Ten years ago organic foods represented 1.2% of foods sold in grocery stores. Organics were hot and going mainstream as soccer moms stuffed lunch boxes with the purist carrots and over-priced apple juice.  A decade later only 3.4% of grocery sales are organic, merely a blip on the radar. 

It is often difficult to predict if the latest and greatest is a fad or legitimate trend. Is the iPad merely an extension of the iPhone or is it a game changer? Certainly tech savvy early adopters are already scooping up the new device, but will the masses adapt to a new way of viewing media?

Our mantra in our firm, in my book and in this blog is that marketers must consider converging factors, and no more is that more true than in evaluating fads.  Within a complex socio-economic environment, changing quickly with the advent of technology, there can be immediate swings in demand of a given product or service.

The key to converging factors and understanding trends is the acquisition of current and relevant information.  The ability to understand trends, and convert the opportunities presented into competitive advantage is both art and part science.  Science is required in the accumulation of hard data, whether it be from public sources such as government statistics or through private sources such as market research or trade associations.

The art is focus on customer wants and needs in order to preempt the market with products, services or features that may not be offered or are framed differently. Often innovation is not presented in the formation of a new product but through the delivery system by which it is presented. The iPad, like the iPod before it is not delivering new media but is providing an improved gadget for accessing music, books and the Internet.

Often, the best way to define a new delivery system is to reverse engineer problems that customers have, and try to find new ways to solve them. This requires a significant intimacy where the vendor can gain a deep understanding of how the customer functions.

In the fashion industry, designers and buyers must accurately predict styles as far as a year in advance, and move quickly to capitalize on emerging styles. Whether your source of information tends to be closer to science or art, the successful marketer has their ear to the ground and is paying attention to all the inputs that determine fad or fashion.

As our economy slipped into recession, private equity investors retreated and sat on the sidelines. As a result, the wizards of Wall Street find themselves in a tenuous position. Without their capital deployed, they cannot generate the management fees required to sustain revenue. They are like caged tigers waiting for their prey to enter the den.

The average multiple in smaller transactions (less than $250 Million) fell in 2008 to 6.9 times EBITA from 8.7 in 2007. Yet, business owners waiting out the recession may be eager to pull equity out of their businesses, even though the stock market offers a poor investment alternative.  In Q4 of 2009, mid-market transactions spiked 77% from Q4 of 2008, reflecting a changing mood and the need for investors to see their money put to work.

Private equity firms currently sit on a projected $609 Billion in un-invested capital. The S&P alone has an aggregate $1.4 Trillion in cash. This may seem unintuitive to many, but any business that is growing and has positive cash flow is in a tenable position to attract investment from financial or strategic buyers.

May the sellers beware that tigers seek the slaughter and are highly selective about which businesses they acquire and under what terms. Those organizations that performed well in the downturn present less risk and are desirous to those seeking safe harbor from economic fluctuations.  One would imagine that private equity fund managers, with more time on their hands, may be even more difficult than under normal conditions. Almost always in control of senior debt, equity managers are notorious for buying organizations, moving out management and strangling corporate cultures.

In the ten years starting in 1997, the U.S. share of global public equity securities fell from 49% to 34%.  The turmoil in the European and Asian markets may be the impetus for more investment in the US of A. For those entrepreneurs that have run their businesses prudently, who offer growth and profit, the M&A market may offer significant opportunity in the years to come.

As many view the holiday season as a glimmer of hope, I was struck by several news items this week:

 Apple vs. Google

The battle for Silicon Valley supremacy has heated up in the last few weeks as the two behemoths vied for two start-ups:  La La Media (bought by Apple) and Ad-Mob (purchased by Google in November).  As technology often drives M&A activity, these deals may be a spark for a wave of acquisitions, as investors who have been sitting on the sideline may re-enter the fray.  The release of operating systems from Microsoft have often been the trigger for waves of technology spending, and it will be interesting to see how the sector fares this year.

Retail Discounting

I was struck by an offer by a local golf course this week. It read “What Rain, Play all Day on Friday for $39”. It used to be that marketers offered discounts when demand was low. Now, everyone from carpet cleaners to retailers are trying to drive demand to offset over-capacity or excess inventory. Such a combination creates a double whammy, where high costs are only exacerbated by diluted margins. It appears as if our worst fears for the retail sector are coming to fruition.  A shocking 95% of Americans say they are holding off purchases to take advantage of last minute sales.

 The uber discounting in the retailer sector is truly horrific. Retailers used to make all their margin in the fourth quarter, but they are sabotaging any enterprise value by giving away the store.  If you feel compelled to start a price war in your business, do it at a time when you want to introduce new customers to your product or services, not when they are going to buy from you anyway.

Boeing Tests 787

 The aerospace sector has also been crushed by high oil prices, the recession and the delay of new products.  Yet this week Boeing’s 787 airliner will make its inaugural flight and begin a year of field testing. The 787 is Boeings’ response to the European Airbus A350, a generation of planes built using up to 50% composite materials.   

United Airlines ordered twenty five 787’s and twenty five A350’s, suggesting that airlines may be ramping up capacity, especially in more profitable long range routes.   With the exception of military suppliers, the American aerospace industry has been in a deep freeze and is eagerly awaiting a rebound.

It appears that some sectors of the economy are starting to improve while others remain stagnant.

It seems that corporate acquisitions have come full circle.  In the 80’s, behemoth conglomerates fell out of favor as many of them were seen as too fat and inefficient.  Over the last decade, specialization and commitment to “core competencies” have been the mantra of CEO’s and management consultants.

Yet a recent trend has emerged as companies are going vertical, and seeking out business combinations that enhance positioning within the value chain. Our firm has recently worked with several companies employing this strategy, at a time when PepsiCo is buying back bottlers they spun off in the 90’s, and Oracle is purchasing Sun to which Larry Ellison spewed, “We’re really brilliant, or we’re idiots.”

Two converging trends seem to be the impetus to a return of vertical integration.

• Complex computer and distribution systems make integration critical to the success of an organization.
• The movement towards thrift and efficiency amplify a basic rule of distribution-the last mile of distribution is the most expensive (the implication being that it is more important than ever to control the distribution channel).

Many U.S. companies who have outsourced manufacturing and service overseas are starting to see the  upside of owning their suppliers.  Recent activity begs the question, when do such acquisitions make sense?

Much research around M&A’s over the last few years has yielded data that suggests that return on investment in these deals is realized through incremental revenue, not through cost cutting and efficiency. With the staggering costs of completing such deals, shaving a point or two of margin does not provide a very enticing payoff.

Thus companies seeking alliances and mergers should be focused on acquiring companies that complement their business in a natural and synergistic way.  For example, buying a supplier of quality parts provides the opportunity of integrating systems which may optimize inventory, improve cycle time and enhance the customer experience. If such synergies translate into more revenue, vertical integration can contribute to both the top and bottom line.