More Companies need a Hooters Makeover

Hooters announced last week that it is reinventing itself. The iconic restaurant chain that made its name by featuring waitresses in tank tops and hot pants is rethinking its business model.

Hooters built a strong business in the 1980s and ’90s, growing to almost $1 billion in revenue. But in recent years, sales have slipped as the restaurant’s business concept has fallen out of step with current societal trends, making it an unacceptable dining option for many.

While Hooters still has a strong following, its new owners (H.I.G. Capital and others) needed to make a tough call. Rather than continue to invest in a declining concept, they chose to reinvent it. The new Hooters promises to maintain critical assets (i.e., the Hooters girls) while rethinking other elements of the business proposition (more-modern uniforms, better food, a décor that looks less like a strip club, etc.).

While it’s too early to tell how the Hooters makeover will do, its business team deserves credit for objectively evaluating their product and proactively responding to current market trends. Many companies have a hard time coming to grips with changes in the marketplace that make their product or service less relevant. As a result, they end up putting all their energy and resources into keeping flawed products and business models alive.

In fact, many large companies today are long overdue for their own version of the Hootersmakeover.

IBM first-quarter revenue was down 5.1 percent…IBM Chief Executive Officer Virginia Rometty sent a video message to employees blaming the shortfall on executional misses and urging them to work harder. A bigger issue is that many of the company’s products and services are losing ground to cloud computing, and IBM has been slow…

McDonald’s finished the first quarter of 2013 with same-store sales down 1 percent and U.S. operating income down 3 percent. The company blamed a weakening economy and increased competition, but the more pressing issue is that McDonald’s is on the outside of the growing trend toward healthier eating and thus is losing customers to chains with healthier options…

Office Depot is down 30 percent vs. five years ago. The company is suffering from the worldwide trend away from paper-based office supplies…  Rather than fixing its business model, Office Depot has essentially opted to double down on its current failed model…

Eighteen months ago, Netflix badly needed a transformation. Netflix management undertook an ambitious plan to refresh the company and turned it into a leader in the emerging video-streaming business. In the first quarter of 2013, revenue was up 18 percent compared with a year ago, and the stock has rebounded to more than $200 per share…

Cisco Systems…has used market changes as an opportunity to gain a competitive advantage by adapting its products and services faster than its rivals. As a result, its sales have grown 150 percent over the past 10 years…

More Companies Need High-Priced CEOs
It’s proxy season, and several companies have released chief executive pay data in their annual filings. CEO salaries in S&P 500 companies are up 8 percent, on average, to $9.3 million, and as usual, critics are claiming that CEO pay is out of control. Their biggest targets are Disney’s Bob Iger ($40.2 million), DirecTV’s Michael White ($18.0 million), and Hewlett Packard’s Meg Whitman ($15.4 million).

The truth is companies that pay for high-priced executive talent usually get better results—and the money they pay these executives is a good investment.

The quality of a company’s CEO is the single biggest driver of its results. Since Iger took over Disney in 2000, he almost doubled the company’s value, creating $50 billion in shareholder wealth. DirecTV’s White generated more than $10 billion in shareholder value in just three years…

CEO salaries are rising because more companies are realizing the value of good CEOs, and their pay—much like contracts for top-tier professional athletes—is getting bid up.

Critics of high CEO pay claim it is out of line vs. lower-level salaries and wages. But this is like comparing the Yankee Stadium peanut vendor’s pay with that of the players.

Of course, everyone in a corporation is important and should be compensated fairly. But good companies with poor CEOs are rudderless and fail. Good CEOs like Iger and White create thousands of new jobs because their companies are successful. It is a virtuous cycle. Employees prefer to work for winning companies like Disney instead of for struggling companies with weak CEOs…

Many public company boards are on the defensive, fearful of pursuing talented executives with pay packages that activists might attack.

Private equity investors are taking advantage of this and are luring away talented executives…

In 2009, the Blackstone Group  lured Mars’s North American president, Robert Gamgort, away to run Pinnacle Foods, a company just 30 percent the size of Mars North America. When Pinnacle went public last month at a value of $2.3 billion, Gamgort received stock and options worth about 1 percent of the company’s value…

Good executives, like good ballplayers, are in high demand and often need guaranteed pay to jump ship. Current Yahoo CEO Marissa Mayer had a cushy vice president job at Google, a seven-figure pay package, and unvested stock options worth $14 million. Yahoo was a company in trouble that desperately needed someone like Mayer. It took Yahoo a $117 million, five-year (partially guaranteed) contract to lure Mayer away.

So far Mayer is off to a great start. She has already increased the value of the company by more than $10 billion, so initially it looks like a great deal for Yahoo shareholders…

Yahoo’s board had a choice. They could spend big bucks to get Mayer, giving the company a chance to be a winner again. Or they could put their shareholders and employees through several more years of failure with lesser-qualified, but lower-paid CEOs, such as Jerry Yang, Carol Bartz, and Scott Thompson, who collectively ran the company into the ground…

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Too Much Cash isn’t Good for Apple
Apple Computer is under fire from dissident shareholders for hoarding too much cash. The company is being sued by Greenlight Hedge Fund manager David Einhorn, who is attempting to get Apple to pay out most of its $137 billion in cash reserves to shareholders. Last week, Einhorn won a procedural injunction against Apple, and the issue is likely to come to a head at Wednesday’s shareholder meeting.

Apple is not the only company sitting on excess cash. Large corporations today are hoarding more cash than ever. S&P 500 companies today have cash and liquid investments on their balance sheets worth a record $1.23 trillion. That is up more than 50 percent from just four years ago.

Large cash balances reduce shareholder value because they create reduced returns on capital…. Excess cash creates pressure for corporate managers to put the cash to work…   The presence of excess cash is a distraction that can cause companies like Apple to veer off track by pursuing wrongheaded acquisition strategies.

Hewlett-Packard (HPQ) is a great example of this. During the 1980s and 1990s, HP was a leader in innovation, and its stock price increased thirtyfold from 1980 to 2000. In the late 1990s, as its balance sheet improved, the company shifted course and began a more aggressive M&A strategy, pursuing large targets such as Compaq, 3COM, Palm, EDS, Autonomy, and others. Many of these deals failed, and the company has declined in value.

Apple’s success over the past decade was driven by a strong innovation program that gave us the iPod, iPhone, and iPad. Organic growth creates significant shareholder value. Acquisitions create little or no value, because companies pay full price for those assets, and many of them fail. Studies by McKinsey, KPMG, and others have consistently shown that only 20 percent to 40 percent of all acquisitions improve shareholder value, with the rest losing money.

In many cases, acquisitions distract companies from pursuing innovation. For most of them, their executives’ time and focus is their single most limited resource. Acquisitions are a huge drain on management time, often causing organic growth programs to be sacrificed.

Quaker Oats’ 1994 acquisition of Snapple not only was a bad move from a financial standpoint but also sapped the energy of the company’s management team as they put all their effort into trying to fix the failed deal. Not only did Snapple fail, but Quaker’s established businesses also began suffering. Eventually, Snapple was abandoned, management was fired, and Quaker was sold off to PepsiCo (PEP).

Most of today’s great companies did not become great because they had hoards of cash. In fact, most were cash-strapped. Great innovation requires very little cash. When Steve Jobs took over Apple in 1997, the company was close to bankruptcy. His lean, “make it happen” attitude helped fuel Apple’s innovation success.

If Apple wants to regain its mojo, it needs to start by getting rid of most of its cash. Then, instead of worrying how to spend its money, it can focus on getting back to its innovation fundamentals.

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Packaged-Goods Testing Gets a Makeover

As BehaviorScan test markets close, a new challenger using small-scale in-store tests emerges

SymphonyIRI recently closed its BehaviorScan test markets in middle-American enclaves Cedar Rapids, Iowa; Eau Claire, Wis.; Grand Junction, Colo.; and Pittsfield, Mass. For more than three decades, those towns, wired to serve different ads to different homes and track purchases by special consumer panels, served as the final testing grounds for thousands of products on their way to store shelves — or to the dustbins of CPG history…

Another traditional standard of CPG product and concept testing, Nielsen Bases, also hit turbulence recently. The Insights business within Nielsen’s “Buy” division, where Bases is housed, saw sales decline 9% in the third quarter….

And a small challenger to now-defunct BehaviorScan markets is seeing rapid growth by promising the speed and relative confidentiality of survey-based tests like Bases with the real-world accuracy of in-store tests.

GameChanger, a San Francisco company that specializes in tests that can encompass anything from a weekend in one store to several weeks in around a dozen stores (or even tests done online via e-commerce), saw sales grow more than 40% last year to $4.5 million. That came after a 518% sales hike the prior year, which landed it in the Inc. 500.

The premise of GameChanger, founded by Clorox Co. veteran Larry Popelka, sounds like a motto of former P&G Chairman-CEO Durk Jager from the late 1990s: “Make a little. Sell a little. Learn a lot, and fail cheap.”

That’s not entirely coincidental. GameChanger Director Laura King was global brand manager on Swiffer’s launch in the late 1990s. She recalls Bases testing at the time predicted a low repeat rate that would have Swiffer generate $20 million to $40 million in first-year sales. That would have kept Swiffer from meeting P&G’s $100 million hurdle rate, she said.

The brand team’s own experience with enthusiastic test users suggested a higher repeat rate. And Mr. Jager, who was chief operating officer at P&G at the time, greenlighted the launch anyway, Ms. King said…

Mike Paul, a 16-year veteran of General Mills who spent five years working in Yoplait product development before leaving to start the consultancy Vision Quest Innovation in 2011, became a convert to GameChanger’s small-scale in-store tests while at General Mills. Part of that conversion came from Greek yogurt.

Bases, or General Mills’ proprietary version of it, Mr. Paul said, doesn’t do well at testing things that differ too much from what consumers are used to. “Greek yogurt tested horribly,” he said. “Consumers didn’t have a precedent”…

Even with tests at only a dozen stores, GameChanger can use targeted TV, digital and other media, like BehaviorScan tests once did, Mr. Popelka said. But the tests happen in varied locations to make them harder for competitors to find, with brands and marketer names sometimes changed to avoid detection via scanner data or media trackers such as Kantar Media and Nielsen.

The in-store tests range from as low as $50,000 for one store on a weekend to $350,000 for tests over multiple weeks at a dozen or more stores with a full marketing plan, which Mr. Popelka said was similar to Bases (Nielsen declined to comment on costs). But Mr. Popelka said his setup time is six to eight weeks vs. six to 12 months and $1 million to $2 million for BehaviorScan or larger-scale test markets companies do themselves….

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GameChanger Featured in SF Business Times

GameChanger CEO Larry Popelka was featured in this week’s San Francisco Business Times as a leading San Francisco area
entrepreneur.  Here are highlights:

Entrepreneur Profile
Larry Popelka
CEO and Founder, GameChanger

What it does: Innovation consulting for consumer products companies to help them build and test new ideas.
HQ: Alameda.
2012 estimated revenue: $4.4 million.
Employees: Approximately 30.
Founded: 2007.

Source of startup capital: Self-funded.
Background: Before working at GameChanger, he was vice president of marketing at Clorox in Oakland. He’s been in consumer products marketing for over 20 years. He received an M.B.A. from University of Chicago and an undergraduate degree from Northwestern University.
Age: 54.
Residence: Alameda.
Web site: gamechanger.net

Big picture

How’s business:  We’ve been growing at a rate of about 50 percent per year. We’re beginning 2013 with a good start.
What’s going to change at your company: We’re going to add another 10-15 people. We’re going to expand if we’re able to hit our financial growth target.

Business moves

Reason for starting business: What I was doing at Clorox was running a corporation innovation group, and I realized it was impossible to do good-quality innovation. We were trying to outsource projects to entrepreneurs. We did that for several years, and some were successful, some were not. With GameChanger, it’s creating services for big companies to come and use.
Most difficult part of decision: Deciding what business we were in. At first we thought we might be investing in startups and helping them build new products. It required trial and error.
Biggest business strength: Flexibility.
Biggest business weakness: Sometimes we fall too much in love with the products we’re working on. If we work on a product, we fall in love with it, and then the company decides not to go with it, it’s hard.
Biggest risk: Starting GameChanger. I had a cushy job at Clorox. I could’ve done that and retired.
Biggest mistake: We’ve changed our business model three or four times. We had some lean years because we didn’t have a good business model. We’ve had some consulting engagements where we’ve messed up and didn’t get them executed the right way, but we’ve gone back and been able to recover from them.
Biggest worry: That we’re going to let somebody down. There’s a lot of pressure.

Work routine

Favorite task: Helping big companies operate like entrepreneurs.
Least favorite task: Dealing with all the bureaucracy, paperwork and new laws or new regulations that make it hard for small businesses.

Dreams

Five-year plan: In five to 10 years, we expect to be 10 times the size.
Inducement to sell: If I knew there was a strategic investor or buyer to help the company be more successful.
First choice for new career or venture: I’d be an entrepreneur.

Personals

Most-admired entrepreneur: The group of people that started the venture capital industry in the 1960s from the documentary “Something Ventured.”
Favorite pastime: Golden State Warriors fan.
Favorite book: Can it be my own? “The GameChanger Manifesto.”
Favorite film: “Moneyball.”
Favorite restaurant: Sushi House in Alameda.
Favorite music: I’m a big Bruce Springsteen fan.
Car: I bought one of the first Chevy Volts.

Click here to read full profile:  http://www.bizjournals.com/sanfrancisco/print-edition/2013/01/25/larry-popelka.html