REPOST: China Quality: Good Enough is NOT Good Enough

Repost: China Quality- Good Enough Is Not Good Enough

I posted this article almost 2 years ago. Recent events have proven to me that not much, if anything, has changed since I first wrote the below. Except tariffs and a further tarnishing of China's reputation in the US. IF China is to successfully make the transition from emerging economy to developed country AND a part of the world community, quality standards and mentality must be addressed. There is more than technical change needed; this calls for CULTURAL change. That can only come from the leadership...

Among the tens of thousands of factories in China, there is a wide variation of quality level, from very good to very bad. Factories who produce for domestic consumption typically have very little concern for quality; export-oriented factories generally need to be more conscious of quality, to meet their customer’s minimum requirement and not have their production rejected at final inspection. It is those factories we will examine here.

On average and in most cases, the customer’s minimum requirement is the sole operative standard; in very rare cases does a China factory have their own internal standard, or even a picture of what they expect their final product to reach. The operative benchmark is: good enough.

Think about it- how many well known China products can you think of that evoke an association in your mind that says, “ Oh yeah-that brand is really good quality.” Very few, and not well known, such as Haier or Huawei. Contrast this with Germany or Japan where most people can easily recite many brands they associate with good quality-and usually a commensurate higher price.

This mindset holds China back from reaching the level of quality that can raise it to the level where prices can be increased to match the higher costs of labour and materials-and be accepted by buyers and consumers for those reasons. A consumer in a store investigating a product finding out it is made in China usually produces eye rolling-what China wants is a smile of recognition. How can China achieve this change of perception?

In fact, the inability to raise quality standards amidst higher costs and market price pressure is having the opposite effect-factories will want to find a way to lower costs so they don’t lose money at lower prices-which usually means quality compromises. This may be conscious, or simply (as is the case most of the time) of rushing the production through the process to deliver on time, without spending time or money to pay attention to the quality standard of the product. Just making it through-sometimes with smoke and mirrors.

What compounds the problem is the cultural peer pressure put on the customer’s staff or representatives, who are almost always Chinese. As quoted before from Jim Mann’s Beijing Jeep, the Chinese are very good at purposely confusing friendship with business, viewing friendship as a relationship where friends “help” each other. Maybe in this case it would be letting them slide on marginal quality. What is more, the race card is often played with these staff- we are Chinese, you are Chinese- the foreigner is the outsider/enemy, even if they pay your salary. They hate me/they like me- very few Chinese can escape this guilt trip and realize that whether your factory likes you or not just does not matter in business. Business is business- not about emotions—just real things you can see. 

What needs to happen is:

1.    China factories need to develop their own internal quality standard.This should be a standard that supports the price they are asking for the product, and one they can be proud of.

2.   This standard should not be allowed to vary with the customer’s expectations or the price of the order. By definition, a standard is just that- a set of fixed points that a product should reach.

3.    Customers should clearly communicate their quality standard of excellence in product before any production starts and never, ever compromise for delivery or to be “nice.”Nice is emotion-products are real.

4.   Make it a practice of delighting the customer by exceeding expectations, not just getting by on good enough.  This will go far in getting new orders- and justifying higher prices.

5.    As I have said before, factories mustadopt a process-oriented quality system. Each process leading to the final product should have its own internal QC. This will pinpoint process problems early on, and prevent problems from wasting the factory’s money by reaching the final inspection stage.

6.    Factory should perform their own final QC before the customer shows up.Then, problems that do reach the final stage can be rectified before the customer is dissatisfied or rejects the order.

7.    Use the same quality standard for all materials and accessories.Producers cannot expect an excellent final product by addressing  only assembly.

8.   Most important- the antiquated mentality of getting by with what customers will accept-especially foreign customers-has got to change.Mentality that old and entrenched can only be changed if management is convinced it is in their short and long term interest. Good enough is not good enough.

This is not about cost of production. There is no doubt that efficient production costs less than careless muddling. This is about smiles- evoking that smile of recognition that Made in China means quality you can believe in. For China to advance in the world economy as it must, both quality systems and mentality must change. Then perception will also change.

Psst- The Secret to Improving China-US Business AND US-China Business (forget Trump)- DISAPPEAR

Wow, this goes against everything I and my colleagues teach in courses like Global and Digital Marketing, Competitive Strategy. Porter and all conventional theory teaches us that we should have a UNIQUE, disruptive strategy that flies in the face of competitors.

But the formula for success may be given to us by a much older strategist- Sun Tzu-from nearly 2,000 years ago. "Win all without fighting."

What does this all mean? WE are trained to believe that our success in Global Markets is to distinguish ourselves as a competitor to local brands, and to take PRIDE in our foreignness.  But the truth is that the winners in BOTH US and Chinese markets have gotten under the skin of consumers without fighting for their origin or ethnicity.

There is no doubt about the simple fact that the winning competitor in ANY market is the one that earns the conversions, TRUST and loyalty of the local public. But what does it take to accomplish this? This is the conundrum that foreign firms have been facing- China firms trying to get a foothold in US markets, and vice versa.

I am 100% sure (yes, 100%) that the solution is contrarian: DISAPPEAR.

What the hell does this mean? How can I get established in and conquer a market if I DISAPPEAR?

Let me give some examples in both China and US and let's see if we can't come to agreement.

Example 1. Carrefour- A French company that has firmly established a foothold in China and Asia as a go-to supermarket-hypermarket vendor. Products, merchandise arrangement and store layout cater to the local public-always. Only a very small section of the store is dictated to imported product. Store locations are selected for those which can be reached by ALL forms of transit (a huge percentage of the customers are seniors). Even the transliteration of the Carrefour log into Chinese is a familiar and comforting phrase in Chinese: 

In Pinyin, jia le fu- loosely translated as Family, Happy, Lucky.  Clever or what?

CounterExample 1. Marks & Spencer- The English company saw an opportunity to expand its business into the growing Chinese market and opened many large stores in China. But they forgot one important thing: the customers are Chinese, not British. 

So they did no separate design, merchandising or sizing for the Chinese market; they just assumed that Chinese customers would be lucky to be able to purchase the (conservative and often ugly) mens and womens and kids product that they also offered in UK. Problem: the stuff wasn't nice (for any customer), very conservative and not fashionable (for any customer), and sizing in most cases was the same as offered in UK- wait, Chinese bodies are different-they didn't get it and their ethnocentric arrogance blocked their view.

Result: M&S Gone from China.

Example 2. White goods market. Haier-Actually a very good quality brand that has established footholds not only in China but in Europe, MENA, Mexico as the Leading brand. But in US it lags at only about 1% of purchases. Why? 

Counterexample 2. Samsung and LG- Both Korean brands, but are the absolute and undisputed market leaders in US. Wait- Korean brands leading the US market- why? Two reasons: 1. They EARNED it with great quality and service and, most important, 2. Their country of origin is either INSIGNIFICANT, or INVISIBLE to buyers

Statista surveys suggest that, while Samsung and LG enjoy an overwhelmingly positive perception in US, Haier is in the I-don't-know range. Why? Because it has not DISAPPEARED as a Chinese Brand.

Easier said than done, I understand. But it absolutely CAN be done, both ways. How?

1. Leave your Ethnocentrism home (disengage those who can't). Business is business and who cares about your country of origin;

1. Study and conquer the local markets so customers FORGET that you are a foreign brand. 

I would love and invite anyone to disagree with this premise. IF not, companies that want to succeed in either the Chinese or US marketplace need to follow this course. 

Forget the trade BS- China and US markets will be there forever. So some little political babble won't change anything.

So, do we want to be successful or NOT? Going back to Porter, we can analyze each of the above company's position vis a vis the Five Forces and come up with exactly the same result (you need to take my class for those details:-)

Good Luck!

"Levi's New Outfit for Success"-Let's look at the numbers and the reality

The above is Gartner L2's article written on 14 February 2019 (read, click here) that glorifies Levi's rise to file an IPO and their high rankings on customer search.

As Scott Galloway is a principal of Gartner L2 and a glorious skeptic (I miss "Winners and Losers in a Digital Age), I am a bit surprised that he and Gartner are so much of a cheerleader and lost all the righteous skepticism.

IF they looked into the numbers, they would see that Levi's

a. WAS public and privatized in the early 80's led by KKR.

b. has barely grown in the last ten years compared to the global denim market

c. is making most of its profit (and doing more than 50% of its business) in Europe and Asia, where customers will pay a high price for the prestige of the name, NOT the fashionability or even quality of the jeans compared to others.

d. Is NOT a major player in the global denim market, despite the fact that its brand name is somewhat generic for the product.

Let's take a look, tell me if you see something I am not seeing.

Let us start with the global denim market, as reported on Statista:

OK, then let's look at Levi's:

The majority of the increase in business in 2017 came from Europe and Asia (mostly Europe). 

The plot thickens- US sales actually REDUCED in profitability despite a small increase, while Europe and Asia provided more than 80% of the revenue on 43% of the sales. How this happened is that Levi's can trade on its name in these markets to be able to charge high prices that it cannot begin to get away with in the US market.

So the name brand that is generic to US denim (reputed to be the inventor of same) is selling more offshore than in its home country. Is that healthy for a brand's longevity? If you check the story of Esprit, which was the most iconic brand of women's sportswear in the 1960's and 1970's, and now cannot even be found in the US, you can gain some insight.

So what does that tell you about Levi's strategy and their prospects? To begin, that Levi's value proposition delivers less than 5% of the global market, and that number is being supported by sales outside of the US.

Next, that it is unable to make money in the competitive US market and has to  compete on price, thus reducing its profitability. Warren Buffett would tell you that this is proof positive that Levi's has either no MOAT or a very narrow one which is getting narrower.

We know for a fact that being an iconic brand with a storied American History is no guarantee of success IF you don't preserve your identity and relevance. Enter Sears, which is not dead yet corporately, but in the minds of shoppers, is.

Let's view this as I would demonstrate to my Marketing class: IF we look at the fundamentals of Strategy as detailed in Michael Porter's Five Forces, we can clearly deduce that, for Levi's in the USA, they are powerless to defend Threat of Entry and Threat of Substitutes; Power of Buyers is high because, in all three, switching costs are LOW. Further, brand loyalty is less and less of an issue in the US; is it temporary in Europe and Asia?

Levi's seemingly has convinced Gartner L2 that they are the resurgent force in the jeans market and on their way to being the major player that they were 40 years ago; it is their job to do that. And they also want their customers to know that they are environmentally sensitive and solidly behind sustainability. Great for the planet, but do customers care?

The numbers don't bear that out. 

Finally, regarding the IPO, I hope their return to public financing won't saddle them with the fatal dose of debt that killed Sears and Toys R Us, among others.  Based on the numbers in the 2017 Annual report, their debt is about $1.1 billion. Once the bots in the stock market get a hold of Levi's, and decrease their share price and market capitalization by 20% in one day if the results are not rosy and sunny, DESPITE their iconic brand  (like Kraft Heinz), that will be extremely damaging to their future.

So what is my recommendation? Levi Strauss, FORGET the IPO until such time as you have a firm brand footing and real price and profit growth in the US (by radically upgrading your value proposition). I believe a reason that Bob Haas wanted to take the company private back then was the unreasonable treatment in the stock market; that has not gotten better in the last 40 years. 

(Full disclosure: I worked at LS&Co before and when KKR took it private. I was the leader of the team that marketed the Women's 501, which was an attempt to give Levi's the fashion relevance that it still seems to need now (since women buy more jeans than men). 

Best of luck, folks. Go back to the basics of Strategy and reexamine. Leave the ego at the door.

Why does Eddie Lampert want to keep Sears alive?

A related article to one on CNN.COM, "Sears gets out of bankruptcy alive," (https://www.cnn.com/2019/02/07/investing/sears-decision/index.html) asks the question, "Why does Eddie Lampert want to keep Sears Alive?" (https://www.cnn.com/2019/01/28/business/why-lampert-wants-sears/index.html)

Lampert insists he believes Sears can still be a viable retailer, after its relevance and market value have shrunk from the top of the retail heap to nearly nil. Yet, he gives no plan as to what is going to change to reverse the death spiral that Sears is now on. He claims, ""for one simple reason -- We believe in the potential to create a successful, multi-faceted, 21st century company that can benefit from the changes in today's retail environment."  How? Merchandising? Market Positioning? A Strategy? None of the above are explained.

The author of the article points out several key points that I believe lead to the true answer to the question:

1.   “But if Lampert's $5.2 billion bid to rescue Sears fails -- as its creditors want -- he has a secondary bid ready to go. Under the alternate plan, Lampert would pay $1.8 billion for just the stores.”

2.  “Lampert managed the company since 2005 as if it were a slow-motion liquidation, said Philip Emma, analyst with Debtwire and an expert in retail bankruptcies. He steadily closed hundreds of stores and the spun off assets, such as Land's End and Craftsman tools.Keeping Sears open means Lampert could continue that strategy.”

3.  ”Over the years Lampert has loaned the company $2.4 billion, most of it backed by hard assets such as real estate.

4.   “That debt, and the new cash make up just more than half of the $5.2 billion bid price. The remaining $2 billion comes from promise that Sears will pay off some of its liabilities and debts. So if the bid is successful, Lampert will again get control of the company, one that he says is worth $5.2 billion, by putting up only a fraction of that amount in cash.”

Real Estate. That is what the author of the article is clearly implying is the reason. Looks like that to me too.

Smart deal. A clever long-term plan. But a tragedy for all the families of those who worked for Sears loyally over the years, and for the customers that made Sears an important part of their lives for more than 100 years.

"Macy's on the Brink"

This week Macy’s stock plunged nearly 20% based on a pitiful Holiday 2018 report where owned sales increased only .7% (this compared to a nationwide holiday reported sales increase of 5.1% and online increase of 16.5%). This was the day of reckoning for the failed and confused strategy Macy’s had pursued over the last 20 years, and their impotence to meet the competitive situation in the market.

The death sword to Macy’s is their price, price and more price strategy that has for years blurred the distinction between them and TJX, Target, etc.  which was taken with a chaser of “fashion” and acquired fashion resources. This was all smoke and mirrors, for what the customer saw was overwhelmingly price, upon price and if you use your card or blah blah, more price. Add to that crowded, confusing and over inventoried stores that convey no message except price. Tragic Result: Loss of Identity and Relevance.

The market itself outdid Macy’s and made Macy’s irrelevant. Fashion is super abundant online and in stores, such as Everlane, Untuckit, Zara, etc. etc. and price is the wheelhouse of others who advance that as their strategic message (see TJX). 

Michael E. Porter, the modern guru of strategy, clearly says that, in order to succeed, your strategy must be Unique. Macy’s used to be unique. What are they now?

Almost 2 years ago, in April 2017, my very first article on my blog wwww.isourcerer.com was “The Death of (Apparel) Retail (As We Knew It)-Part I- The Survivors”in which I said, “Some of them: Inditex (Zara, Massimo Dutti, Zara Home), Uniqlo, H&M, Primark, Amazon, Costco, Sam’s Club. Why are they growing while others (like Macy’s, JC Penney) are dying slow and painful deaths?”

And 

“So let’s be clear- the imminent expiration of the world of Macy’s et al. is NOT due to PRICE.  Macy’s can get down and dirty with the best of them. It is about VALUE. The brand value which deparment stores used to represent and which differentiated them from the discounters is gone- eroded by the overdistribution of brands. Since middle class brand worship is dead, department stores are resorting to promotion to bring in consumers (while at the same time killing the manufacturers by making them pay for the buyer’s incompetence and the stores errant philosophy). Most important, losing the TRUST and respect of the consumer.”

And

“There was a time when self-respecting middle class America did not want to be seen shopping at, or wearing product from “the mass market.” Now there is no distinction about shopping in Macy’s- it is a confusing and discouraging experience- and no shame to shopping at the new normal.  If you go to Uniqlo, Massimo Dutti, or sit home and shop from Amazon, it is a satisfying experience- can it also be a badge of honor?”

One year later after including the same message in many articles, I wrote the unfortunate truth: In my article, “Macy’s- The Asteroid That Killed Retail” I compared Macy’s to the Chicxulub asteroid that killed the dinosaurs and changed the world in that, during their takeover of Federated (NOT a merger) and May Co. and Broadway, they sanitized regional department stores that had been in people’s lives for decades and made them, arrogantly, MACY’S. This effectively buried the American department store heritage, the Bailey Savings and Loan. NOW department stores are “irrelevant”-why?

I don’t think that the department store format is necessarily dead. Years ago, it represented the great moderate middle for those who wanted quality at a price. And it was “our A&S, or our Filene’s” etc. That needs to be revived. Different segments of the country have different needs and ideas. One universal marketing strategy won’t work.

Retail dive reports (“Macy’s On the Brink): "Macy's in the Northeast and in California was a higher-end department store," "There's New York City and Boston and San Francisco, and then you had everything else. And for the 'everything else' part of Macy's, nothing that this guy [CEO Jeff Gennette] is doing is meaningful in a Dayton, Ohio, or a Kansas City, Missouri. The stuff he's doing that's good probably isn't even enough in New York, so it's too little, too late, and not applicable to the whole chain." Correct. 

Mark Cohen, an esteemed professor at Columbia and a former colleague at A&S (one of Macy’s victims) says in the article, “"Macy's didn't have to mean something years ago because Macy's had a reputation. Now most of what Macy's sells can be found elsewhere, often in a nicer place," Cohen said. "Or in front of your computer at home."  

And “"Macy's is caught between the fantasy and the lack of reality (emphasis mine), between Herald Square and Union Square and everything else in the world," he said. "The web and the store have to speak with one voice, and underlying it all, which is the most challenging, they have to answer for themselves and their investors and their customers — 'What is Macy's?'" 

What is Macy’s?

In light of the dynamic current market and in the context of competitive strategy, Jeff Gennette, please answer the above question so we (and your customers) all can understand.

Can Macy’s survive? Absolutely. Remember, Macy’s is not just a department store- its real estate holdings probably have more market value than the company itself. What it takes to revive the retail, in my opinion, is, first, facing the truth. Then, a TOTAL reexamination of strategy, followed by an overhaul of the value chain, and, most important, humbly restaff with people whose experience and dedication will get you there (Basil Liddell Hart’s Great Captains)- Merchants with a proven track record, regardless of their AGE (they are out there). 

Since the fish stinks from the head, leadership should be replacedwith those who have no stake to defend themselves in the current mess, and who will embrace the fact that Macy’s is of much smaller relevance in today’s market (I avoided irrelevant) and have the market, marketing knowledge and vision to rebuild from there.

Full disclosure/true history- I am a former A&S (Federated) buyer who took great pride in the iconic regional department stores in our company-You know them no matter where you are from: A&S, Filene’s, Woodward and Lothrop, Marshall Fields, Burdines, Bullocks, shall I continue?  Nothing short of criminal to deprive the loyal residents of their shopping home. As I said earlier, THIS is what killed department stores, because, truly, who gives a crap about Macy’s in Indiana?

Last and worst, after returning from China in 2017, and seeking to find my role back in US, I had several phone interviews with Macy’s because I felt (correctly) that I could help them. Needless to say, never got even a face to face. I was told that I was not qualified for a position with the title, Strategy (or others). How’s your strategy working out for you now, Macy’s?

Last year, in my Baruch class on Leadership in the Fashion Industry, I listed Macy’s after Sears and JC Penney as a potential fatality. And here we are.

Let’s summarize: Macy’s, the only way back from the brink (a few of many things that need to be done):

1.    Make yourself relevant again; reinvent your message in the spirit of what department stores WERE- fashion destinations with value. 

2.    As Mark Cohen said, we should be able to answer the question “What is Macy’s” with a UNIQUE strategy.

3.    Hire some people who can select the right items instead of filling your floors with redundant merchandise- MERCHANTS (regardless of their AGE).

4.    New management team who has no baggage and the vision to succeed.

5.    Be humble about what you are now and what you are not.

6.    Create an omnichannel strategy that will help you WIN (not like today where you allow your competitors to sell the same thing on your web page as long s they pay).

7.    Have a national and global retail strategy that reflects the different needs and wants of different regions- maybe bring back the old names (you own them anyway) or just append a regional name to Macy’s (Like Macy’s Indiana). But, most important, you cannot have one buying strategy for the whole nation- you need to learn about your regions and follow them. If you go to Massimo Dutti in Shanghai and in Parma, Italy, you will find the merchandise is mostly different. 

Truthfully, I don’t expect my advice to be sought or followed, therefore I do expect that Macy’s will continue to be a great stock to short in the future. I hope for Macy’s and its loyal employees sake that I am wrong.

Can Jill save JCP?

Jill Soltau was appointed CEO of JC Penney in October of 2018. Her retail background is Sears (ouch!), Shopko (oops-just filed for bankruptcy) and, most recently, President and CEO of Joann Stores (a privately held fabric and craft chain with sales of about $2.5 billion). Her background in those department stores, hopefully during better days, is in merchandising.

Here’s what she faces at JCP:

“The company says comparable-store sales for the nine-week period ended Jan. 5 fell 3.5% on a shifted basis; on an unshifted basis, comp sales fell 5.4%. “(Seeking Alpha, January 8, 2019)

This while the rest of the retail world (or most of it, anyway-see Macy’s) is reported to have increased sales for the Holiday 2018 season by 5.1% and online sales reported to have increased 16.5%. (Seeking Alpha)

2017 revenue at JCP was about $12.5 Billion with a net loss of $116Million. By contrast, Amazon Cyber Monday sales were about $7.9Billion. 

The above is not intended to inflict pain or rub salt in the wound, but to highlight the question: What is the current position of JCP in the consumer’s mind? Answer- forgotten. Or at least an afterthought. Or an after-after thought.

Why? As I have pointed out many times about the big losers at retail in my blog www.isourcerer.com, and most recently in the 2018 article, “JC Penney and Sears: The Hollow Men-An American Tragedy,”  (read it here), it has lost its relevance, its identity in the consumer’s mind.

So how to get it back and not only survive but grow in today’s dynamic retail environment?

Here’s my two cents for JC Penney (pun intended):

First- JCP needs a Strategy. Taking a lesson from my class on Competitive Strategy at NYU, let’s paraphrase Michael E. Porter’s definition: The core of a strategy is a value proposition that makes you unique. What do you offer your customer that nobody else does (the answer is not price-only). 

This unique value proposition is your identity. So what is JCP current identity? What makes them unique? Clearly, not enough people know or think they know. Then, what can JCP do to create an identity that everyone will remember? To me, the most valuable thing about JCP is its name and what it represents in the history of American retailing. Nobody else can match that, so here is the beginning of unique. 

JCP needs a new story. Rebuild the brand on the images of what made American retail great. The catalogue, the early stores- THEN, fast forward to today.

So, what about today? From a merchandising and process standpoint, JCP needs to reinvent itself.Buying more of what is selling now in the stores won’t do it. Find a niche in the customer’s shopping map. Clearly, not as a luxury brand and hopefully not as a price monger (Walmart, TJX, etc. are deeply imbedded there). 

So where? Look at Zara and those disruptors that are successful now, such as Untuckit and Everlane. Based on their sales increases, they are filling a need that is not nearly maxed out. Value Fashion Merchandising. 

Then how? First, completely redo your value chain to gain speed to market, and don’t be satisfied with four seasons a year. Newness. Give the customer a reason to come back. 

Second, redo the store experience. There is lots of history to draw upon. Maybe, for example, redo the stores with the trappings of the past-wood, fabric, lighting that would suggest that, when you shop at JCP, you are a part of history that has updated itself to the present day.

Most important, hire the right people. Not consultants- like hiring a head football coach from baseball. People who have walked a mile (or, like some of us, hundreds of thousands of miles) in retail and wholesale shoes.Merchants. With battle-hardened Experience. 

Finally, for my advice today (there is so much more to this), update your process. Your web site needs to reflect merchandise you want that you can order online or try on/pick up in store. Not this.For those of you who didn’t click the link, here are some highlights:

and this:

From the comments on LinkedIn, it seems Jill is a great people person, and she acknowledges that her success rests on finding the right people. Good- but which people and to do what?  To paraphrase another marketing guru, Peter Drucker, in his iconic concept Management by Objectives, everyone needs to buy in and be passionate about the mission (learn more here).

I also wish you the best of luck and hope for your success, Jill. As a former retail merchant who watched Macy’s singlehandedly destroy the nation’s regional retail, I am rooting for a revival. Macy’s is kindly stepping out of the way. 

More sense of urgency, I think. You don’t have years to solve this problem. 

Good luck!