Whatever your opinion of private equity companies, their potential for financial engineering when taking over a company or their forcing of operational and managerial changes, the Elliot Investment Management letter and presentation to the Southwest Airlines’ Board of Directors is insightful. 

However, as Forbes points out, all of Elliot Investment Management’s ideas are about “extracting more revenue from customers to better reward shareholders.” Let’s be clear: customers define brand value. If brand value is diminished or negligible in the eyes of customers than there is no shareholder value. 

Diluting the unique identify of Southwest in order to stuff the pockets of shareholders will erode the specialness of the Southwest brand. Forbes writes that “Turning (Southwest) into a clone of United, American and Delta could be a fatal mistake.” Even The Wall Street Journal indicated that “Southwest’s culture helped to make it uniquely successful. Delivering much-needed modernization without damaging it will require more than cold numbers.”

Standing his ground, southwest CEO Bob Jordan indicates that the Southwest brand adapts to its customer needs. The brand is willing to change certain deliverables but within the framework of the brand’s purpose and promise. Mr. Jordan indicated to CNBC that it has been a while since Southwest researched customer preferences. But, this is underway and operational and financial benefits are being reviewed.

Lining shareholder pockets can be detrimental to any brand. However, there do seem to be some internal warning flags as to how Southwest has been managing over the past years.

On the other hand, and If Elliot Investment Management is correct, Southwest Airlines is suffering from some of the most troubling tendencies that lead to brand decline. Elliot Investment Management explains that with Southwest’s early successes, Southwest fell into 1) the comfort of complacency and 2) thinking that worked yesterday will work today.

These two tendencies and other troubling tendencies are the result of brand mismanagement. Elliot Investment Management is correct. These are “stop-now” behaviors. When it comes to a brand turnaround, these tendencies for trouble must be eliminated as these are impediments to brand invigoration.

The Comfort of Complacency

The Elliot Investment Management letter to the airline’s Board of Directors states the following, “Even as the Company’s performance has deteriorated, Jordan (Southwest Airlines’ CEO) has demonstrated a surprising level of complacency, describing each quarter as ‘great’ or ‘strong’ while the earnings outlook continues to fall.”

Complacency is comforting but it is also concerning.

Complacency stops ideas, innovation. Complacency stops brands from keeping up with customers and competition. Complacency allows employees to keep on doing what they are most comfortable doing. Complacency lulls people into laziness and inaction; crushing creativity and curiosity. Complacency gives a brand’s management the opportunity to stop looking at the changes in the world and the brand’s specific market segment. Complacency takes management’s eyes off of the competition. 

Brands are not passive. Brands are promises. Brands are active promises of an expected, relevant, differentiated experience. Brands can be quiet, traditional and chill but brands must move if they want to deliver. Complacency creates inaction and, eventually, irrelevance.

The more successful the brand, the easier it is to walk off the complacency cliff. Complacency leads a brand to believe that there is now nothing left to do but live off of the success.

Warren Buffet wrote in one of his well-read shareholder letters, “… complacency is another corporate cancer.” Mr. Buffet wrote that complacency is dangerous because it has its roots in past success.  

Elliot Investment Management wrote that Southwest Airlines’ Board has reinforced an insular culture and outdated thinking in the face of indisputable evidence that change is required.

Believing That What Worked Yesterday Will Work Today

One of Elliot Investment Management’s key criticisms of Southwest’s strategy and actions is the brand’s  “rigid commitment to an approach developed decades ago,” an approach that “has inhibited its (Southwest’s) ability to compete in the modern airline industry. This ethos pervades the entire business with outdated software, a dated monetization strategy and antiquated processes. This failure to modernize is vividly underscored by the December 2023 operational meltdown that was caused by the Company’s outdated technology, which led to Southwest stranding over 2 million customers over the holidays.”

Elliot Investment Management added that Southwest Airlines’ Board of Directors keeps “doing things the way they have always been done.” To be fair, CEO Jordan does seem to be willing to consider certain changes such as premium seating, as long as customers perceive these changes as desirable.

Change happens. Doing what once worked when the current landscape is different makes no sense. The management guru, Peter Drucker, had a lot to say about “doing what has always worked in the past” in the current environment. 

Mr. Drucker pointed to these three lessons:

• “Environments change. Continuing strategies and actions that created past successes will eventually lead to failure.” 
• “Being defensive and unyielding will also lead to failure. Organizations must be willing to (quickly) abandon formerly successful approaches.” 
• “Believe that change will happen and that sometimes the change will be revolutionary. Enterprises should create the future by making changes even though it means ‘obsolescing the products or methods of its current and past success.’” 

Warren Buffet indicated that having past success is very dangerous because there is a tendency to see past success as generating present and future success. Mr. Buffet wrote that past success does not mean subsequent success. CEO’s who continue to ride on the wave of past success create a culture that is lackadaisical and lazy.

Markets and customers change quickly. So, companies must be flexible, agile, and quickly decisive. However, it is also important to have a leader who is willing to look outward rather than backward. 

Building a culture that is not afraid of letting go is critical. This does not mean giving up the enterprise’s core values. But, it does mean being ready to take leadership in a fast-moving, changing world.  Staying out of trouble hinges on how willing the brand’s top executives are to recognize when it is time to move on and jettison a strategy that is holding the brand back. 

At its core, however, and according to the business press, the Elliot Investment Management approach appears to be a financial play for better margins and better performance and higher stock price. In other words, more profit. Sure, Southwest Airlines has a lot of issues that affect all stakeholders.. The fear is that the Southwest Airlines brand will take a hit. A lot of observers see the end result of this activist action as grounding what Southwest stands for in the eyes of its customers just to satisfy shareholders.  

Satisfying shareholders at the expense of customers is another tendency for trouble. One of Peter Drucker’s mantras was” The purpose of business is to create a customer.” Losing customer focus is a certain path to trouble. The future belongs to customer-focused businesses that are best at attracting and retaining customers resulting in sustainable, profitable share growth.

Of course, stop the bleeding must be the first step in a turnaround. But, turnarounds require 1) stopping any decline in the core customer base by clarifying the brand’s purpose and promise; 2) achieving cultural alignment; 3) defining an immediate 90-day plan and 4) defining and implementing a Plan to Win.

One critic stated that Elliot Investment Management has no plan to “fix” Southwest Airlines. The critic posted that Elliot Investment Management’s entire plan, as clear in the presentation, is to turn Southwest Airlines into an ATM for its shareholders. If Elliot Investment Management is actually interested in fixing Southwest I order to generate enduring profitable growth as opposed to just profit, believing that the Southwest Airlines brand is a valuable asset to be properly managed and nurtured and grown might make Elliot Investment Management changes more palatable and more profitable.

What has happened to quality? This is no trivial question.  When you think about all the quality issues plaguing products and service, you recognize how shocking is the current state of quality. Brand-businesses need a new quality revolution.

Think about the state of quality:

Of course, there is Boeing. Which is a horrible situation. But, not a total surprise when you read about the financial engineering that created the current Boeing brand; financial shenanigans that allowed Boeing to morph into a business where seemingly maximizing shareholder profits over customer safety took priority; where seemingly executives believed you can cost-manage your way to enduring profitable growth. Poor quality components from Boeing’s supplier was only part of the problem. At Boeing’s manufacturing plant, safety problems were just pushed down the line, until no one took responsibility or the problems were forgotten about. Even with the tragic deaths, the safety problems lingered and grew. It took a door falling off in-flight to put the spotlight on just how serious are the safety issues.

The FAA is allowing Boeing to create its own safety and quality plan. The FAA told The New York Times, “ We need to see a strong and unwavering commitment to safety and quality that endures over time. This is about systematic change and there’s a lot of work to be done.”

But, Boeing is just one example.

There are driverless car incidents. There are outbreaks of E-coli produce. There are multiple salmonella and listeria contamination issues with some cheese products. There are recalls of Fiji bottled water. It seems as if there are bacteria and high levels of manganese in at least 1.9 million bottles of (recalled) Fiji water. Even Cheerios, a beloved cereal brand has problems with forever chemicals.

Bayer is still figuring out how to fix the Round-Up issue, and not just financially. Sure, there is a financial problem; but court cases infer that users developed cancer and/or died from Round-up’s usage.  

3M has had to pay serious fines for its problems with military earplugs. It is disappointing. The brand so closely associated with innovation created ear plugs for our military that actually do not work, apparently causing hearing loss and worse. How does this happen?

Philips, the maker of toothbrushes and medical systems, designed CPAP machines that actually harm users. When users initially complained about noise from CPAP machines, Philips used noise abatement insulation for the CPAP machines. But, noise abatement insulation breaks down in the machine. The machines become filthy with bacteria. People breathe this in at night, harming users. We learned that 560 users died. Reports state that Philips hid the complaints and deaths until it could not hide anymore.

Court cases seem to reveal that J&J, which recently spun off its consumer products, such as Band-Aid and Listerine as well as J&J baby products into a company called Kenvue, used asbestos in its talcum powder for decades. Women became ill with ovarian cancer. Women died. 

The FDA warned doctors not to use Getinge surgical heart devices as these apparently do not work and can cause death.

Starbucks asked Toyota for help with quality control in Starbucks operations. It appears as if the very long wait-times for a Starbucks order is upsetting customers and impairing the Starbucks brand.

GM’s Chevy Bolt, an original EV offering at an affordable price was shut down due to unfixable battery fires. Now, GM is resurrecting the brand again. Do we know what GM doing differently to make Chevy Bolt vehicles that do not catch on fire?

Ford recalled its new Maverick pick-up trucks due to tail light malfunctions. The malfunctions are in the vehicle’s electrical system. Ford determined that the malfunctions can cause accidents; accidents that can be serious.

A week does not go by without a recall of something, even  cinnamon. Cinnamon from certain manufacturers has contaminants. Certain applesauce products have recalls.

What has happened? 

The manufacturing revolution that maximized quality and deified quality proponents, ensured that production focus on zero defects. The quality revolution embedded the thought that quality is everyone’s responsibility. Toyota used the quality principles of Dr. Edward Deming and brought cars into America that were beyond reliable. 

There once was a time when new cars had screws and bolts on the floor of the vehicle. Or, your new car would not start. When GM introduced the Chevy Blazer, the roof leaked. So, when Toyota broke into the US automotive market with cars that looked a bit strange but started each and every time, we Americans were stunned. 

Toyota is still the quality leader in manufacturing and mindset. Lexus and Toyota are the top two most dependable, reliable vehicles in the 2024 J.D. Power survey.

Today, it is as if we have reached some threshold on quality. We, as consumers, seem resigned to products and services with defects. We do not flinch. We live in a beta-test world where we are the guinea pigs. We just accept the quality issues and move on. It is as if no one cares about quality anymore. 

Looking at the article listings for Harvard Business Review, there has not been an article about quality, quality processes or quality in manufacturing since 2019.  Just one article in 2019. Before that, one article in 2014. 

It used to be multiple articles a year.  In the 1990’s, there were not only articles in HBR, but HBR Press published books and compendiums of articles on quality. At HBR, there were lots of books and articles about quality customer service, as well.  James Heskett, W. Earl Sasser Jr. and Leonard Schlesinger were frequent contributors on service quality up until 2008.

To back up, a bit, there once was a major quality revolution in the US. There were a handful of quality proponents who led the quality revolution: Philip Crosby, Joseph Juran, Edward Deming, Peter Drucker.

Edward Deming was a statistician and the president of the ASA, American Statistical Association. He was run out of the USA because he had a radical view about quality. He believed that quality was consistent conformance to expectations. Using that definition, the highest quality restaurant would be McDonald’s. This caused derision. Dr. Deming’s view was, “Build quality in, don’t test it out…”

Many manufacturers believe quality control is all about a testing and inspection systems. They see quality is an evaluation tool. Which do we want: quality evaluation or quality management? These two are very different mindsets. Physical and technical compliance are not unimportant. But, quality is more than that, much more. 

Dr. Deming said quality control is not a department. He said quality is an organizational commitment. It is not someone’s responsibility. It is everyone’s responsibility. He said that every employee is in charge of quality. But, ultimately, quality is determined by customers in use, not by occasional inspections and audits. In other words, the customer has the “say” on quality.

Dr. Deming’s objectives were 100% customer satisfaction, zero defects and zero variability from expectation. These are conditions that most manufacturers and service providers adhere to now.

You can boil down the ideas of Juran, Deming, Drucker and Crosby as follows:

• Crosby… Conformance to requirements and customer specifications 
• Juran… Extent to which a product successfully serves the purpose of the user  
• Deming… Efficient production of the quality that the market expects 
• Drucker… Quality is not what the supplier puts in; it is what the customer gets out 

These ideas had a profound effect on manufacturing in the 1950s, 1960s, 1970s and had a major influence on quality work conducted in the 1980s and 1990s.

In 1987, the US Congress established The Malcolm Baldrige National Quality Award (MBNQA) to raise awareness of quality management and to recognize U.S. companies that implemented successful quality management systems. The award was and continues to be the nation’s highest presidential honor for performance excellence.

So what is quality? 

Quality is consistent conformance to customer expectations. Quality is not what the brand promises. Quality is not what the brand intends. Quality is perceived and defined by customers. Living up to expectations consistently is how a brand becomes a trusted brand. Building trust builds brand power.  Quality is a condition for generating enduring profitable growth.

A quality brand is more than a quality product or service. A quality brand is a quality product or service marketed and managed in a quality manner. Quality must permeate every aspect of every contact with the customer. Perceived quality is overwhelmingly the most important determinant of brand strength.

Research consistently shows that brands perceived as high quality have double the earnings of brands seen as low quality.  

In 1990, a marketer named Peter Doyle published an article on research he conducted. He said: “Quality generates higher margins in two ways: 1) quality boosts market share, which results in lower unit costs through economies of scale. And 2) by creating a differential advantage, quality permits higher relative prices.”

We know through other quantitative data that high quality brands are the strongest price competitors. They can hold a high market share and higher prices.

Quality people, quality results, quality experiences, quality attitudes, quality behaviors, quality profits allow a brand to attract and retain quality people who produce premium quality branded experiences that users love. 

As Phillip Crosby said, quality is not an investment in the future;  it is a present day cost of doing business. Quality does not increase costs; it reduces costs. Quality does not cut into profits; it increases profitability. This is because quality leads to increased customer satisfaction. And, this leads to increased customer loyalty; reduced price sensitivity; higher repeat purchase and loyalty; leading to more sales. In other words, quality does not cost money.  Quality makes money. Quality leads to profits.

Failing to consistently live up to brand promises costs money.  Delivering quality does not cost a lot of money to do, but costs a lot if you do not do it. The answer: Continuously improve.

Quality is critical. But, quality is not one thing. Quality is different on the manufacturing line than it is in a call center or at a hotel front desk or behind the cash register at a fast-food restaurant. Having a solid quality control process and quality standards along with engaged employees and an organizational commitment to quality are essential. 

In 2007, the president of Toyota was interviewed for an HBR article. Here is what Katsuaki Watanabe said: 

“To me, becoming number one isn’t about being the world leader in terms of how many automobiles we manufacture or sell in a year, or about generating the most sales revenues or profits. Being number one is about being the best in the world in terms of quality on a sustained basis. I attach the greatest value and importance to quality; that lies at the root of my management style. It’s critical for Toyota to keep making the highest-quality vehicles in the world—the best products in every way, manufactured without any defects. Unless we enhance quality today, we can’t hope for growth in the future. That’s why we are investing in the development of new technologies, new processes, and human resources. My top priority is to ensure that we do that resolutely, sure-footedly, and in a thorough fashion. We’ve never tried to become number one in terms of volumes or revenues; as long as we keep improving our quality, size will automatically follow.”

After Starbucks recent second quarter 2024 earnings call, founder and past three-time CEO Howard Schultz posted comments about his hand-picked successor’s strategy. Mr. Schultz reacted to statements made to analysts by Starbucks’ CEO, Laxman Narasimhan and CFO, Rachel Ruggeri, where both executives described Starbucks’ “underperformance.” Mr. Narasimhan and Ms. Ruggeri also handled analyst questions with an abruptness that seemed to leave a lot unsaid. Both Mr. Narasimhan and Ms. Ruggeri stated, however, that Starbucks is a great brand with enormous opportunity ahead. The comments sounded hollow as Starbucks is already a great brand with enormous opportunity, but only if properly managed.

The press picked up on Howard Schultz’ very public concerns. Mr. Schulz was quite clear: Starbucks’ problems are not the weather and not “headwinds.” Mr. Schultz sees Starbucks’ problems stemming from a loss of focus on the US stores. There was some concern on the part of analysts as well. As one analyst said when questioning the quarterly performance and Starbucks’ C-suite responses:

“I guess, you know, I’m trying to think through the sequencing of how we got here today, and it seems like in October, and early November, at the Analyst Meeting demand was not a problem in the U.S.

“And, I hear you saying that you have a lot of unmet demand. But could you, excuse me, kind of help us do a hindsight on how these issues have come to a crux, so quickly just four or five months hence since those kind of very ambitious goals that were given?

Mr. Schultz wants Starbucks to remain the customer’s Third Place. Mr. Schultz understands that Starbucks Third Place between home and work, its “café society” positioning, has evolved due to technology and changed customer behaviors. But, the Third Place experiential context is still important and compelling. In a world where customers want and where brands create experiences, why are Starbucks executives seemingly not focusing on the Starbucks experience?

Mr. Schultz worries that Mr. Narasimhan’s executive team is more focused on transactional issues than experiential issues. And, judging from the earnings call transcript, there is a sense that how a person purchases Starbucks is front and center. The earnings call did not highlight what actually makes Starbuck’s so compelling and what can continue to keep Starbucks growing and profitable in the experiential role that it originated.

In his third stint as CEO, Howard Schultz provided a roadmap, a vision of a “reimagined” Starbucks Third Place. Mr. Schultz recognized that how we live changed over the past 35 years of Starbucks history. But, he also understood that the emotional and social rewards delivered by Starbucks were, and still are, critical human needs: the need to belong and the need to be uniquely independent.

We all need to belong. We want to belong to something bigger than ourselves: a community, a network, a business, a family, a cause, a union, a nation, a neighborhood or a place. Belonging requires connecting. Connections are part of the Starbucks experience. 

At the same time, we want to be ourselves. We want to be individuals. We want to be seen and respected as individuals with special characteristics. We want to be independent and unique. 

Starbucks offers both: belong to a community, a place and individualize your beverage. Be unique like all of your friends.

Social behavior research suggests that both independence and belonging are essential for finding and securing our place in life.  And, sociologists, psychologists, behaviorists and those who study culture speak of the power of the independent self and the interdependent self and the ways in which these interact. The personal self and the social self “mutually reinforce each other.”

Technology may have enhanced and altered how we behave independently and interdependently, but technology has not changed our driving human needs. The need for a place where we can be both individual and inclusive still remains.  Starbucks’ café society experience satisfied our desire to be part of something, to connect while allowing us to be individuals.

In his post, Mr. Schultz suggested that focusing on the channels of how we receive our Starbucks is important but channels are all about the way in which we deliver a brand promise. Starbucks needs to work on making the third place experience contemporary.

In September 2022, Starbucks offered this vision for the brand:

“Fast forward 35 years, and as the world has evolved, so has the Third Place. Starbucks stores are serving more people each day than ever, with customers often ordering on their phones instead of at the counter. The menu has grown from just a handful of drinks to dozens, with stores built for mostly hot beverages straining to meet the demand for more customized drinks and cold beverages. And food is an increasingly important part of the mix – what was once a case of mostly breakfast pastries case is now a food platform that includes warmed sandwiches, available all day long.

“As Starbucks is reinventing the company, it is also reimagining the Third Place – keeping coffee and connection at the center.”

Additionally, Starbucks stated:

Today, we find ourselves at another unique moment; a moment that challenges us to reinvent and think differently,” said John Culver, group president, North America and chief operating officer. “Our partners have come to expect more from us. Our customers have come to expect more from us.  And it is clear our physical stores must modernize to meet this moment.”

Starbucks described its brand essence as “delivering experiential convenience, in a way only Starbucks can.” To do this, Starbucks needs to make it easier to work there and easier for its employees to connect with customers and vice versa.

Mr. Schultz provided a strategic map. There were three must-do’s: 1) purpose-built store design, 2) coffee and craft, and 3) elevating experiential convenience. 

All three of these must-do’s focused on keeping Starbucks’ Third Place experience contemporary. 

Purpose-Built Design would “’reimagine our store experience for greater connection, ease and a planet positive impact.’ Starbucks purpose-built store design approach would modernize physical stores to serve the increasing demand while creating an environment that is inclusive and accessible, through the lens of sustainability. To help drive innovation, Starbucks has turned to the team of R&D experts and baristas working side-by-side in Starbucks Tryer Center, to help streamline the work behind the counter, and enable more time for genuine human connection.”

Coffee and Craft would “reimagine the coffee experience with breakthrough beverage innovation that elevates coffee craft and quality. Whether the coffee is hot or cold – Starbucks is turning to proprietary, patented technology invented in-house, like the new Clover Vertica™, which offers every customer a freshly brewed cup of coffee in just 30 seconds. Coffee is at the center of who we are and remains on the forefront of anticipating what customers love and our partners are proud to deliver.”

Elevating Experiential Convenience would focus on the total brand experience. “The Third Place has never been defined solely by a physical space, it’s also the feeling of warmth, connection, a sense of belonging Starbucks. Digital technology is helping augment and extend that feeling of connection with customers – whether they are in Starbucks stores, in their cars, on their doorsteps.

“One way Starbucks is doing this is through Mobile Order on the Starbucks app. Starbucks is enhancing Mobile Order to make it easier for customers to order, anticipate when their order will be ready, and make it easier and more efficient for partners to serve mobile order customers, eliminating some of the stress at peak times. Mobile ordering is also being extended to more licensed locations at airports and grocery stores.

“The company also unveiled Starbucks Odyssey, a new experience powered by Web3 technology that will foster connection and unlock access to new experiential benefits and immersive coffee experiences for Starbucks® Rewards members and partners in the U.S. Starbucks is one of the first companies to integrate Web3 technology with an industry-leading loyalty program at scale, while creating a community online that will enable new ways for Starbucks to engage with its members and its partners. As of Monday, customers and partners are now able to join the waitlist for a chance to be among the first to receive access to the Starbucks Odyssey experience, which will launch later this year.” “We have a heritage of continuously adapting how we serve customers, anticipating where they are going and innovating to take them there. Connection is who Starbucks has always been.’”

Nothing happens until it happens at retail. 

Very few people are like Howard Schultz who deeply understand this idea. Place is more than a space. Place is more than its operations. Place is more than its offerings.

Years and years ago, with the Surgeon General’s report on cigarettes, Philip Morris decided to forgo the emphasis on the “smoke” of Marlboro and, rather, evoke a place. The place was Marlboro Country. Marlboro Country spoke to all Marlboro’s benefits and rewards. Philip Morris did the same with Miller Beer. Miller Beer created Miller Time, that special time and place after a hard day’s work.

The wonderful southern writer, Eudora Welty, believed place was the anchor when crafting a story. She understood how the powerful description of place grounded a story. She wrote,

“Place has a more lasting identity than we have, and we unswervingly tend to attach ourselves to identity. Experience has ever advised us to base validity on point of origin. Place … is the named, identified, concrete, exact, and exacting, and therefore credible, gathering spot of all that has been felt, is about to be experienced. Location pertains to feeling; feeling profoundly pertains to place; place in history partakes of feeling, as feeling about history partakes of place. Place is seen in a frame. Not an empty frame, a brimming one. Point of view is a sort of burning-glass, a product of personal experience and time; it is burnished with feelings and sensibilities, charged from moment to moment with sun-points of imagination.”

True of writing and true of retail. Place has power. Mr. Schultz loves the Starbucks “place.” He is committed to Starbucks thriving as a Third Place. Of course, he sees the financial issues and the shopping issues that are troubling Starbucks. But, he also knows that fixing the place which drives the total brand experience, making the brand place beloved, is task number one. Place is the face of your brand.

Mr. Schultz’ concern is that the current management focus is only on the sale and not the sensibilities. There is also a heavy focus on attracting new customers. The problem is that core customers, new customers, occasional customers will become increasingly transactional if the place loses its relevance and its differentiation.

As Mr. Schultz wrote, what is missing is a “maniacal focus on the customer experience.” And, he pointed out that data are OK, but “The answer does not lie in the data, but in the stores.” Falling under the spell of data allows management to put the onus on measurement. Further, Mr. Schultz reiterated his 2022 strategy that galvanized the brand around the total brand experience. “Through it all, focus on being experiential, not transactional.” 

Current management has the opportunity to increase Starbucks‘ brand value by enhancing the Starbucks brand experience relative to the customer-perceived costs of money, time and effort. And, by building trust. Letting the third place become no place would be tragedy.

Recent data show that US fertility rates are dropping. US women are giving birth “at record low rates,” according to the CDC. Demographers’ current concern is the “replacement rate.” Replacement rate is the total fertility rate at which women give birth to enough babies to sustain population levels – that is, replace a generation. Replacement rate assumes that death rates remain constant and net migration is zero.

Right now, the US replacement rate is well below the 2.1 children necessary for generational fulfillment. This number affects many socio-economic issues including labor pools, Social Security funding and the military. The current and future landscapes of brands are already being and will continue to be affected as well. 

It is true that there is a US youth population similar in size to the Baby Boom generation. This demographic phenomenon means that manufacturers and brands are dealing with a population that is both older and younger at the same time. However, the lower number of babies relates to a different impact altogether. The fewer babies born, the more the challenges and the opportunities for brands. The impact of fewer babies on brands is already significant.

Demographics matter. Demographics matter for brands, not just demographers and army recruiting stations. 

Brand-businesses must focus on more than digital and AI. It is imperative to focus on the actual people who will be buying brands that are marketed digitally or experienced through advanced AI technologies.

Forget about the past when demographics was the sleepy section at the end of every survey. Demographics is no longer just for survey screening. Demographics is the way in which our world is shaping up. And, unless there is some major global apocalypse, far beyond the scope of the recent coronavirus, demographics will happen. 

Brands must be ready.

Let’s look at diapers. P&G and Kimberly-Clark face a new reality. The issues with diapers are not just about competitive features and benefits, as well as prices, which increased steadily. Diapers are one business where as demand goes down, price goes up.

A critical diaper issue is the fact that there are fewer babies to wear those diapers. Diapers are serious, profitable businesses for P&G and Kimberly-Clark. As reported on Bloomberg.com, the “stagnating birth rate” is intensifying the “rivalry” between these two diaper manufacturers. 

The conflict came to a head recently. Kimberly-Clark changed the fit of its Little Movers diapers and advertised this change to customers as the best fitting diaper. P&G challenged the claim with the NAD (National Advertising Division of the BBB National Programs) and won. Little Movers will alter or remove its ads. Previously, Kimberly-Clark challenged a P&G claim and won.

Bloomberg points out, “P&G and Kimberly-Clark…  together claim more than half of the US diaper market. P&G’s yearly sales for Pampers alone are more than $7 billion globally, almost 9% of company sales. But the volume of baby-care products sold declined in the fourth quarter amid higher prices. The category is also large for Kimberly-Clark, which gets more than a third of its revenue, or about $7 billion, from baby- and child-care items.”

Both Kimberly-Clark and P&G spend money, time and effort innovating and renovating their lines of diapers. Bloomberg states that Huggies has moisturizing baby wipes, fragrance free diapers and baby clothes.  P&G has focused on bigger sizes and overnight training pants. These are not for newborns. Pampers is a high priced brand, so revenues may be up but fewer people are buying. Luvs, P&G’s more affordable brand, is having a difficult time. 

Adult diapers are a fast-growth category especially since Baby Boomers are well into their 70’s.

But even with adult diaper growth, data show that adult diapers are still not even half of the baby diaper marketplace.  

Diapers for toilet-trained older children who need some extra protection at night is also a focus. P&G told Bloomberg, that the company is producing diapers for larger kids. In the past year, Pampers introduced a size 8, for children weighing 46 pounds or more. One observer stated, “The diaper makers have been finding ways of extending the lifetime of their customer—overnight pants for toddlers, overnight pants for even older kids. So that’s helped a bit.”

From a brand standpoint, the lower birthrate is problematic not just for diapers. There are problems for makers of baby toiletries such as shampoo, soaps, lotions, diaper rash balms. There are concerns for baby wipes, baby foods, baby furniture, baby formula, baby bottles, breast pumps, maternity clothes, strollers, books, car seats and baby toys. 

Toys are an especially fickle market. Just look at how quickly people lost interest in Barbie after its blockbuster movie. Toys R’Us is precariously balancing its comeback with stores within Macy’s stores. And, even though Macy’s is in trouble, the demographic troubles will also be significant hurdles to Toys R’Us revitalization. Toys for babies and toddlers are big business. Once a kid discovers digital adventures, they are glued to the family computer. Toys R’Us becomes a less interesting place.

But, let’s take the word baby out of the picture. Imagine the consequences for public education, for example. School districts rely on funding based on number of students. What if there are fewer students? Child care is very expensive. But, imagine there are fewer children to be cared for by non-family members.  Or children’s sports such as T-ball or soccer.  There are entire infrastructures built into kids’ sports.

Zoo visits might decline, As will grandparents. You need children for grandparents to exist. Food purchases will be lower. Houses will not need as many bedrooms and bathrooms. Cities and towns will put fewer dollars into playgrounds. It is a rare occurrence to have a playground with activities for adults as in Philadelphia’s new Anna C. Verna Playground in FDR Memorial Park.  There you can find a megaswing that can handle more than 20 people at a time… not just kids.

Medical practices might alter. There would be fewer maternity wards; fewer children’s wards; fewer obstetricians; fewer children’s hospitals; fewer pediatricians; fewer pediatric dentists. Health care costs would change as well.  

Lawyers will have fewer custody cases. Theme parks will have fewer kid visits. Child services will need to refocus. Some colleges may disappear. The pet industry may continue to grow.

A couple of years ago, McDonald’s promoted an adult Happy Meal. It was a big hit. But beyond being a sentimental traffic-driver, the fact is that when there are fewer kids, there are fewer kids’ Happy Meals sold. Burger King is urging crew members to put crowns on adults. Possibly because there are fewer kids to wear the crowns.

Although the demographic data may sound bleak, there are still babies in the US and woman are still having babies. There are just not enough babies being born. For all sorts of reasons, women are delaying pregnancies. Demographers indicate that women are saying they want to have children, just not now. Knowing how long the “not now” will last is tricky to forecast. 

In the meantime, brands as well as organizations such as the military or libraries or municipalities must realistically focus on future-proofing themselves for a world with fewer infants leading to smaller cohorts of youth and young adults. Future-proofing means being prepared. Being prepared means that your brand is ready, agile and able to accept, withstand and make changes for enduring profitable growth. Future-proofing is not foolproof, but it is a serious step in the right direction. 

What can brands do to be prepared? 

To maintain market relevance, brands must do the following: 

• Begin with having a thorough knowledge of the marketplace. 
• Develop a true understanding of customer-defined market segmentation. 
• Generate relevant insight into customers’ behaviors. 
• Prioritize the market segments. 
• Use knowledge and insights, define the Promise of the brand to appeal to the prioritized market segments.

Here are three fundamentals for creating or adapting products or services to a new demographic landscape.

Conduct Needs-Based Occasion-Driven Market Segmentation

The purpose of market segmentation is identifying and understanding a brand’s customers. Viable, actionable market segmentation addresses several key areas to assist in directing brand-business strategy and brand policy. Segmentation can also help in managing resource allocation. 

Market segmentation requires craft as well as research skill. Contrary to what many academics, researchers, and consultants say, the output of a segmentation study does not reveal truth. In fact, it can raise more questions than you had beforehand. If analyzed and synthesized with intelligence and creativity, market segmentation can provide insight into the following: 

• Superior understanding of the customer so the brand can pro- vide outstanding competitive advantage 
• Strategic focus that is fundamental to effective marketing 
• Identifying market priorities; effective market segmentation drives business strategy, not just brand strategy 

A proper market segmentation study should help you answer these three key questions: 

• Who are the prime customers and prospects? 
• What are their needs and problems? 
• What are the occasions in which these needs and problems occur? 

Satisfying customer desires and understanding the occasions in which these occur is the key differentiator between marketing and selling. Selling is about convincing customers to buy what we know how to provide. Marketing is about providing what we know customers want or might want or that satisfies their problems. Superior understanding of consumer needs and occasions provides the basis for outstanding competitive advantage. 

Generate Genuine customer-Driven Insights

Real insights are incredibly valuable. 

Unfortunately, insight is now a marketing cliché. Insight is mis-understood, misused, mistaken and meaningless. Marketers made it a meaningless, useless term. Why? Because marketers have turned everything into insights. And, when everything is an insight, nothing is an insight.

• Is it insight to discover that people’s incomes are under strain and stress? 
• Is it insight to learn that people want an easy-to-use clothes washing- machine?
• Is it insight to learn that people like food that tastes good? 
• Is it insight to learn that people prefer a dog food the dog will eat?
• Is it insight to learn that a business-to-business customer wants a computer system that won’t go down?

These are not insights. These are observations of the obvious. Yet, in each case, these were reported as insights based on extensive research.

Meaningful insights are more than mere information. Meaningful insights need to meet two criteria:

1. Surprise at what you learned. And, as a result of this surprise, 
2. A change in behavior based on this learning.

Real, actionable insight will not come from superior data analysis. Business schools are turning out MBAs who are analyzers rather than synthesizers. MBA has come to mean, “manage by analytics.” Soon, if not already, with all the MBA financial engineers, MBA will come to mean “murderer of brand assets.”

Superior analysis provides understanding of where we are and how we got to where we are. Superior analysis does not provide insight into what kind of future we can create. 

One thing we do have today is lots of information. To generate genuine insights, go from information to insight. This insight will be informed insight; informed judgment not guesswork. Insight means seeing below the surface of information.  Insight relies on synthesizing rather than analyzing.

Analysis travels backward. But, brands move forward. Brands are a future promise as in “This brand will promise to do.…” So we must use synthesis. Synthesis means… “the combining of diverse concepts into a new coherent whole.” Analysis leads to understanding what is happening and why. Synthesis leads to  genuine insight into what might happen.

Solve Problems

Problem-solution is one of the best ways to generate a new or improved product or service.

For example, in 2004, McDonald’s had a problem with mothers of small children. Kids loved Happy Meals. Children were happy with the Happy Meals, but mothers were unhappy. Mothers told McDonald’s there was nothing for them to eat while their kids enjoyed the Happy Meal. All mothers found on the menu board was coffee. OK, sometimes, moms picked at their kids’ fries.  McDonald’s solved the mothers’ problem with a chicken Caesar salad accompanied by Paul Newman salad dressing.

Dyson solved a problem by eliminating bags from vacuum cleaners. TravelPro solved a problem by putting wheels on suitcases. Problem- solution should be at the basis of innovation and renovation. Products and services must address customer problems, satisfy customer needs or anticipate customer needs. 

Demographics will happen. How a brand-business addresses the demographic waves is not so certain.  As one consultant told Bloomberg, “I wouldn’t count on the birthrates suddenly changing direction, it’s a cultural fact.”

But, by understanding potential market segments, generating genuine insights about these segments and solving problems, you can be confident that what you are doing is the better road to enduring profitable growth.

Brands do not always survive financial engineering. Sears is an example. Bed Bath & Beyond is another. Toys R’Us is still struggling after a bankruptcy and collapse. Quiznos survived bankruptcy but is a small shadow of its former self.

Some brands are lucky. Some brands manage to slog through numerous mergers, spinoffs and sales to generate full recovery and more. Allstate, Discover Financial and Coldwell Banker are three that not only survived but are now giants in their industries. Interestingly, Allstate, Discover and Coldwell Banker were owned by Sears. Luckily, these brands escaped Sears’ fate. 

Many of the brands that have massive debt tend to disappear. Or these brands find ways in which to stay alive but through different methods such as Bed Bath & Beyond which sold its name and is now an online operation of Overstock.com. Toys R’Us tried a revival by opting for stores within Macy’s. Unfortunately, Macy’s is not doing well and is closing stores.

Financial engineering is the catchall phrase for extreme cost cutting. This cost cutting includes job losses, debt accumulation, share buy-backs, increased dividends, forced spinoffs and money siphoned into the pockets of investors rather than invested into sustainable profitable growth of businesses.

Financial engineers see strong brand equity as an opportunity to extract value rather than extend brand strength.  This is a form of brand extortion. Proponents of financial engineering take brand loyalty for granted. Investments in continuous improvement and innovation are decreased as dividends and share buybacks are increased. Monies are transferred from R&D, customer insight research, service and support and marketing resources.

Financial engineering is a shareholder-driven rather than a customer-driven way of doing business. Some private equity activist investors focus on making short-term gain for shareholders, rather than building a brand that requires both short-term and long-term strategies. Resources that should be invested in brand building are siphoned into shareholders’ pockets.

It appears as if the iconic seafood restaurant, Red Lobster, is possibly headed for bankruptcy court. Bloomberg BusinessWeek reporting indicates that Red Lobster needs to restructure its huge debt, renegotiate a large number of leases and, hopefully, extricate itself from some long-term contracts.

A large part of the Red Lobster problem relates to its numerous owners along with associated management changes since 2014. Brand-businesses need consistency. 

In 2014, Starboard Value LP led by activist investor Jeffrey Smith, took a major position in Darden Restaurants. In a long, detailed presentation, Mr. Smith excoriated Darden for mismanagement of the portfolio (Red Lobster, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen) and for preventing the brands from making more money for shareholders. Starboard Value LP fought for replacement of twelve Board members due to declining profit. (Darden also owns Darden Specialty Restaurant Group: Bahama Breeze, Seasons 52, Yard House, The Capital Grille and Eddie V’s Prime Seafood.)

At the time, the Darden Board of Directors saw selling Red Lobster as a means of showing their fiscal performance. Starboard’s reaction was ballistic, creating such animosity that the Darden Board issued an open letter to shareholders accusing Starboard of making false and misleading statements.

Eventually, Starboard won. The entire Board of Darden was completely replaced. But not before Darden’s Board sold Red Lobster. 

In 2015, to give shareholders more money, Starboard spun off the portfolio’s real estate into a REIT for short-term shareholder returns. Once the REIT hit the news, Darden’s stock price rose as much as 5.8%, advancing its yearly rise to more than 20%. However, Darden admitted that marketing costs went down and customer traffic dipped. You cannot build a strong business on a declining customer base.

What happened next was surprising. Originally, Starboard focused on Olive Garden implementing severe cost-cutting as the way to fix its businesses. Customers started complaining and complaining with their feet. Starboard realized that financial engineering was not working. But, overtime, Darden Restaurants learned the limitations of financial engineering and focused on building equity in its portfolio. Starboard reversed its approach by focusing on re-energizing Olive Garden.

As of today, Olive Garden is a viable restaurant with a loyal base. There are concerns that continuous price hikes have alienated Olive Garden’s low income customers. This is a potential problem because you cannot build a strong business on a declining customer base. But, Olive Garden is doing well. Unlike its lost sibling, Red Lobster.

But, Red Lobster suffered a different fate.

In the 1980s, many large corporations branched out from their areas of expertise to own leading brands. General Mills, the US multi-national food manufacturer, was one of these companies, expanding into toys in 1965 and then into restaurants with the 1970 acquisition of the 5-store seafood restaurant, Red Lobster, founded in 1968. General Mills created a division called General Mills Restaurants, which developed the Italian-themed Olive Garden in 1982. General Mills spun off General Mills Restaurants to shareholders in 1995 calling it Darden Restaurants.

Under pressure from Starboard as to possible mismanagement, the Darden Board of Directors made the fateful decision authorizing the sale of the Red Lobster brand to Golden Gate Capital, a San Francisco private equity firm, owners of Romano’s Macaroni Grill and California Pizza Kitchen. The Darden Board based the Red Lobster sale price on a review of the brand, its customer base, rising commodity prices for seafood and the brand’s declining guest counts. 

The Darden Board hoped to use Red Lobster’s sale as a means of generating more shareholder money. the sale of Red Lobster for $2.1 billion to Golden Gate Capital was a hail Mary pass. Darden received 1.6 billion indicating that $1 billion would be used to address outstanding debt.

The first nail in Red Lobster’s coffin was that this sale to Golden Gate Capital was a leveraged buyout. A leveraged buyout (LBO) is when one business acquires another business using lots of borrowed money that allows for the purchase. Using debt, instead of its own money, helps the buyer reduce costs of financing the purchase. Unfortunately, if the purchased entity is a poor performer, there is a risk of major cash flow losses.

An LBO just piles on debt, in many cases, crushing debt. At the time of Golden Gate Capital’s LBO of Red Lobster, Thai Union Group, a seafood supplier, owned 25% of Red Lobster. Thai Union Group eventually bought Golden Gate Capital’s stake in Red Lobster in 2021. 

Bloomberg BusinessWeek indicates that Thai Union Group wrote down its stake in Red Lobster this year. Thai Union recorded a share loss of $19 million in the first nine months of 2023, according to The New York Post. Because of this loss, Thai Union reported a $530 million non-cash impairment charge in its fourth quarter earnings.

Basically, this means that the value of Red Lobster is now reduced. This loss of value appears on Thai Union’s balance sheet. With this impairment stated, the carrying value of Red Lobster’s goodwill is now the new accounting basis.  Goodwill is the purchase price of a company less the difference between the fair market value of the assets and liabilities. Red Lobster is just not worth as much as it used to be worth. Writing down assets happens when there is financial engineering. Money is not intended to build the brand-business as an asset. This happened to numerous Kraft Heinz brands as 3G Capital focused on their zero-based budgeting at the expense of the iconic brands in the Kraft Heinz portfolio.

A spokesperson for Thai Union stated: “The combination of COVID-19 pandemic, sustained industry headwinds, higher interest rates and rising material and labor costs have impacted Red Lobster, resulting in prolonged negative financial contributions to Thai Union and its shareholders.”

Just last month in March 2024,, Red Lobster hired Jonathan Tibus as CEO. Mr. Tibus is a bankruptcy and restructuring expert. Mr. Tibius was CEO during the bankruptcy of Kona Grill. He was also chief restructuring officer of Krystal, the Southern fast-food restaurant known for its small, square burgers, aka sliders. Reporting indicates that Red Lobster executives saw Red Lobster as “walking dead.” So, the focus became what options are available to save the company. 

Unfortunately, Red Lobster had debt the minute it arrived at Golden Gate Capital. Juggling debt payments, onerous leases and labor costs mad matters even worse. Brands pay the price for the pecuniary, greedy actions of financial engineers who favor shareholder value over customer value. What financial engineers do not understand is that without customer value there is no shareholder value. On the other hand, financial engineering is more about take-the-money-and-run. 

Additionally, tactics at Red Lobster generated losses rather than gains. According to CNN, the “endless shrimp promotion led to deep losses that the company is still trying to dig out of.“ To remedy these losses, Red Lobster’s answer is all you can eat lobster. “In celebration of its annual Lobsterfest, Red Lobster is giving 150 winners an“Endless Lobster Experience,” a two-hour complimentary feast of unlimited lobster, two sides and Cheddar Bay Biscuits.” 

These all-you-can-eat promotions do not promote the brand. These promotions attract meal-deal seekers at a huge cost to the business. These promotions seem especially off-base considering that Red Lobster posted a $12.5 million operating loss in fourth quarter 2023 alone. Free food or lots of food for very little money are probably not tactics to be used when you are going under water. As Albert Einstein said, “Insanity is doing the same thing over and over again expecting different results.”

What’s next? There is a significant chance that bankruptcy court is around the corner, However, now that Red Lobster’s bankruptcy plans may be closer to reality, holders of Red Lobster gift cards are ready to dine, just to use up the cash on the card before Armageddon. Hardly a brand win-win.