Ann Fulmer on Mortgage Fraud

Yesterday, Ann Fulmer spoke at the Economic Summit we held at Bryant on the topic of mortgage fraud. Fulmer made herself into one of the nation's leading experts on the subject when the problem invaded her own upscale neighborhood in the suburbs of Atlanta. She gave a dynamic presentation, in which she showed us how much it may have contributed to the mortgage meltdown, while providing vivid examples of how fraud simply decimates some neighborhoods (because there's some benefit to the criminals of clustering their activity in particular areas). It was truly frightening to see how mortgage fraud works, and to see that it can affect upscale suburban neighborhoods, bringing other more dangerous crime along with it. For more on Ann Fulmer, see this story about her in Business Week, and this one in the New York Times.

Ethnography, Failure, and Diaper Design

Fortune has a great article on how Kimberly-Clark designed a new line of premium diapers, in part to cope with declining future demand due to demographic trends (lower birth rates). The article highlights two important practices that firms are employing these days. First, it points out the importance of ethnographic marketing research, i.e. direct observation of consumers in natural settings using a company's products. Firms are employing these observational methods, rather than relying solely on focus groups and surveys, because they have learned that people often say one thing and do another. Moreover, consumers often aren't even aware of key aspects of how they use particular products. Observation yields great insights about the specifics of consumer behavior. Here is an excerpt from the article on this point:

"In many cases they went into homes to do interviews; in others, they placed motion-activated cameras in the home to observe diaper-change routines and then watched the hours of footage at K-C headquarters... Nelson plays some footage of a newborn getting its diaper changed, taken from one of the videocameras. You see the baby's legs continually springing up and the mom trying to straighten them as she puts on the diaper; clearly it's a struggle. Footage like that started pushing the team in the direction of thinking that a better diaper would be shaped to get around those legs and follow the curves of a baby's body."

The second key point in this article is that Kimberly-Clark is intentionally creating failures in their research labs to learn more about diaper technology. Only through intentionally causing many types of diaper leaks can they discover how to create a diaper that fits comfortably, yet does not leak. Here is the excerpt on that point:

"Fit diapers in varying states of sagginess, are noisily playing with trucks and watching SpongeBob SquarePants. They're an adorable collection of diaper blowouts about to happen, and when they finally do, K-C's researchers record each failure in obsessive detail: how much the diaper weighed at the end, where the leak seeped out, how the diaper fit around the legs.
The goal of this forced-failure test, as Kimberly-Clark calls it, is to check that the diapers being churned out at the company's factories match the rigorous standards for Huggies Supreme Natural Fit..."

As the father of three, with one still in diapers, I found the article quite interesting. It's rather amazing how much time and money is spent trying to perfect diaper "technology" at Kimberly-Clark.

The Perils of Going Green

Fast Company has an article about how Clorox struck up a partnership with the Sierra Club when it launched its Green Works line of more environmentally friendly cleaners. The deal means that the Sierra Club label to appear on all Green Works products. Naturally, the environmental organization receives a payment in return for the use of its logo. This partnership has been very beneficial for Clorox, but it has created much internal furor within the Sierra Club. Some members apparently do not agree with this type of commercial deal.

This case illustrates the perils of "green" strategies, both for the for-profit firms and the environmental organizations. In this case, the environmental organization found itself on the hot seat for its commercial tie-ups. In other situations, we find that firms who are trying to "go green" find themselves inviting much more scrutiny than they had ever experienced. Sometimes, claiming progress on the environmental front only invites more attention, and perhaps criticism, from various constituencies and activitists. In sum, becoming more environmentally friendly has many merits, but it can be a perilous activity for all involved.

The Importance of Design

From the remarkable success of Apple to the popularity of kitchenware products made by Alessi, we see many examples of the power of innovative design. More and more companies have rediscovered the basic notion that success in the marketplace is not simply a function of a product's quality or technological superiority; design matters. Now, Business Week reports that Coca-Cola has taken a fresh look at how design can freshen up the iconic brand's look and feel. There's no question that great designers can not only help to improve the products we purchase and use, but they also can help connect consumers more closely with brands. A good design can and should convey the meaning of a brand. Some of Coca-Cola's recent work seems quite interesting, particularly because the firm does have some interesting design roots - particularly with the famous glass bottles of old.

Prewards- Coupons for a Digital Age

Business Week has a fascinating article about a new Web 2.0 technology that marketers are using to court millenials. The concept is called a preward. Here is how Business Week describes it:

"Edo Interactive, a Nashville-based firm that deals with Web 2.0 technology, is trying to change the game. After spending a year studying young consumers, they developed Facecard, a prepaid credit card aimed squarely at millennials and the businesses that court them.
Launching nationally Sept. 1, Edo's gimmick works like a fiscal Facebook: After applicants create profiles on Facecard.com, they get a card in the mail that allows them to borrow, lend, or give away money to buddies electronically. For a fee, retailers can send them "prewards," small denominations of instant store credit, based on their age, location, and personal interests. Because the $2 to $3 gifts are redeemed via credit card, tracking consumer response is a cinch."

Now, I found this technology rather interesting, but I was also struck by the amount of spending by millenials, and thus the amount of marketers' attention focused on this demographic. According to the article, "America's 80 million millennials (and their folks) shell out roughly $200 billion annually, according to Chicago-based investment firm William Blair & Co.." Wow! Those are some huge numbers.

Well, this leads me to my main point. Both college faculty and parents need to be paying a great deal of attention to the importance of teaching young people about responsible personal finance. These young people are being hit with massive marketing efforts aimed at getting them to use credit cards and spend their money (and their parents' money!). Yet, many young people do not understand certain essential basics of personal finance. Unfortunately, that means that they leave college in far worse financial shape than simply the debt load of college loans. I don't think we can start too soon by the way. We need to begin educating young people about financial matters when they are in elementary school, and gradually introducing more complex ideas about how to manage one's money.

Knowing Your Target Market

One of my MBA students, Judd Taylor, has shared with me an interesting example of a firm perhaps not being fully aware of how its pricing strategy shapes its target market, particularly given the recent run-up in fuel prices. Taylor wrote:

"I recently completed a new stone patio adjacent to the deck on my house. In the process of researching suppliers for the stone pavers, I noticed that one local company offered free delivery for any amount of goods purchased. I wondered how they got away with this given the recent increases in fuel prices. Further investigation revealed that their stone prices were noticeably higher than their local competitors, indicating that they must transfer their transportation costs onto the price of their products. The ability to offer “free delivery” must be an important advertisement for this firm as it is indicated in all of their flyers and brochures. Conceivably, this pricing strategy would appeal most to homeowners who cannot amortize the cost of the delivery over a large order. Contractors might prefer to pay the delivery charge in exchange for a lower price on the materials, especially for large orders."

Taylor's example is an interesting one, because one wonders if the firm understands how its pricing strategy may be shaping its target market. Does the company understand that it will attract homeowners much more so than contractors with this pricing strategy? Perhaps it does, but in some cases, firms may not understand how a particular pricing strategy may shape who shops, and who does not shop, for their products.

How about the implications of oil price increases? Well, a free delivery ad might play well given high gas prices. However, those increases in gas prices certainly will result in higher and higher item prices for the stones, if the firm wishes to continue make profit with its free delivery strategy. This will only drive more contractors away, and it will mean that homeowners with very small jobs will be the most likely purchases of their products. Will this be economically attractive for the firm? What will its cost structure look like with a high frequency of deliveries of small batches of items? The cost of these kinds of deliveries, naturally, is higher than traveling to a job site to deliver a very large order.

The point is simple: Every firm should be clear on how its pricing strategy shapes the kinds of customers who will purchase its product. Does the pricing strategy attract the kind of consumers that a firm wishes to target? Or, is a firm attracting customers which it does not want, or with which they cannot make an attractive profit?

Productivity of Scientific Researchers

The Wall Street Journal had an interesting article yesterday about the productivity of scientific researchers. The article cites studies about the period during one's lifetime when a researcher tends to be most productive. The Wall Street Journal cites research by Benjamin Jones of Northwestern, who argues that innovators tend to make their peak contributions around the age of 40, but then their contributions decline markedly in their early to mid-50s. Thus, the period of peak productivity is fairly limited. Naturally, these studies simply report the averages; there are many outliers, both young inventors who make substantial contributions at an early age as well as people who continue to innovate well beyond their early 50s.

The article points out that some companies are trying to find ways to extend the peak period of research productivity for their most talented people. They are trying to find ways to both help the young promising stars accelerate their learning curve and become more innovative at an earlie age, and they are trying to help older workers maintain their pace of innovation beyond their early to mid 50s. For instance, companies such as Sun and Texas Instruments are pairing up young engineers with experienced mentors; the partnerships benefit both the young and the old. The young come down the learning curve faster, and the old get access to new ideas and fresh perspectives.

As an academic, from time to time I think about this issue of research productivity over one's lifetime. I've seen plenty of scholars who make great contributions at a relatively early age and then become rather stale. They continue to work in a very narrow domain for decades, and they don't branch out to learn and discover new things. I think it takes a concerted effort on the party of any researcher, whether commercial or academic, to keep exploring new territory and exposing one's mind to completely new perspectives. It's easy to continue to mine the same territory upon which one has built their reputation; it's harder, but ultimately more beneficial, to take the risk to go beyond one's comfort zone and stake out new ground. In sum, I think all of us need to set some personal goals about the new bodies of knowledge and new skills that we would like to develop in the next 3-5 years; we need to keep setting these goals over time, so that we truly become lifelong learners. Hopefully, this will keep us innovative and productive for decades to come.

The Fall of Oil Prices

It's been amazing to watch the rapid decline of oil prices in recent weeks, driven in large part by the fact that demand has dropped. People and companies have finally begun to make substantial changes in their behavior, as witnessed by AAA's data on the reduced amount on miles driven by Americans this summer.

If there is one positive from the high oil prices that we've experienced, it is that firms have implemented major changes to eliminate wasteful use of energy. Such cost reductions will help them become more competitive in the long run. It's interesting that the U.S. productivity numbers have been rather strong during the past few quarters, despite the downturn in economic activity. Perhaps the productivity growth is a reflection of firms trying to become more efficient to offset the high price of energy. Whatever the cause, the growth in productivity in 2007-2008 bodes well for long term economic growth, despite the short term economic troubles.

One last thought on oil prices... One does have to wonder about the timing of the shift in the oil market. Is it just a coincidence that prices began to fall when the goverment began discussing ways to crack down on short sellers who may have been acting inappropriately? Short sellers clearly play a useful role in our capital markets, but there are some questions regarding the appropriateness of some behavior.

Global vs. Local

Ford announced this week that it was shifting more of its production to small cars, and that it was going to bring some of its popular European small cars to the United States. The news reports suggest that Ford is finally making more progress toward standardizing models across countries, whereas in the past, the company focused on building different models for different local markets.

The Ford situation reminds us that there are two different reasons that firms customize their products for local markets. First, they might do it to tailor their products and services to local customer tastes and needs. This is a perfectly viable reason for localization, though of course, companies must weigh the benefits of local customization against the foregone economies of scale. However, there is a second reason that firms customize for local markets, and it is not value maximizing. As companies grow and develop local management in various countries, those organizational units grow in power. Sometimes, they become fiefdoms run by managers behaving like feudal lords. These managers insist of building their own products for those markets, rather than adopting global product platforms. Yet, they might be doing so because they want to control their region and accumulate more resources under their control, rather than because it is actually the right thing to do for the business. The Ford story suggests that firms need to be particularly attuned to this second, value destroying reason for local customization in different geographic markets.

Airline Service

Sorry about the long delay between postings. I was finishing up the manuscript for my next book, and then I flew here to Tokyo to teach an executive program. I did have an interesting experience on the flight over here. I flew from Boston to Dallas, and then from Dallas to Tokyo on American Airlines. I've flown this route every year now for the past five years, and I always fly American Airlines as I have elite frequent flyer status with them. I was quite surprised, though, when I landed in Dallas. As I walked off the jetway into the gate area, a woman from American Airlines stood there with a placard with my name on it, as well as the name of one other passenger. She offered to drive us to our gate for the departure to Tokyo. Now, Dallas is a huge airport, and it was quite some distance between the gates. However, we had plenty of time before our next flight. I had never been offered this type of service on prior flights to Tokyo. I think it's interesting that American Airlines appears to be going that extra mile to provide service to its best customers, even while cutting back in many areas. While we have read so much about labor reductions, here we had a person driving us through the airport. It seems clear that the airlines are very focused on trying to enhance service to their core customers. It's always been tough for the airlines to differentiate their products. Flying has simply become a commodity product. Yet, here we have an airline trying to make sure that it offers a small amenity that may help it retain its best customers. It will be interesting to see if more attempts are made at differentiating their products and services, and if these efforts are any more successful than they have been in the past.

A Friendly Deal for Bud?

The Wall Street Journal reports this morning that Inbev may be raising its bid from $65 per share to $70 per share in an effort to secure a friendly deal with Anheuser Busch. It's not surprising to see Inbev up its offer, given that a friendly deal likely means a smoother integration process than a hostile takeover. Achieving key synergies becomes crucial to justify the takeover premium, and those synergies require the cooperation of Anheuser-Busch managers and employees. Most experts believe Anheuser-Busch would have a hard time devising a strategic plan that would allow it to argue to shareholders that it can get to $70 per share on its own, even if it sells noncore assets such as the theme parks and packaging business. It will be interesting to see if the two firms can hammer out a friendly deal. Moreover, it will be interesting to see how analysts and investors react to the larger takeover premium being offered by Inbev. Will they think that the potential synergies justify that acquisition price?

Deliberate Practice and Simulations

Research by K. Anders Ericsson and others has shown that elite performers in a wide variety of fields do not excel simply due to innate talent. Instead, these stars engage in a great deal of what Ericsson calls "deliberate practice." It's more than just hard work. Elite performers engage in practice that is aimed at a very specific performance improvement goal, and which provides immediate feedback. Moreover, deliberate practice involves focusing on the things that elite performers don't do well; many of us tend to practice that at which we already excel in our leisure sport activities. Finally, deliberate practice consists of extensive repetition of the very same activity, so as to hone a particular skill. It emphasizes focus over variety in the building of skills - i.e. working on one thing at a time. As famous tennis instructor Vic Braden has said, "“Losers have tons of variety. Champions just take pride in learning to hit the same old boring winning shots."

Can businesses leverage the power of deliberate practice to develop their human capital? Surely, they can. We can engage in deliberate practice when it comes to key activities such as drafting and making presentations. Leadership development programs can provide opportunities for deliberate practice at a variety of skills related to communication, negotiation, and the like. Beyond that, we can employ technology to create opportunities for deliberate practice. One innovative new methodology for doing so involves the use of simulations and video game technology to train employees. For instance, Hilton Garden Inn employs an interactive training game called "Ultimate Team Play." This game allows individuals to immerse themselves in various scenarios that take place in a hotel. They have to make decisions about serving customers, and they have to complete various tasks. The game provides immediate feedback to the trainees, enabling them to see how their efforts impacted measures such as customer loyalty and satisfaction.

Starbucks Closing Locations

Starbucks recently announced that it was closing 600 locations this year. Interestingly, it appears that the company will close company-owned locations, rather than any of its licensed locations (such as small airport shops). While this closure strategy may make sense economically, one still wonders about the strategic logic of the company's massive growth of licensed locations. It seems quite likely that the proliferation of licensed locations, including the abundant licensing to food service companies, has diluted the Starbucks brand.

It's hard to argue that you are one of the highest quality coffee companies in the country when you have your coffee being brewed and then sold from air pump dispensers in tons of different locations. How long does that coffee sit in those dispensers before it is sold? Is it really fresh? Does it always taste as good as Starbucks drip coffee sold in its company-owned locations?

In my view, the company must address this fundamental strategic question. The craving for growth above all else clearly drove them to expand at a frenetic pace in recent years. Now, retrenching can be painful. Stepping back from its licensing strategy won't be easy. It may even be economically a negative in the short run, but it may be precisely what the company must do strategically to position itself for the future.

The NBA, Referees, and The Wisdom of Crowds

The NBA has an interesting and quite serious problem these days. The league appears to have a lack of credibility among many fans. Disgraced referee Tim Donaghy claims that some games were intentionally manipulated by the officials, and NBA commissioner David Stern dismisses the claim as the desperate accusations of a criminal. However, many fans question the league's credibility when it comes to the officials. One of the games mentioned by Donaghy (Game 6 of the 2002 Lakers-Kings Western Conference Finals) raises serious questions in the minds of both sportswriters and fans. The commissioner cannot simply dismiss all of this as the fraudulent claims of a criminal. Whether true or not, the real issue is the credibility problem that the NBA has with its own fans.

What should the NBA do about it? Peter Keating has an interesting solution in this month's issue of ESPN: The Magazine. Keating draws on the work of James Surowiecki, the author of the best-selling book, The Wisdom of Crowds. He suggests that perhaps the NBA should allow fans to vote on key calls in an NBA game. After all, Suroweicki and others have shown that the collection of thousands of independent opinions often may yield an answer that is better than the judgment of any particular expert.

Keating's suggestion may sound preposterous, but perhaps there is a different solution that the NBA might experiment with, drawing on the same logic of mass collaboration. Companies in a variety of industries have employed mass collaboration effectively. For the NBA, perhaps fan voting could be used to EVALUATE referees, rather than to actually make calls in a live game. Rather than simply relying on an expert in the league office to judge the competency of officials, perhaps the NBA could take a look at how its millions of fans think referees have performed. Comparing the fans' collective judgment to the ratings by experts could be quite interesting. Not only might it yield informative results, but such a system might go a long way toward restoring the league's credibility in the eyes of its customers.

Airline Pricing

We have all seen the reports of new fees being imposed by the airlines, particularly for checked luggage. It's amazing to me that an industry with such an awful reputation for customer service would now choose to nickel and dime its customers in this fashion, rather than raise fares slightly. It's especially befuddling to charge for checked luggage, because this scheme creates an even bigger incentive for customers to try to carry on everything that they have. More carry-on bags means a slower boarding process and longer turnaround times. That means planes sitting on the ground rather than flying... which decreases profits, as well as angers customers.

Then, we have the befuddling news that United Airlines may require minimum stays on some routes. I'm not sure that I understand this policy. Does it mean that I can't fly from Boston to DC and back on the same day with United? Why would they turn away that business, when their goal should be to fill the planes so as to spread their fixed costs over as many passengers as possible? If this is true, then perhaps there is some economic reason for doing so, but again, it sure does not seem like a move designed to please its customers.

Exxon Mobil Selling Gas Stations

News reports indicate that Exxon Mobil plans to sell its 2,200 company-owned gas stations over the next few years. The articles suggest that, despite high gas prices, the company does not make sufficient margins in gas retailing, because the business is highly competitive. While that may be true, there is a larger strategic issue at play here. The company simply recognizes that the case for forward integration into gas retailing simply is not a strong one. That is why most of the Exxon Mobil gas stations around the United States already were operated by distributors, rather than being company-owned.

Apple owns its retail stores because it wants to control the consumer purchasing experience, gather critical marketplace information, and further enhance its product differentiation. Exxon Mobil has no such powerful rationale for forward integrating into retail gas operations. They can accomplish their goals by licensing their brand to distributors who own and operate the locations. Let those who are more adept at operating these businesses do so... after all, gas retailing is about much more than fuel these days. The business is much more about operating convenience stores profitably than it is about pumping gas.

The 3,000 Mile Oil Change

The state of California recently launched a campaign to persuade consumers that they may not need to change the oil in their cars every 3,000 miles. In fact, for most new cars, the manufacturers recommend that you change your oil less frequently. For my car, Honda suggests changing the oil every 5,000 miles, for instance. (For older cars, the 3,000 mile benchmark may still make sense.) If everyone changes their behavior, Americans could reduce their consumption of oil and reduce the amount of waste generated.

If more attention on this issue spreads across the country, we could see important implications for businesses such as Jiffy Lube and other auto maintenance centers. They have profited from the disciplined approach that many Americans take to changing their oil every 3,000 miles. If people begin to adhere to manufacturers' guidelines for new cars, we may see substantial challenges for these firms. It will be interesting to watch to see if this trend takes hold, and how the auto maintenance centers respond. With oil above $130 per barrel, it's also interesting to see how many different ideas are being pursued to eliminate wasteful consumption.

Guest Post on Decision-Making

Heather Johnson sent me the following guest post, with her take on a subject that I've spent a great deal of time studying over the years.

The Choices we Make

Any student of management should be familiar with the process of decision-making – describe and understand the problem, identify the objective, determine the alternative options available, evaluate each of these options either objectively or subjectively, and choose the one that fits best. Unfortunately, the simplicity of the statement of the process does not carry over to the actual process itself, which is why most people find the procedure of making decisions extremely difficult.

On one end of the spectrum you have people who agonize over every small thing, from what to eat to what to wear; and on the other, you have those who save their energy to rationalize choices that are life-changing, if not for them, then for the people whose livelihoods depend on them. I’m not trivializing the first category, only trying to highlight the fact that every one of us considers the decisions we have to make as the most important choice we make at the moment.

The art of making decisions is a theory that has been thrashed about, debated on, and put to effective use in almost every boardroom across the globe. But it’s not something that’s applied when it comes to the individual - personal decision-making is a process that’s often intuitive, based on circumstances that prevail at that point, and influenced by people who control aspects of our lives. From where I sit, this is what I’ve learnt about people and the decisions they make:

· The majority is happy to go with the flow; they do not take decisions that change their lives overnight or even set in motion the harbinger of positive change. Any change that happens is forced, and these people then rearrange their lives to fit around the change.
· Some people straddle the fence; they know they have to take a decision one way or the other (mostly a yes-no decision where there is no in-between ground) and they’re hesitant or afraid to choose. The more daring in this category call the shots and finally choose while the meek (who I don’t think will inherit the earth) fall on one side after being either pulled or pushed. If the decision is a success, the one who chose is elated that he made the right decision; if it’s a failure, the one who fell blames the one who pushed him over, a case of passing the buck once again.
· Some let other people decide; they are the laidback kind who are ok with following the leader rather than taking the lead themselves.
· A rare few are go-getters; they plan their lives and map out where they should be at what point of time. These people live their dreams, and if one or two of the dreams die a premature death, they’re back to the drawing board mapping out new strategies and alternatives. This kind thrives in challenges – they do not fear to take the road less trodden and delight in finding offbeat paths that lead them to the pinnacle they hope to achieve.

The choices we make have repercussions, both on ourselves and the people whose lives are intertwined with ours. Unfortunately, there’s no writing on the wall to guide us as we take decisions that sometimes, may be the difference between success and failure, wealth and mediocrity, and even life and death. But the fear of failure should not be a deterrent to attempting – just as you’d get back on a horse asap after a fall, do not hesitate to make a new choice even if the one you made earlier turned out to be a mistake.

The best way to make decisions is to let your head rule your heart and not vice versa. Rational scores way over emotional when it comes to decision-making. The time taken to make a decision should not outweigh the value of the decision itself – it’s not worth it to spend a whole day deciding the color of pants you want to buy. Think your choices over, and when you’re done, your instinct will tell you what’s right.

This guest post is written by Heather Johnson, who frequently writes on the subject of grants for nursing college degree. She welcomes your comments and freelance writing inquiries at:
heatherjohnson2323@gmail.com

Inbev Makes Bid For Anheuser Busch

Inbev officially announced its takeover bid for Anheuser Busch. They offered $46.4 billion for the American brewer, valuing the target firm at a 35% premium to the 30-day average stock price prior to recent speculation about the acquisition.

As I mentioned in a recent Reuters article, I think the Anheuser Busch board of directors will have a hard time turning back this bid without making other strategic moves. (Consider what has happened at Yahoo after that firm rejected the Microsoft bid). Shareholders are not likely to be pleased if the board simply rejects a bid that offers a substantial premium. The family only owns about 4% of the shares, so it cannot block the deal on its own.

If the Busch family does not want to sell to Inbev, what can they do? I think that one possibility would be to find a private equity buyer who would be willing to retain and work with the current management team in place, particularly CEO August Busch IV. Mature companies with strong, stable operating cash flows and valuable brands make attractive targets for private equity investors. The only question would be whether a private equity firm (or group of firms) could raise the required capital at the right price given this year's turmoil in the capital markets.

Regardless of what happens, I think you will see prospective buyers (Inbev, private equity firms, or some other white knight) taking a close look at some of Anheuser-Busch's ancillary operations. While the theme park business (Busch Gardens, Seaworld, etc.) is quite profitable, it's hard to make a case that strong economies of scope exist between the beer business and the theme park operations. One way to generate cash to help finance a deal would be to sell the theme parks. Other business units, such as the firm's packaging operations, might also receive scrutiny.

Shrinking Retail Floorplans

Gap announced this week that it plans to reduce the size of many of its stores, and suspend the opening of new U.S. locations. In particular, many of its 12,000 square foot stores will shrink to somewhere between 6,000 and 10,000 square feet. Now, Gap has struggled mightily this decade; thus, it's not surprising that they are undergoing such changes. However, one could argue that we could be seeing the start of a trend in retail.

Over the past two decades, retail formats have gotten larger and larger, with superstores cropping up everywhere. It's not just the mass merchandisers such as Target and Wal-Mart, but a whole array of other specialty retailers as well. These giant stores perhaps made sense in an era of $25 oil, but executives will have to rethink the notion of optimal store size given oil prices in excess of $130 per barrel.

Heating costs represent a largely fixed cost. As they rise, the breakeven point for a retail store suddenly rises as well; in short, you need far more revenues to cover your fixed costs today. Given near term pressures on sales, companies need to rethink their cost structure. Reducing variable costs such as labor may be one option, but retailers do not want to cut too deep in that area, for fear of harming customer service. They may find that shrinking the size of the store helps bring down the breakeven sales figure, while also helping to improve inventory turns. Slower moving items can simply be sold on-line today, something that wasn't possible two decades ago. Overall, retailers may lose some revenue from shrinking their floorplans, but they could more than make up for it in higher asset efficiency (more sales per square foot, greater inventory turns, etc.).