On Bourbon, Oil Price, and Innovation

Image by Yarek Waszul

Image by Yarek Waszul

An interesting article in today’s Times about two “liquid” industries, oil and bourbon. The two industries, unlike as they are, have one thing in common: long lead times from the initial investment to finished production. Good bourbon takes more than 10 years to age, and so does the oil exploration and production. The article argues that the bourbon is in the same state as the oil was 10 years ago: demand exceeding supply and prices are rising. In the oil industry rising prices prompted more than double investment in exploration, and now that the supply has grown, prices have dropped. Bourbon is taking a different approach:

“We’ve been adamant about not raising our prices to our distributors much beyond the cost of goods and inflation,” Mr. Brown said. “The reason for that is very simple. We’re in this business for the long term. Just because bourbon is hot right now doesn’t change our way of thinking to say let’s take advantage of the situation.”

Buffalo Trace and other bourbon makers try to carefully allocate their product to distributors around the country at what is, effectively, slightly below the market-clearing price. A result is headlines like “The Great Whiskey Shortage of 2013.” On the gray market, bottles of 23-year-old Pappy Van Winkle reach four-figure prices.

But the bet the bourbon industry is making is that there is more money to be made in the long run by cultivating a new generation of bourbon drinkers among young adults, and by building loyalty among customers in all corners of the United States, and eventually the world.

Clearly, the bourbon guys are concerned about keeping competitors off the market. Had the oil industry followed the same path, I suppose, the todays’ world would have been quite different. Many innovations have been sparked by the high oil prices: Teslas, Leafs, Solar Cities of the world. The “boom bust” cycle, which is not unlike the bullwhip effect, is generally bad for incumbent operations, but in some cases it also provides an opportunity for innovation. Who knows what the next hottest liquor will be?

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Web-marketing to China?

This blog has existed for over 2 years, yet until now it had a big lacuna on its visitors map: China. Yesterday it happened – first two Chinese visitors. Mind you, according to this article wordpress.com is out of the blocked list since October 2012. So what’s taken them so long? I see three possibilities – either WordPress is not popular in China, or it is excluded from search engine results, or traffic from China is rerouted through other locations.

]All have interesting implications for the WordPress business model, ad delivery, marketing, as well as VPN providers and their opportunities. It’s not a secret that WordPress makes money through placing ads into blogs. Knowing the location of a VPN user will deliver personalized, location based ads, and higher revenue. At any rate – this is how the map looks now.

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Where does the Big Data come from?

The Big Data is getting big, but where does it come from? And what does it mean for people? The recent WSJ article offers a nice interactive feature on the subject.

There are some obvious sources like social networks and point-of-sale data, but some are less so. For example, that multimedia/navigation/emergency help system in your car can be routinely tracking your driving habits, and, possibly, sharing the data with insurance companies. Another recent (and controversial) source of the location data is the license plate tracking systems, implemented both by police and private companies. Continue reading

When should you not outsource?

Among the outcry about America losing its manufacturing jobs, two iconic companies, prominently featured in recent WSJ and NYT, prove that manufacturing is still possible in the good-ol’-America. One of them is Harley Davidson, the maker of big smooth-riding bikes, the other is Watermark, Brooklyn-based manufacturer of high end bath faucets. Both of them face stiff competition from Asia. Both of them could outsource, but did not. Why?

The answer is, of course, in understanding their strategies and core competencies. Harley is an American legend for more than 100 years. And so is Watermark, boasting its Brooklyn chic design. This is what the customers are willing to pay premium for! Ironically, many of the customers are in Asia. China with its growing highway network is getting a taste of riding, and liking it better on a Harley; the builders and buyers of luxury condos in Shanghai prefer to have unique faucets from Brooklyn. Going through the recession neither of the companies made a move to make their products cheaper. High price together with their “Made in USA” brand are driving demand for them.

It does not mean that companies did not have to trim some fat in their operation. Harley streamlined their production process, cutting workforce by 2000, but at the same time making sure that the remaining 1000 are better trained and flexible enough to perform multiple operations. Their inventory is down and production volume can be adjusted relative to demand. Some clever technology is in use at Watermark as well: 3D printing is used to speed up prototyping and cut lead times.

Now, could they have done the same overseas? Quality and quantity-wise – probably, yes. Would they be able to market their products so well? Probably, no. Interestingly, even Apple has “Designed in California” brand on their product. Had they have to drop it, by how much would they have to reduce their price?!
And since it’s Friday, I can’t help but notice another, rather peculiar, commonality in their day-to-day operations. Both companies routinely submerge their products in the water. That clearly better be done here in the States!

ABC retailing

Letters ABC have a special relationship with retail. For instance, there is a chain of grocery stores called ABC Stores on the islands of Hawaii, that sells delicious chocolate covered macadamias. They are so widespread in Oahu, that some people say that “ABC” there stands for “all blocks covered”. They are also pretty often photographed, and for that reason for some people it stands for “always bring camera”.

Another meaning of “ABC” in retailing comes from inventory analysis – it is a classification system often used for products sold at a store – those that are “Type A” generate the most revenue, “Type B” generate some, and “Type C” – would be some obscure stuff kept on bottom shelves. And while those macadamias are surely Type A for the Hawaiian chain, the question is what are the type A products for a typical American grocery store?

Continue reading

On the power of randomization: Selling diapers to pregnant women

I posted before on how Priceline uses randomization to conceal the minimum price they would be willing to accept in the Name your own price channel. Here is another example on putting randomness to work. This one is from retail.

Whether we like it or not, retailers do accumulate a wealth of data about our purchasing patterns. Every time you use a credit card, coupon, or a loyalty card, transaction data is logged and stored. The data is obviously used to send you more coupons, ads and peddle new products. Now, how much can retailers learn from this data? It turns our quite a lot. As this article from the forthcoming NY Times magazine describes, Target can actually predict whether a woman is pregnant just by analyzing change in her shopping patterns.

Pregnancy is a sensitive matter, however, so when a week after shopping a bunch of coupons for maternity clothing and baby products arrives in mail, women can get upset. It also looks awful lot like spying – does not it? Lesson #1 – one has to be very careful with this kind of data. Lesson #2 – even if data suggests something, do not necessarily pursue the opportunity at full speed. Here is what Target does: they randomize. Put a coupon for wine glasses next to diapers and office furniture next to pacifiers. Combinations seem to be quite ironic. But it does seem to work – the same article reports substantial growth in maternity and baby product sales for Target after they started doing this.