Target: Recovering from a Straddle

This week's issue of Fortune has a cover story about Target's new CEO, Brian Cornell.  He has made some bold moves in the initial months of his tenure, including a complete exit from the company's costly failure in Canada.   The article sheds some light on a key reason why Target struggled in recent years.  We all know about the Canadian troubles and the major security breach.  Beyond that, however, the company faced some more fundamental issues in its US business.  Check out this excerpt from the article:

The Great Recession threw the company off its stride. Being trendy seemed like an indulgence in a time of depressed wages and underemployment. Target’s marketing began echoing Wal-Mart’s dogma of frugal prices rather than fun and flair. Target cut back the shelf space it was devoting to unique, unproven merchandise—whether it was home goods or clothing—and reduced the quality of some of its apparel to keep costs down. Meanwhile, Macy’s, Kohl’s, and H&M were imitating the company with their own designer collaborations.  Target was standing out less and less. To generate visits the company added more groceries, but without any distinctive touch to set it apart. By 2013 food, a notoriously low-margin business, had grown to a fifth of its revenue. Target had concentrated too much on the “pay less” part of its mantra and not enough on the “expect more” part.

This excerpt suggest that Target moved away from its differentiated positioning during the economic downturn, as it tried to compete more on price because consumers were hurting.  However, it found itself straddling its longstanding position as a highly successful differentiated player in the mass merchandiser market and the low cost position occupied by players such as Wal-Mart.  It was in no man's land - not the most efficient, frugal, low cost and low price player... nor the hip, cheap chic, fashionable player it once was.  Cornell seems to be moving aggressively to fix the problem.  

Target succeeded historically because it chose to stand out from other mass merchandisers, differentiating slightly from the low cost pack.  Expect more, pay less.  It didn't become Nordstrom, but it was clearly not Wal-Mart.  JetBlue has tried to do the same thing in the airline industry.  It's a tricky strategic position though, because you can't completely ignore cost and efficiency.  You cannot have the cost structure of a luxury retailer.  When recessions hit, it can become tempting to compete more aggressively on price so as to retain customers.  However, that can damage the firm's differentiated positioning in the long run.  Full disclosure here... Target is a great partner of Bryant University.  I'm rooting for Cornell and the entire team to continue to reinvigorate the organization. 

JetBlue: Stuck in the Middle?

My former student, Harris Roberts, asked an interesting question on Twitter yesterday:  Is JetBlue stuck in the middle?  In other words, are they stuck in a competitive position somewhere between an effective low cost strategy and a successful differentiation position?  The question arises because of the news that came out yesterday about the firm.  JetBlue announced that it would be charging baggage fees for the first time.  For certain types of low fare tickets, passengers will have to pay baggage fees.  In addition, the company will be reducing leg room and adding seats on certain jets that it will fly.  The announcements come after much investor pressure and a change in the CEO office.  Investors have clamored for JetBlue to improve its profitability, as it has lagged competitors in recent  years.  The moves, of course, represent a significant departure from JetBlue's past strategy.  If you have watched JetBlue's marketing in recent years, you know that more leg room and no baggage fees have been key elements of their message.  

Why do the moves suggest that JetBlue may be stuck in the middle strategically?  For years, JetBlue has tried to be the "Target" of the airline industry.  In other words, they have tried to differentiate themselves from the pure low cost players in the industry (Spirit, Southwest), while trying to operate more efficiently than the legacy carriers.  Target has tried to do the same for years, operating at a lower cost structure than traditional department stores or older discounters, while differentiating from Wal-Mart.  Such a strategy has been very successful for Target for decades, though the last few years have been challenging.  JetBlue's lagging profitability may suggest that it has not been able to achieve the efficiency of the low cost players.  At the same time, its efforts to differentiate (better service, TVs on the seats, more leg room) have not been sufficient to generate a price premium that offsets the higher costs associated with these amenities.  The moves to cut leg room and add baggage fees are not so much a sign that they are moving to become stuck in the middle... to me, they may indicate that JetBlue had already become stuck in the middle.   Now they are trying to find their way out of that challenging competitive position.   It's difficult, though, to make moves that contradict a longstanding marketing message.  It will be interesting to see how customers react. 

JetBlue: Stuck in the Middle?

Let me start by acknowledging that, as a customer, I love JetBlue.  Their service stands out in an industry known for, quite frankly, a pretty awful customer experience.  Having said that, I've always worried that they run the risk of being "stuck in the middle" in terms of their strategic position.  They are not a low cost player in the industry, but on the other hand, they cannot command a premium price either as a truly differentiated player.   Now the Wall Street Journal reports that CEO Dave Barger is under fire, as financial performance has been subpar.  The paper notes, "Meanwhile, excluding fuel and profit-sharing, unit cost—the cost to fly a seat a mile—rose by 6.3%, and labor expenses were up about 15% on a unit-cost basis, the biggest jump ever year over year."  

What's the diagnosis in this article?  Wall Street Journal writer Susan Carey explains, "But many analysts and investors believe that JetBlue is marooned in an industry middle ground, between much larger, full-service carriers like Delta Air Lines Inc. that are improving their service and profitability, and successful ultra-discounters like Spirit Airlines Inc. that go after passengers who don't want perks—just rock-bottom fares. JetBlue has been profitable since 2009, but only marginally so and it often disappoints on quarterly profits."   That sure sounds like a company stuck in the middle, doesn't it?  

JetBlue: Does Adding Business Class Seats Make Sense?

According to Businessweek, JetBlue will be rolling out a 16-seat business-class cabin on certain transcontinental routes aboard new Airbus 321 planes in the near future.   JetBlue VP Scott Laurence told Businessweek,  “I think the incumbent pricing at $2,500-plus, each way, is something we think doesn’t make a lot of sense.  It doesn’t stimulate an already existing market. We think we can stimulate demand there and really have an impact on that market.”  In other words, look out legacy carriers!  Your first class service is about to be challenged by a less expensive, high quality service from JetBlue.  

Is this a good idea?   It strikes me that an opportunity does exist in the market.  A significant gap exists between the price (and associated service) of a first class seat on one of those transcontinental flights and the price and service associated with an economy seat.   JetBlue may be able to come in with an attractive offering at a price point that induces some economy customers to upgrade, while stealing some first class customers from other airlines. 

What's the downside?   JetBlue has succeeded in part because it made good tradeoffs.  It chose NOT to do many of the things legacy carriers do (no first class, no bulky cart used to deliver drinks, no hub and spoke system, etc.).  Those tradeoffs made JetBlue unique and hard to imitate.  Now the company is relaxing one of those key tradeoffs.   Companies often find that they violate key tradeoffs when they strive to grow.  Sometimes, abandoning key tradeoffs damages the power of a unique business model.  JetBlue will face some questions: Will it slow down the boarding process when you add a business class cabin?  Will stocking the cabin require more time, and thus slow down turnarounds?   Will providing service to the business class cabin cause flight attendants to sacrifice the quality of service to the rest of the passengers?  Given these questions, it's a good idea that JetBlue is launching this new model as an experiment.  The key will be to learn and adapt quickly as challenges arise.  The deeper question will be:  Are we sacrificing key elements of our competitive advantage by pursuing this opportunity, or are we enhancing our competitive advantage by further differentiating from the competition?