December 14, 2008

The Great Implosion

Worse than a recession, better than the Great Depression, I coin our current economic situation "The Great Implosion".

I'm not sure when you first thought something was amiss. For me, it was the Spring of 2005. Nordstrom would announce spectacular annual profit levels, driven by robust comp store sales growth. Our stock price, languishing in the $8 to $13 range for years, surged past $30 in the Spring of 2005 (and would peak in the upper $50 range in early 2007).

All was good!

Well, good unless you were a garden variety analyst in the Database Marketing department, where we were handing out salary increases that, on average, were on par with inflation. I recall that my team howled at the injustice. They worked long hours to simply keep up with inflation, then went online and read the insider trading summaries, observing the ways we in management supplemented our compensation. My team felt that one of the one hundred greatest companies to work for might be able to offer them more than inflationary salary increases.

Of course, Nordstrom wasn't acting out of the norm, and wasn't trying to be nasty to employees, not in the least bit. The sole responsibility of a publicly traded company is to increase shareholder value, not to offer a database marketing staffer a higher-than-average wage.

It could have been worse for Nordstrom database marketing employees. Take AT&T, for instance. AT&T gave thousands of employees walking papers, then increased the dividend to shareholders. Gotta love capitalism!

Floyd Norris of the NYTimes shows us that from Q4-2004 to Q3-2008, S&P 500 companies generated $2.4 trillion in profit. They converted the profit into $1.7 trillion in stock buyback programs and $0.9 trillion in dividends. Shareholders made $2.6 trillion from the $2.4 trillion in profit generated by S&P 500 brands.

The data imply that S&P 500 brands had to borrow, in order to hand profits to shareholders while growing sales. This author of this article suggests that Nordstrom took on $1.5 billion in debt during the past few years, while buying back stock during the bubble, and is now on the hook for a hundred million dollars in interest payments each year, while absorbing huge comp store sales decreases and credit challenges.

Nobody should have been surprised that employees used their homes as a giant piggy bank, especially when the hopes of getting ahead in corporate America were/are slim. Borrowing against a home increasing in value became a vehicle to perceived affluence.

And when the piggy bank finally broke, the entire economic system collapsed --- The Great Implosion began.

TechCrunch keeps track of layoffs ... the numbers continue to grow. Worse, employees who get to keep their job will spend the next decade paying taxes for funds that bailed out the financial sector, a group of companies that largely benefited from the profit generated by S&P 500 brands.

The past eight years amounted to a gigantic redistribution of wealth. It was like a giant roulette wheel, where companies and employees made bets, periodically winning and losing, until a 00 turned up. The house collected while everybody wondered "what just happened?"

Now we have no choice but to dig out of The Great Implosion. Long-term, we won't do this by offering customers up to 60% off and free shipping. And we probably won't do this by ever trusting financial institutions again ... or by trusting big brands. We'll have to dig out of this by being crafty.

I get to work with companies in different geographic areas. Out West, I often work with startups, folks who exhibit very little fear --- they are hiring, finding funding, moving forward, creating products that will meet the needs of a future customer.

Elsewhere, I pay close attention to brands that have been around for a long time. Fall 2008 results are not optimistic ... these folks are hit hard by a spending slowdown.

They are also being hit by the redistribution machine known as Google. These companies work hard to generate demand, only to see Google take a penny here or there (on a massive scale) while re-directing demand to those who are best at playing the search and online marketing game. In the Fall of 2008, companies don't know how to fight back ... we simply race to the bottom, moving inventory at any cost. None of us can know what the long-term impact of an extended period of "up to 60% off and free shipping" will do to e-commerce. One might surmise that the impact won't be positive.

Most interesting to me is what will happen online in 2009. Assuming that customers continue to cut back on spending, leading to cuts in advertising by brands, it is reasonable to assume that Google will suffer. When Google stops fueling the growth of the online ecosystem, really interesting things start to happen.

The next generation of great online marketing leaders will come from this pressure-cooker. This new generation of leaders are, in my opinion, going to be different individuals than the ones that rode the updraft of e-commerce.

An entirely different skillset is required to acquire and retain customers when times are really bad. The e-commerce leaders of the next decade will create merchandising strategies that get customers to spend once again. Today, e-commerce is capable of taking orders ... it is not good at creating orders (as Alan Rimm-Kaufman says). This is one of the business tragedies of The Great Implosion ... we learned how to capture, intercept, and re-direct demand (often cannibalized from other channels), but we didn't learn how to create it.

I am actually filled with optimism about 2010 and beyond. I truly think this will be a period of tremendous innovation and creativity.

This brings us back to the employee, the individual hosed by The Great Implosion. We have a responsibility to bring something to the table. We have a responsibility to innovate, and to be creative --- and if our employer won't recognize our innovation and creativity, we need to find another job, or start a business of our own. We need to compete! Or as Scott Adams of "Dilbert" fame recently suggested, maybe we need to have a diversity of bosses. Working for one bad one isn't great, working for numerous bosses allows us to pick and choose.

Time for your thoughts about The Great Implosion. What do you think will happen over the next few years?