sold and bet against. And as those mortgages got riskier and riskier, because there was no federal regulation, there was no oversight, and thus, no one to pump the brakes.

All of this was pretty clear when the collapse happened. Main Street, right or wrong, pointed its fingers at Wall Street, as did the government. Round after round of congressional testimony berated Wall Street executives. In the wake of the public outcry, Dodd-Frank and the Volcker Rule were passed, which — at least in theory — put an end to investment banks having CDOs, restricted them from making certain kinds of speculative investments and limited the kinds of hedge funds banks are allowed to own.

But that was yesterday.

In today’s presidential race, many prominent candidates, particularly within the GOP, are once again touting the virtues of financial deregulation.

Which raises the question: are you freakin’ serious?

These are the candidates who are quick to say that we are still in financial recovery — a recovery that came about in large part by deregulation. So what gives? How can these candidates tout lack of oversight and call it “job creation” and “economic opportunity” with straight faces?

The answer is frustratingly simple: because there’s a lot of money involved.

The New York Times recently completed an investigation into campaign donation thus far in the presidential race. They found that, so far, 158 families have provided almost half of all the early money to presidential candidates. These families tended to be rich, white, older, and headed by men. They leaned conservative. And of the industries they represented, the largest was finance.

As it turns out, they’re a very specific group of financiers that are backing GOP candidates: hedge fund owners, venture capitalists, and partners in private equity firms.

Of those 158 families, 138 are supporting GOP candidates. And of those 138, nearly half (64) are involved in finance.

Screen Shot 2015-12-06 at 2.59.07 PM

The potential payoff is clear. Democrats have pledged to uphold Dodd-Frank, and have argued for changes that would introduce higher levels of corporate and investment taxation. The GOP, meanwhile, in the name of promoting economic growth and opportunities, has fought these policies, urging instead for broader tax cuts and deregulation of the finance and energy industries.

Adopting those policies makes smart business sense if you’re a Republican presidential candidate: the total amount those 158 families have donated thus far to presidential campaigns is about $176 million dollars.

 

 

 

Caught In The Cross-Fire

Earlier this week Britain agreed to participate in bombing ISIS bases in Syria. This should come as good news to a majority of people around the world, especially after the terrorist attacks in Paris, but a significant number of people cannot look beyond the comforts of their home and think of the innocent Syrian lives affected; economically, socially and emotionally. As the world unites against terrorism, it is unknowingly playing the role of a terrorist. Sure, carrying out air strikes over ISIS bases will curb the expansion of the organisation, but at what cost? Since 2010, Syria has lost 230,000 of her own, witness 11 million displaced from their homes, and experienced a fall in GDP by 60%. This is no mere coincidence.

 

Damaged Economy

Syria 1

 

 

 

 

The cumulative economic loss since war broke out is equivalent to 229 percent of the country’s 2010 gross domestic product, according to research by the Syrian Center for Policy Research. Energy. Manufacturing and agriculture have suffered the most. Syria’s mining and construction workers have also been dealt a blow, with exports dropping from $12 billion to $2 billion.

 

Refugees On The Run

Syria 2

Four years of conflict has left about 11 million people as refugees or internally displaced. The impact has been particularly acute on Syria’s youngest generation. In a country where the pre-war literacy rate was about 90 percent, many children are now deprived of an education. Consequently a sizeable portion of the population, mainly the youth has left for a better life and opportunity. Syrian refugees expected to arrive in B.C. between now and the end of February are expected to generate $563 million in local economic activity over the next 20 years.

 

Crude Reduced

Syria 3

Before the European Union suspended crude imports in September 2011, Syria produced about 380,000 barrels a day, according to then Oil Minister Sufian Alao. Production has since collapsed, with Islamic State using the limited supplies for their own operations. A report by Syria’s General Establishment for Petroleum stated that first quarter oil production averaged 9,486 barrels a day.

 

Syria’s Growing Count

The war has left 230,000 Syrians dead. In the region’s modern history, it is only second to the Iran – Iraq war which left a million people dead on either side. As the ISIS continues to strengthen its hold the rest of the world will continue to spoil their expansion through air strikes. In the middle are the helpless Syrians whose numbers will keep rising.

 

I do not blame the US and its disciples for this. Although Syria’s fall is attributed to the presence of ISIS and the resulting war, the rest of the world cannot walk out without feeling guilty. They have worsened Syria in their attempt to save her. Do not get me wrong. I am not discouraging the air strikes on ISIS base, but I am pointing out the tragedy facing Syria, hoping that more people understand what the Syrians are suffering through.

 

Sources:

http://globalnews.ca/news/2374843/syrian-refugees-to-boost-b-c-economy-by-half-a-billion-dollars-report/

http://www.bbc.com/news/business-33244164

https://www.chathamhouse.org/sites/files/chathamhouse/field/field_document/20150623SyriaEconomyButter.pdf

Let’s do Cyber Monday!

Besides eating turkey and gathering with your family to celebrate what you are thankful for, shopping online or in stores has become a major part of our Thanksgiving holiday. The words “Black Friday” and “Cyber Monday” quickly become the most mentioned words during a conversation between two housewives during this holiday season.

What exactly are the terms “Black Friday” and “Cyber Monday”? The term “Black Friday” usually refers to the Friday after Thanksgiving, known as the first day of Christmas shopping. On “Black Friday,” retail stores carry out good deals and promotions to attract customers in an effort to increase sales. The term “Cyber Monday” refers to the first Monday after Thanksgiving, created in 2005 by a marketing firm in order to carry on the tradition of shopping in stores on Black Friday to shopping online that following Monday.

The difference between “Black Friday” and “Cyber Monday” is more than one occurred on Friday and another occurred on Monday. “Cyber Monday” mainly focuses on online shopping and targets female in the work force. When the term “Cyber Monday” was first introduced, it was ranked as the 12th busiest online shopping day of the year. However, 10 years later, it has already become the biggest and busiest online shopping day of the year. “ This year, 2015, it is estimated to 3 billion total in sales, which is a 12% increase over 2014, surpassing “Black Friday”, which is estimated to generate 2.7 billion in online sales, according to Adobe Digital Index” (Bonewright)

When listing out the websites to visit on “Cyber Monday”, Target appeared to be the top choice of many online shoppers since the store offered 15 percent off of any items online. Shopping should always be a fun and engaging experience; however, for some shoppers who shopped on the target website, it turned out to be an unpleasant shopping experience. Due to the high traffic and demand online, the Target website stopped working for some customers when they tried to add items to their carts. When customers tried to add certain item to their carts, a message pop up on their screen indicating that there is a waiting line for that product and the customer needed to wait patiently or continue to refresh the page.

Target faced massive amounts of complaints and a new hashtag #targetfail was created on twitter. A representative told WIRE magazine, “The volume of traffic today is double the site’s previous record, set three days ago on Black Friday.” The spokeswoman said that while the site hasn’t crashed per se, the company has been “metering” the site’s traffic since 9am CST, when the company saw its biggest spike. (Greenberg)

Although the term “Cyber Monday” was originally created by a marketing firm in order to boost sales for certain retailers, it has become one of the most significant online shopping day for the United states and seen as a prominent trend for online retailing business.

 

 

 

 

 

 

 

 

 

When China joins the global reserve currency, who wins and who loses?

yuan-dollar-CNY-USD-shutterstock_1250pxThis past week, the International Monetary Fund announced it would introduce the Chinese yuan to their reserve currencies group. The global reserve currency currently consists of the U.S. dollar, the euro, the British pound and the Japanese yen. The elevation of the yuan on a global level will soon make up about 11 percent of the IMF special drawing rights, which is an international reserve asset supplementing the official reserves of the now five main countries of the global reserve currency group.This decision will not go into effect until October 2016, but many financial experts are expecting the internationalization of the yuan to have mixed consequences on other countries and regions of the world like the United States and Europe.

U.S.

Although the yuan will not be an official player in the global reserve currency until next year, investors have already started promoting the positive global impact the change will have on the United States. Former New York City mayor Michael Bloomberg and former Treasury secretaries Henry Paulson and Timothy Geithner are leading a coalition to bring trading of the yuan to Wall Street. According to Wall Street Journal reporter Justin Baer, the group believes the inclusion of the yuan would lower costs for U.S. companies purchasing goods and services from China. They will continue to push for local yuan trading and work with both the Chinese and U.S. governments to develop the best currency trade plan.

Europe

Screen Shot 2015-12-03 at 9.33.41 PMThe British pound was the original IMF global reserve currency, until the U.S. dollar surpassed it in the 1920s. CNBC data journalists say since 2010, the pound has held 11 percent of the special drawing rights. However, the eventual addition of the yuan could reduce its holdings to 8 percent. The euro will most likely deal with an even greater loss. When the European union joined in 1999, the euro quickly gained ground accumulating over 37 percent of the special drawing rights by 2010. Now, the yuan could force the currency to reduce its shares for the first time by 6.5 percent. Both of the major currencies in Europe could be facing some stiff competition in the near future as more countries start adding the yuan to their reserve funds. As for the U.S. dollar, it seems like it will continue as the dominant global currency.

China

The inclusion of yuan in the reserve currencies group shows how the International Monetary Fund thinks China is ready for the big leagues. On the other hand, it also suggests the IMF wants to push the government of China to make its markets more accessible. Financial reforms in China have slowly increased in the last few years, but now China has the international and economic recognition to potentially move towards a free market economy. In an interview with Bloomberg Business, the head of the People’s Bank of China foreign central banks and global financial companies will not have to go through a pre-approval process to conduct transactions within the country. China is heading in an interesting direction, but time will tell if its new global status will have an impact on its economic policy.

Sauna business, hot business

vanha sauna

Many people in the U.S. can say one word of Finnish without knowing it. They can say sauna. Some of them – I believe – even have some kind of an image what sauna is.

Some few have experienced it.
Sauna is an old Finnish word, and it is ancient old tradition in Finland. The word refers to the old way of bathing in this cold country, and it refers to the bathing house – a steam room that is heated up of with a special kind of stove, kiuas.
Ages ago saunas were considered sacred places in Finland. Women gave birth to their children in saunas – as they were not only sacred but also clean and warm places even in the midst of cold winter. There are many superstitions and old rituals related to bathing in sauna.
Still today, saunas are so important to Finns that nearly every apartment building in the country includes a common sauna for its habitants. In addition to that, quite many people have a tiny sauna in their apartment.
Houses are sure to have a sauna room – it would be considered odd if a new house built in Finland did not include a sauna.
In the cities, saunas have electric heating systems but in the countryside and in the leasure homes along the country’s 200,000 lakes, they are still heated up with logs burning in traditional stoves.
For decades, there has been two big sauna equipment producers and stove makers in Finland. These companies are called Harvia and Narvi.
Their owners were, and still are, among the richest people in Finland.

 

harvia

Photo: Harvia sauna

On Wednesday, December 3rd, the main headline in all the news sites of the U.S. was the mass shooting that happened in San Bernandino, California.
The most read story of the site of the main daily newspaper of Finland, Helsingin Sanomat, was about saunas. It was a column of the paper’s correspondent in Britain who wrote about her friend who wanted to have a Finnish sauna in her in her backyard in London.
“Ordering a sauna from Finland was not possible – why don’t Finns want to make money?” This was the headline of her story (roughly translated).
The text itself told that a Finnish-British family who tried to buy a Finnish sauna from Finland to London didn’t even receive an answer to their requests for offers from the Finnish sauna and stove makers.
Instead, a German sauna maker – with no roots in Finnish sauna tradition – answered immediately and finally built the family a Finnish style sauna with an electric heater.

 

Finnish readers were very upset about the story. Not only did it tell that foreigners were selling our tradition but it also told that Finns cannot make money abroad – even in the case when it should be really simple. The country’s economic situation is very worrying. Unemployment is in rise. Trade is slowing down.
And Finns let Germans sell the products that should be our national pride!
I wasn’t surprised to read this sauna story.
In Los Angeles, I met a Finnish film maker who told me what happened when he wanted to build a sauna to his backyard in Hollywood. He is a wanna-be carpenter and did all the wood work himself. He had his sauna in a garden shed, and finally only the heating system was missing. He wanted to buy a Finnish stove. He couln’t get one.
He bought a Swedish electric stove.
What a shame.

 

So what are the Finnish sauna makers doing? I decided to find out.
Money, is the first answer.
The sauna company Harvia’s profit margin has been between 20 to 25 percent every year since 2010. The company started in year 1950 as a small local stove maker and grew until the first years of new millennium.
The owners – a family with name Harvia – then reported that is was the as big as it can get in Finland. The family sold the company to an international investment company, and the company started to grow again.
Its’ net revenue was €40 million in 2010, and €44 million in 2014.

Narvi, the other main sauna brand, is not doing that well. It is a company with good financial standing and high gearing ratio – but for how long?
Last year its net revenue was €6,7 million. The net revenue reduced from the previous year 18 percent. At the same time Narvi made a loss of €282,000, and in 2013 the loss was even bigger: €1,9 million.
In its’ website, Narvi boasts about being “currently the only large producer of sauna heaters in the market, whose entire product range is designed and manufactured exclusively in Finland”.

 

Keeping the production exclusively in Finland is obviously not that good idea.
Harvia, the profit-making sauna maker, has opened factories in China, Russia and Estonia. They have a sales office in Hong Kong.
The CEO of Harvia told a reporter of Helsingin Sanomat this year, that Asians do not yet ask for a Finnish sauna built in their homes. But Harvia is doing business with hotels. If a hotel wants to have five stars, it needs to have a sauna.

Harvia may have a good reason to ignore one or two Finnish expats wanting to buy a Finnish sauna. Harvia is busy in Asia.
But the sauna maker Narvi, who wants to keep its production in Finland… What on earth keeps it from selling its’ products abroad?

When does a tech company cease to be a tech company?

When it’s on its way to no longer being a company, period.

Yahoo CEO Marissa Mayer (from Fortune)

Yahoo CEO Marissa Mayer (from Fortune)

 

Once upon a time, Yahoo was the leader in Internet search, but now as it looks more like roadkill with Google’s and Facebook’s tire tracks over it. As a result, it is considering selling its Internet business, which would make it a…uh…different company.

Two major questions that come to mind are: 1. Why? And 2. What will this new Yahoo be?

The first question has an answer: an activist investor, in this case, New York hedge fund Starboard Value.

Starboard has been a vocal critic of Yahoo CEO Marissa Mayer, believing her tenure has been an abject failure to Yahoo investors, as net revenue has fallen despite industry-wide investment in digital marketing. Consequently, the fund is working to force her to accept defeat at the hands of rivals Facebook and her former employer, Google, and abandon what has been the company’s core business since its inception.

Jeff Smith, Starboard Value (from New York Times)

Jeff Smith, Starboard Value (from New York Times)

 

This Starboard-Mayer situation is certainly not the first time an activist investor and a CEO have gone toe-to-toe on business strategy, but there is frequently some sort of fight. In this case, with three and a half years of declining revenues, Mayer doesn’t really have a leg to stand on.

Further complicating the issue is the alternative to spinning out the Internet business—potentially paying astronomical tax bills in two different countries. Coincidentally, this also begins the discussion of the second (and unanswerable) question of what would become of Yahoo.

Yahoo bought a stake in Chinese e-commerce giant Alibaba for $1 billion in 2005—an outrageous sum of money at that point in time. Arbitrary nature of tech valuations aside, Alibaba went public last year with the largest tech IPO in history. Great news for Yahoo, right?

Wrong.

The stock has basically declined in value over the last year, and while Yahoo is still looking at a stake worth a bunch of money, it’s also looking at giant tax bills from both the U.S. and China if it tries to capitalize on that stake by spinning it out.

Initially, Mayer had thought that she and Yahoo might dodge the U.S. tax, which by some estimates, would total more than half of the value of its stake. Then the company might have to pay Chinese taxes on top of it.

Starboard’s stance is that Yahoo needs to cut its losses and dump its Internet and display ad business, much the way AOL did when it sold to Verizon earlier this year. Its demand letter alluded to a market for the business but didn’t elaborate.

Regardless, though, the consensus among those covering tech seems to be that the clock is ticking on Mayer, and this decision is likely to make or break her tenure.