How To Compete On Price: Lessons from American Paintbrush Makers

As they say, competing on price in commodotized markets is a race to the bottom. Scale and distribution are the only two things that can save you there. 

But what if you’re neither a behemoth nor do you have Amazon or FedEx’s distribution expertise?

You can do one of two things, as illustrated by Adam Davidson in his NYT piece on American brush-makers and Chinese competition:

1. Compete on quality

(Bronx Paintbrush Factory Owner: Israel) Kirschner hasn’t changed a thing. He makes brushes the very same way, employing many of the same machines, that his father did 50 years ago. He told me that he sticks with the old ways because, unlike with toys and T-shirts, a big chunk of the brush business caters to professionals who aren’t merely shopping for price but rather for quality. Michael Wolf, who runs the Greco Brush Company, a supplier to professional house painters, told me that his customers need to know before each job that every single bristle on every single brush will be attached properly. One loose fiber left on a wall can damage a painter’s reputation, which in turn can hurt Wolf’s too. Wolf said that he can buy brushes for between a quarter and a dollar cheaper in China, but he is never sure exactly what he’ll get. Some orders are shoddy; others never arrive. So Greco sticks with the company he knows. “My father did business with his father back in the ’50s,” Wolf told me. “We’re keeping it going, the two of us.”

2. Compete with non-stop innovation

At the other end of the business is Lance Cheney, 53, the fourth-generation president of Braun Brush, who told me that he would close his company rather than make the same kind of brush, the same way, for 50 years. He is constantly creating innovative brushes so that he never has any competition. Cheney makes a beaver-hair brush that’s solely for putting a sheen on chocolate. He sells an industrial croissant-buttering brush and a heat-resistant brush that can clean hot deep fryers. His clients, he said, now include General Mills (he made a brush for their cereal-manufacturing line) and the energy industry (a line of expensive brushes for cleaning pipes in nuclear reactors). He even developed Brush Tile, fuzzy panels used in artistic wall hangings. He said his proudest creation is a tiny brush that helped Mars rovers dust debris from drilling sites. When Cheney sees other firms making one of his brushes, he often drops the product rather than enter a price war. Braun Brush, he said, has grown at 15 to 20 percent annually for the past five years.

PS: Of course, not every industry has conditions that allow for (1). If the primary users of paint-brushes were amateurs who didn’t care for quality, that strategy wouldn’t fly. And if this category didn’t support or need innovation (for example, if this was about can openers…), (2) wouldn’t work. Another reason why competitive strategies can’t be indiscriminately used without understanding customer needs. But then again, you already knew that…

Google’s Music Service – Catching Up or Getting Started?

Google unveiled its new music service, Google Play Music All Access, at its I/O conference last week. As Matt Peckham wrote on Time this week (he chose to call it GPMAA, BTW):

…GPMAA represents Google’s attempt to offer a subscription-based music service, streaming “millions” of songs — intermingled with up to 20,000 more, uploadable or song-matched from your personal library — for $10 a month ($8 a month if you sign up by the end of June). Chris Yerga, Google’s engineering director who steered this part of the keynote, explained that GPMAA would include common music streaming features like curated playlists, album recommendations and a build-your-own-radio-station feature.

Since the current streaming music market is dominated by the likes of Pandora and Spotify, both of which offer “freemium” models (free for a certain number of hours/features; beyond that, consumers pay), Google’s move is a bit unusual because its music library is similar to their libraries. Also, no ads. Just a paid subscription, with adaptive streaming sound quality. 

As Matt and several others noted, this doesn’t sound like a differentiated service. In fact, it actually sounds like a narrowly focused offering, targeting those that listen to a lot of music every month. 

So why do it? And what is its long game?
(You can bet a decent amount of money that this seeming head-scratcher of a move fits in with a larger strategy.)

Some thoughts on this topic come to us from James McQuivey, a Forrester analyst, who writes on his blog:

To be clear, music is one of the most powerful tools for engaging digital consumers because they use it every day and connect to it emotionally and socially. If Google failed to make a play for the music business, it would later regret it because its customers would remain forever tied to another digital service that could ultimately open a vulnerability in the company’s relationship with hundreds of millions of Android and Chrome users. The fear of ceding this permanent vulnerability to others explains why Google Play is adding All Access.

In fact, he thinks that Google should have created a first of its kind “media package” consisting of music, movies and video games. 

If only the company had reached beyond simply catching up to existing music players. Google’s PC, phone, and tablet based customer relationship puts it in a unique position to reach for a blended media subscription experience, something that expands the very notion of what media is and how people believe they’re paying for it. Imagine $24.99 a month for all-access music, Netflix-like streaming, two current movie downloads, and a lending library for paid games where you can “check out” one paid game for free for one week at a time. That would be a way to make Google Play media content do more than merely copy iTunes, Pandora, and Spotify, it would take media consumption beyond the reach of Netflix, Amazon, and anyone else. But evidently Google wasn’t ready to reach for the real prize.

That last sentence is the key, IMO: Google may have exactly those ambitions, but its not ready. Yet. 

The bundle itself makes a lot of sense in theory, at least to me. Why have consumers sign up with 4 different services, for their audio, video, movie and game needs, when they can just sign up with Google? (Or Amazon, for that matter, who may also presumably be thinking along those lines…) 

And if you look at the Google Play snapshot I included above or go to this site and click on Books, Magazines, etc., you may just be impressed at the choices that already exist. (Question – do you know that you can buy magazine subscriptions via Google now? How about bestsellers from the NYTimes’ list? No? Thought so). 

So if I were Google, while I develop Google Music, on a parallel track I would furiously work to increase my partnerships in Movies and TV (Priority #1: Add streaming video) and start work on that all-inclusive monthly media bundle.

If and when this happens, successfully, not counting its driverless car business and its cloud provider (ala Amazon EC2) aspirations, Google would have transformed itself into a twin-headed colossus: An ad-driven “free” online enabler or provider of all kinds of data/user-content driven services, and a non-ad-revenue driven consumer media distribution giant. 

What do you think? 

PS: A big caveat here is that consumers that are willing to pay for movies, those that are willing to pay for music and those that will pay for other kinds of media may all behave very differently and may (or may not) see the value in a bundled offering. Just because something sounds good in theory is no excuse to expect it to succeed in practice. So I would imagine that Google either already has models that tell it that bundled offerings may not succeed, which is why it hasn’t already offered one just using the libraries it has access to – or – its models are telling it that such a bundle will be a runaway success, and all it needs is access to vast content libraries and a reputation in this space, both of which it will build in the coming months and years. As they say, watch this space…

OK, So Foxconn IS Going To Launch Its Own Brands

Back in February, when Foxconn announced a hiring freeze, sage pundits (ahem…) prophesied that this could actually foreshadow Foxconn-branded electronics. And that, in doing so, it would just be the latest contract manufacturer to want to move up the value chain. 

Well, guess what?

Foxconn appears to have already tested the waters with low-priced 60-inch TVs (back in November 2012?!!). And, writes Lin Yang on The New York Times (definitely a NYT thing going on today on this blog), it may be getting ready to make a much more aggressive push on this front. 

While Lin attributes this to Foxconn wanting to “move out of Apple’s shadow”, I suspect, and the comments from a Foxconn VP in the article echo this, that this is really more of a increased-value-capture-via-vertical-integration strategy. And the first step in that direction was a 9.9% investment in Japan’s Sharp corporation, in exchange for USD $840m. 

But, as Lin notes, the global demand for TVs – LCD and non-LCD – is declining. And this may be a problem for Foxconn. This, despite the fact that Foxconn may be mitigating the brand-building problem, at least for now, by selling TVs in China under the RadioShack brand and in the US under the Vizio brand. This, also despite the creative financing strategies it is using to both get its TVs into consumers homes more easily and not dissing its upstream contract-manufacture partners. 

Still, this is a long-game. Mr Gou, Foxconn’s CEO, is tenacious and quite shrewd, as any number of profiles have described him. Ten years ago, most Americans didn’t even know who LG and Samsung were, leave alone buying their appliances and electronics. And it wouldn’t surprise me if we are buying Foxconn branded electronics a decade from now.  

What Ails Infosys?

Recently, Infosys, one of India’s IT outsourcing giants released some weak results. The stock took a massive hit. In contrast, TCS, another Indian IT outsourcing giant, released great results a couple of days later.

So what’s the problem with Infosys, assuming that both are fundamentally in the same business – IT labor arbitrage between the developed world and the developing world?

According to The Economist, 

Infosys’s central dilemma is that its prices are too high compared with its peers’, and hence its best-in-class margins are unsustainable. The firm has now admitted that it has struggled to balance the short-term preservation of profits with long-term growth. Its hesitance has put it in a sort of Catch-22. It is reluctant to have a push for growth for fear of diluting its margins. Yet the cloudier the outlook for sales becomes, the harder it is to control efficiently the costs of ramping up recruitment and investment, thereby cutting into the margins the firm was trying to preserve.

The firm now says it will stop letting profit-margin targets get in the way of winning contracts. 

In other words, it is willing to trade margins for volume. 

On the face of it, such a strategy makes sense. IT services have come to define commodotization. So with a large number of firms – both Indian, and India-based western ones – chasing the same clients and offering the same types of services, pricing power is obviously weakened and volume is the name of the game. 

So why did Infosys think that customers would pay it higher prices? Any Infosys readers care to comment?

“Phones-Plus” from Motorola – One Solution To Google’s Samsung Problem

A couple of weeks ago, I wrote about Google’s Samsung problem.

Samsung helped popularize Android at one time, but now it is getting a bit too powerful – to add to Google’s Android woes. 

One possible way to blunt Samsung’s power was to hope and pray that HTC or someone else gains more market power. 

The other possible solution was to use Google’s Motorola division to make phones that can effectively compete with Samsung’s Galaxy series – but only using hardware or design innovations – since Motorola can’t have access to a (special) version of Android that others don’t. 

Unfortunately, after the Droid’s early visibility (and successes?), not a lot has been heard from those quarters. 

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The Overpriced Cupcake Bubble – Bursting Already?

The gourmet cupcake “craze” – with cupcakes going for $4.50 a piece, or more – is blowing over, according to Emily Maltby and Sarah E Needleman (paywall), on the WSJ. 

As evidence, they cite the performance of Crumbs Bake Shop, a public traded (!!!) chain of cupcake shops:

The craze hit a high mark in June 2011, when Crumbs Bake Shop Inc., a New York-based chain, debuted on the Nasdaq Stock Market under the ticker symbol CRMB. Its creations—4″ tall, with fillings such as vanilla custard, caps of butter cream cheese, and decorative flourishes like a whole cookie—can cost $4.50 each.

After trading at more than $13 a share in mid-2011, Crumbs has sunk to $1.70. It dropped 34% last Friday, in the wake of Crumbs saying that sales for the full year would be down by 22% from earlier projections, and the stock slipped further this week.

I am not sure one can use a single stock’s meteoric fall to indict an entire industry, but with low barriers to entry (unlike, say, gourmet coffee) and little, if any, differentiation between one cupcake hawker and another, the cupcake market was always something of a fad.

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