Business at Work the Best and Worst

Each Monday I post the next section of my 2001 book, which was originally called (by the publisher) Hoover’s Vision but which I have now retitled The Art of Enterprise. I have posted over half of it already; click on the “Monday” column to see all the prior sections. The entire book can be downloaded as a PDF for $10 at





33 Business at Work: The Best and the Worst

With the tools from the preceding chapters in hand, let’s take a look at a few of the most important and, I think, interesting industries in the US and the world today. The thoughts on the following pages are presented mainly to trigger thinking on your own part – not only about these industries, but about others as well, including your own.
In each case, we’ll try to put the industry in some perspective, then look at the ways the key companies are serving customers – or failing to serve them. And I’ll speculate a little on where things might go in the future, and where entrepreneurial thinkers, at big enterprises or small, may find opportunities.
You can learn a lot by examining the best and worst industries at work today. As I travel the world speaking, I attend a lot of conventions. Walking onto the floor of a trade show can be a great learning experience. You almost immediately begin to sense whether the industry is locked in the past, zooming into the future, or (as most are) somewhere in between. Some industry conventions still feature swimsuited models out of the 1950s pointing to shiny new products. Others have scannable convention badges and interactive online demonstrations. Some industries are in the forefront of change, while others seem stuck in the backwaters of history.
When we look at the weak industries, we can sometimes learn why they have gone astray and therefore things to avoid. Most important for an entrepreneur like myself, we can see unmet customer needs, opportunities for new products or new enterprises. When we look at the strong industries, we can see how things are done right. We can find ideas to inspire us in our own industries.
Of course, we could debate at great length which industry is the best and which is the worst. It is not a cut-and-dried affair. In the following pages, I give it my best shot. But the purpose of this discussion is less about picking the best and worst than it is about how to look at any industry – what to look for, what are the good signs and what are the bad signs.

The Best – Feeding the Millions

My nomination for today’s best industry, the one that does its job most effectively, is the food and beverage distribution industry. As you might expect, I define this industry very broadly, including every business that participates in the process whereby food travels from the farm, fishery, or factory to the mouths of hungry people. It includes supermarkets, convenience stores, candy stores, health food stores, gourmet shops, restaurants, fast food joints, neighborhood taverns, vending machines, roadside farm stands, and Starbucks. Add in the huge range of distributors, wholesalers, and other middlemen that help make it happen, and you have a sense of the diversity and size of the food distribution industry.
Last year I spoke at the Texas Restaurant Association convention. I had trouble tearing myself away from the trade show floor. I’ve never attended a convention that was more stimulating, more brimming with excitement, new ideas, and new technologies. Brainstorming with the industry leaders I met there helped me realize why the food industry is so strong.
First, the industry is intensely competitive. There are few government regulations except for health issues, and there are few government protections for the established competitors. Each participant must start each day anew in his or her efforts to satisfy customers. None can rest on their laurels.
Second, the industry is extremely diverse. My dad once owned a couple of tiny grocery stores in small Indiana towns; forty years later, I had the privilege of serving on the Board of Whole Foods Market, the Austin-based company that leads the natural foods grocery industry. From the corner store in the small Idaho town to Wal-Mart, from the Main Street luncheonette to McDonald’s, there is room for all. Many of the entrepreneurial immigrants to the US start out with convenience stores, produce markets, or small cafes. The next great idea in the food business could come from anywhere.
The enormous diversity of the food industry has given us a system that provides literally millions of choices, at all price points, available at all hours in every corner of the nation and even the world. Prices are low, efficiency is high. And the industry’s overall safety, as indicated by the low number of illnesses and deaths, is amazing given its size and diversity.
At the same time, it is important to realize that, at least in the US, this is a very mature industry. The share of our spending that goes to food continues to decline each year as we get wealthier and wealthier. In 1970, US spending on food was 32.5% of total retail spending. In 1999, the figure was down to 24.8%, an enormous shift. If this trend continues, the number will be 15% by mid-century.
Even more striking, over time we are moving away from food “at home” – purchased through stores – to food “away from home” – restaurants and the like. In 1970, eating and drinking places were 26% of the food spending. By 1999 they were up to 38.4%, an even more dramatic shift. If this rate of change continues, Americans will be spending more in bars and restaurants than they will be in grocery stores within 20 years. While this means that “food at home” is one of the slowest growing parts of our economy (under 4% per year), it is still an enormous business. 1999 revenues were $458 billion. The retail grocery business in the Chicago metropolitan area alone is about 5 times as big as Amazon. For anyone with a new idea, even the slightest twist on the formula, the upside potential is huge. And, if your idea is in the “food away from home” area, with sales of “only” $285 billion but annual growth in excess of 6%, the upside is substantially greater. Chicago’s foodservice sales are almost 4 times those of Amazon.
Of course consuming food is not a solely American predilection. The trends mentioned above are indicative of the other wealthy nations. Beyond those nations, among the most visible features of the world economy is the pervasiveness of people selling food to each other. In Bangkok, I watched the woman approach the main train station with a long stick across her shoulders, a bag hanging at each end. Where could she be headed? Turned out she was going to plop down on the lawn in front of the station, pull a wok from one bag and fresh veggies from the other, and start cooking – for whomever wanted some good, cheap home-cooking.
Whether it be the fellows grinding sugar cane in the streets of Mumbai or the teenagers chopping open fresh coconuts on the street corners of Rio, people are everywhere and at all levels in the food business. Often in front of the McDonald’s or under the Coca-Cola sign.
Most of the nations of the world are well behind the western world on the “food curve” – they spend a lot more than 24.8% of their “retail spending” on food. While the percent will come down, as it has in the US, the total dollar volume spent on food will rise dramatically. And most of that growth will be “food away from home.” The big fast food empires like McDonald’s must now look away from the mature US market for their future growth. But the opportunities around the world are staggering. And they are just as staggering for other food enterprises of all sizes, both the well-established and the embryonic.
Within the wealthy nations, there is still a great deal of opportunity left. While hamburgers may have run their course (in terms of increasing market share), international cuisines have only scratched the surface. Today there are only a handful of Brazilian restaurants in the US. Korean BBQ is still in the early stages. We may think of Italian food as Northern Italian or Southern Italian – but if you go to Italy, the food is Florentine or Bolognese of Venetian. It is unlikely that pizza will remain the only delivered meal in most US communities. In these dimensions and more, the US restaurant business has not scratched the surface. On the grocery store front, many of the world’s great eats – from Amazonian fruits to Japanese seafood – are not yet widely available in the US.
In addition, Americans are famous for their snacking. At least I am. Check the sales and profits at Nabisco and Frito-Lay. And yet our foodservice industry has not yet jumped into this game. In Spain, you will find Tapas bars selling small bites, in Italy you will find bars that sell more food than whiskey. Such concepts have huge potential when it makes it to the US.
Whether taking the best of Europe and the Americas to the people of the world, or taking the best from around the world to the people of the “first world,” the food distribution industry has a stunning future, beginning from an admirable base. Would your enterprise be able to compete in such a competitive and innovative world?

Bankers, Bringing Up the Rear

If the food distribution business is the best industry in America today, which industry is the worst? In my opinion, furthest behind the curve is the consumer banking industry. Let’s look at why.
Lack of customer focus. There is little evidence that traditional bankers really care about individual customers. I was talking to a friend in the banking industry, and I referred to the enormous business potential of consumer banking. He didn’t understand what I was getting at. I said, “You know, car loans, home loans.” My friend responded, “Oh, you mean originations.” My mind was on customers, but his mind was on managing a loan portfolio, yield spreads, and selling tranches of loans to other companies.
Of course, these technical things matter. Wal-Mart excels in such technical matters as deciding where to build warehouses and what type of accounting systems to use. But they never forget that the technologies exist to support some person standing in line waiting to pay for underwear. By contrast, most bankers have become far removed from the reality of the customer.
Dearth of innovation. With the single exception of the ATM, banking is one of the few industries that has scarcely changed (from the customers’ side) in the past thirty years. The experience of walking into a bank and handling a routine transaction is exactly the same as it was in 1969 when I spent a summer as a teller. Back office technology has changed, but not the banking we see from the front of the counter.
If you’re a banker, you may disagree with this point. You may believe that banking has changed dramatically in the past thirty years. But if you’d spent your life working in the movie industry or the semiconductor industry or even the car industry, you’d have a better idea of what real change feels like.
Size for the sake of size. The banking industry is obsessed with big mergers, few of which even pretend to promise better customer service. The only change most customers experience as a result of these mergers is that we have gone from being merely a number to being merely a number, but with more digits in it.
The giant banks have swollen well beyond any conceivable economies of scale. When a multibillion-dollar bank merges with another multibillion-dollar bank, the only real saving they experience is that they have one overpaid management team rather than two. The worst symptoms of elephantiasis have long since set in, like those automated telephone systems: “If you are a former customer of National Bank, press 1. If you are a former customer of First Bank, press 2. If you would like to speak to a human being, you have the wrong bank.”
Weak branding. Exactly what is the difference, to the average consumer, between Bank of America and Wells Fargo, between Bank One and Comerica? Industry “leaders” invested millions in creating and building the NationsBank brand and then just flushed it away.
Citibank appears to be the only bank that is truly committed to building a brand. They are expanding their global network of ATMs (readily identifiable by their blue signs) and doggedly pursuing the individual consumer with a strongly unified identity. Beyond Citibank, there is a near-total lack of serious brand building and differentiation among the major banks.
Note that many of the same indicators are equally grim for other financial service companies, including the big insurance companies and stockbrokers. In no industry is “me-tooism” more prevalent. Television is littered with financial-industry ads that say, in effect, “We are the place you should come to because we are the place you should come to.” There are exceptions: Charles Schwab comes to mind. But don’t hold your breath waiting for real differentiation or innovation to sweep the industry. Many of us have been waiting for decades.

Big Opportunities in Financial Services

Having laid down this indictment of the financial services industry, look at the other side – the opportunity. Financial services is already one of the largest industries in the wealthier nations of the world. As the baby boom ages and retires, the industry will only grow bigger. In the middle-income and poorer nations, the demand for basic financial services like checking accounts will skyrocket in the coming decades, followed by demand for more sophisticated services. Today’s car loan customer is tomorrow’s mutual fund buyer. The use by many countries of privatized “social security” systems will only add to the demand.
One of the few recently announced acquisitions in banking that makes sense to me is Citibank’s move to become one of the top bankers in Mexico by acquiring Banacci. On a global basis, consumer financial services is a highly promising, still-embryonic industry.
            While government regulations have historically limited the financial services banks can offer, those regs are gradually dying off. Alert industry leaders are now preparing to compete in the entire arena of financial services, at home and abroad. But at the same time, they should learn an important lesson from retailing. Most markets can support only a few department stores, but many specialty stores. While Wal-Mart and K-Mart are duking it out for leadership in the general-merchandise category, you may prefer to be Home Depot or Office Max or even Dave’s Bridal Shop. In the same way, most of the companies that will profit from the global rise of financial services will be specialists.
Today the most interesting companies in the industry include a “small-town broker” (Edward Jones), an innovative auto insurer (Progressive), two companies that began by serving government employees (USAA and Geico), two independent information providers (Morningstar and—ahem! – Hoover’s), and two bold innovators (Charles Schwab and Vanguard).
Most of the companies today being built as “financial supermarkets” will not stand the test of time. The few that do survive and prosper will be characterized by customer-centered innovation, powerful branding, and merging only when the payoff goes beyond cost reductions.
I believe today’s financial-industry environment, with the lack of leadership on the part of the biggest companies, offers tremendous opportunities for new entrants and smaller competitors. It’s a great time for all types of outsiders, including specialized niche service providers, new companies from abroad, and ambitious local banks, brokers, and insurers. These types of companies can enter the market with a clean slate and flexibility. 
For example, HSBC (formerly Hong Kong and Shanghai Banking) is forging a global brand, unburdened by the baggage and negative traditions of the big US competitors. Specialty companies like Edward Jones, Morningstar, and Progressive can grow in the direction of their choice.
Meanwhile, most of the innovation is coming from local banks. Vernon Hill’s Commerce Bank (Commerce Bancorp) of Cherry Hill, New Jersey, keeps its branches open seven days a week and models its business on successful retail chains. It acts like a service company that cares. When the Wall Street Journal ran a cover story on Commerce in May 2000, the bank had assets of $ 7 billion. Its stock and deposit growth were among the highest in US banking. Even so, in this era of giants, they were not even among the top four banks in their home state of New Jersey. But today the company is up to $8 billion in assets, and still growing. With its positioning line of “America’s Most Convenient Bank,” this is a much more promising enterprise than the giants which make headlines with giant deals.
Alabama-based Compass Bank is aggressively investing in convenient local bricks-and-mortar branches when others are not, especially in fast-growing areas (they must be studying their geography!). Both Compass and Commerce use technology aggressively, but they use it in addition to personal service, not in place of service. 
I believe that most of the so-called industry leaders in financial services are in the same position today that Sears, AT&T, and GM were in 30 years ago – or the headline-making Continental Airlines of 15 years ago – they have nowhere to go but down. For more agile and alert competitors, nothing beats being in a boom industry with weak leadership. If you ran a bank, would you follow the big firms like a lemming, or would you pioneer a new concept like Commerce Bank?