BY ANY MEASURE, the U.S. wine industry has always been a tough business to make money in.
In 2000, the $20 billion U.S. wine market was slow growing, intensely competitive, fragmented, highly regulated, and subject to global oversupply and growing import competition. Over 6,500 largely undistinguished brands competed for the attention of distributors, retailers, and consumers in a country that consumed ten times more beer than wine, and where three-fourths of American adults never purchased wine at all. Not surprisingly, few new entries made market headway in this environment, and profitability proved elusive for most vineyards.
And yet despite these challenging conditions, a new product from a small vineyard in southeastern Australia grew to become the top-selling imported wine in the United States within five years of its 2001 market entry.
The story of Casella Family Brands (CFB) and Yellow Tail wine is an inspirational example of how to succeed by becoming a cat in a dogfight. Figure 2.1 provides a vivid picture of what successful growth looks like. How did they manage it?
Figure 2.1a Casella Family Brands facilities, 1994
Figure 2.1b Casella Family Brands facilities, 2006. Photos courtesy of Deutsch Family Wine & Spirits. All rights reserved.
Industry Norms in the U.S. Wine Market
Americans drank relatively little wine in 2000—on average, about one bottle per adult per month, roughly one-tenth the per capita consumption of France or Italy. Furthermore, U.S. wine consumption was driven primarily by a small segment of committed wine enthusiasts: three-fourths of American adults did not consume any wine, while core wine drinkers, representing only one-tenth of the adult population, accounted for 86 percent of total consumption (see figure 2.2).1
Figure 2.2 Wine consumption by type of consumer. The traditional industry customer focus was on core wine drinkers, the 10 percent of the adult population who accounted for 86 percent of U.S. wine consumption. Yellow Tail targeted 48 percent of the U.S. population who either drank only beer and spirits (33 percent) or who were marginal wine drinkers (15 percent). Source: Merrill Research & Associates, Wine Trends and Market Analysis.
While there were cultural and historical reasons for wine’s lack of popularity in the United States, widely accepted industry norms passed down through generations also contributed to the uneasiness of U.S. consumers over wine:
• Old world wines offered a sophisticated, complex, and acquired taste that many first-time or casual wine drinkers found unappealing.
• Many premium wines are designed to be aged in the bottle after purchase, rather than sold for everyday casual consumption, and are often reserved for special occasions.
• Brand variety was overwhelming, even for wine connoisseurs. For example, over thirteen thousand distinct wine SKUs were sold in U.S. supermarkets. A well-stocked wine store was likely to carry over one thousand separate brands, many with labels in foreign languages or with confusing enological product descriptors.
• Varietal labels are often confusing, as countries use different names for similar wines (e.g., Burgundy is made with the pinot noir grape; syrah and shiraz are alternative names for the grape used for Côte-Rôtie).
• Merchandising practices compounded the confusion, as stores frequently organized wine displays by country of origin, rather than by grape variety, making comparative shopping more difficult.2
• Prices varied widely, from “Two-Buck Chuck” to two-thousand-dollar vintage Château Lafite Rothschild.
• On a dollar-per-drink basis, wine tended to be more expensive than beer or spirits.
It is not surprising that many Americans—including some of the relatively small (25 percent) segment of adults who did consume the product—found wine confusing, if not downright intimidating. According to a 2002 survey, more than 80 percent of U.S. wine drinkers felt their product knowledge was average or below average, 40 percent felt overwhelmed by the selection, and 34 percent did not recognize brand names, leading consumers to hesitate in choosing a wine.3 About one-third of American adults avoided wine altogether in favor of other alcoholic beverages like beer or spirits. According to one widely recognized wine expert, “Thirty-five percent of the population drinks alcoholic beverages but they don’t drink wine. They’ve tried it; they don’t like it. We don’t interview them much because they’ve said they don’t like wine so we’re not going to find out about wine. Can those people be moved over? Who knows? But probably not.”4
This is a classic case of the dogfight mentality that pervades most industries. In this case, thousands of producers were clawing for a piece of a relatively small market—the 10 percent of the adult population who were regular wine drinkers—with products that many consumers viewed as undifferentiated, confusing, and off-putting. The industry assumed that nonconsumers were unreachable and saw no reason to question whether their own business practices were in fact limiting consumer interest. And when CFB first entered the U.S. market, it fell into exactly the same trap.
Casella Family Brands’s U.S. Market Entry
Casella Family Brands was founded in 1969 by a Sicilian immigrant from an Italian winemaking family who arrived in Australia in the 1950s. Filippo Casella was an itinerant farmhand until he had saved enough to buy a forty-acre plot of land in New South Wales, and he began by selling his wine and grapes in bulk to other name-brand vineyards.
In 1994, the founder’s middle son John took over the business after studying enology at Charles Sturt University in Wagga Wagga and working for another Australian winemaker. Seeking to grow his father’s operations with the family’s own brand of quality wine, Casella hired an experienced executive from an export-oriented competitor to lead an expansion effort. The new export manager coveted new markets, particularly the United States. But as a small and unproven Australian vineyard without an established label seeking to sell in the intensely competitive premium wine segment, the company needed assistance, so Casella turned to the Australian Trade Commission to help him find an American distribution partner.
Around the same time, about twelve thousand miles away in White Plains, New York, Bill Deutsch, founder and CEO of Deutsch Family Wines & Spirits (DFWS), and his son Peter were looking to expand their U.S. wine import business. At the time, Deutsch was importing approximately three hundred thousand cases of wine per year, mostly French, distributed through relationships DFWS had built with dozens of distributors across the United States. Deutsch was interested in diversifying the company’s wine portfolio and began exploring potential imports from other countries.
Deutsch saw the opportunity to introduce a fighter brand from Australia and contacted the Australian Trade Commission seeking suggestions for a suitable vineyard partner. Deutsch’s inquiry came within days of Casella’s similar request, and the connection was soon made. Meeting for the first time at a trade show in San Francisco in 1997, Deutsch and Casella agreed to team up. “It was a perfect match,” Deutsch recalled, “two smallish, family-owned businesses looking for growth opportunities; I had a hunch it would work out.”5
Casella offered access to a new source of lower-priced premium wines, and in turn Deutsch offered coveted access to the U.S. market. They agreed that in exchange for half-ownership of the brand, DFWS would market CFB’s wines in the United States. Shortly thereafter, Casella and Deutsch launched a line of wines in the United States under the Carramar Estate label.
Casella followed conventional wisdom by naming his wine after a local landmark (in this case, an aboriginal vineyard site) to give the brand a sense of terroir and history: Carramar means “by shady tree” and estate conveys a place of stature. The bottle label was adorned with an ornate shield and crown, in stark contrast to the vineyard’s humble facilities at the time (figure 2.1 and figure 2.3). Carramar Estate was priced at $9.99, joining thousands of other undistinguished brands in the intensely competitive U.S. premium-wine segment.
Figure 2.3 Casella Family Brands wine labels
Given its “me too” positioning, it is not surprising that Carramar Estate achieved only modest success, selling just twenty thousand cases in its first year. Shortly thereafter, the brand faced a setback as reports began surfacing that consumers were returning purchases to their retailer for a refund, complaining the wine was “corked.” Casella discovered that a batch of tainted corks had been supplied for the Carramar Estate wines the company had shipped to the United States. “John Casella was mortified by this incident,” recalled Deutsch. “He gave me his assurance to buy back all unsold bottles and offered to withdraw from our partnership. I reminded him that I was committed to a long-term partnership and encouraged Casella to come back with a more interesting wine.”
The disappointing Carramar Estate launch proved to be the catalyst that drove Casella and Deutsch to rethink their underlying assumptions of how to compete in the U.S. wine market.
The Birth of Yellow Tail
As Casella contemplated how to produce a wine that would be more distinctive in the crowded U.S. market, he decided to challenge all the conventional wisdoms and industry norms that defined how wines should taste, what they should cost, and how they should be branded, marketed, retailed, and sold in the U.S. market. In other words, instead of rejoining a dogfight, he decided to become a cat.
First was the product. Casella spotted an opportunity to create a wine with a pleasant fruity taste at a lower price—$6 for a 750 ml bottle—to appeal to a broader market than Carramar Estate had. He set out to create an approachable, everyday wine that overdelivered on taste relative to its price, appealing not only to current wine drinkers but also to the larger number of nonconsumers who had previously shunned wine because they didn’t like the taste, price, or complexity of traditional offerings.
Both Bill and Peter Deutsch were immediately enthusiastic, noting “it was delicious; an easygoing wine, uncomplicated and fun to drink.” Echoing these sentiments, Jon Fredrikson, publisher of an influential California wine industry newsletter, commented that Yellow Tail turned out to be “the perfect wine for a public grown up on soft drinks.”6
For brand imagery, Casella turned to a graphic artist in Adelaide, who offered a yellow-and-orange rendering of a yellow-footed rock wallaby (a smaller cousin to the kangaroo), evocative of Australian aboriginal art. The yellow-tailed image was seen as friendly and readily identifiable with Australian culture. Casella paid less than five thousand dollars for the design, which served to anchor the development of a marketing campaign for the new wine.
And the brackets used to depict the [ yellow tail ] brand name? Casella was looking up “kangaroo” in a textbook when he came across the definition of a wallaby. In the margin, alongside the Latin name was the Australian version in brackets: [ yellow tail ]. Casella decided to keep the brackets to set the wine apart and to use the lowercase spelling to further communicate the brand’s lack of pretension.
To reinforce the lack of pretension and the approachability of the wines, Casella decided to shun standard industry practices that had been widely accepted for thousands of years. First, unlike virtually all premium wine competitors, he used the same Bordeaux-style bottle shape for both red and white wines. And second, he avoided enological terminology and ebullient descriptions of terroir on the labels.
For example, a typical premium French wine sold in the United States might carry the following descriptions on its label:
Château de Fontenille is a splendid property situated in the middle of sixty-five hectares, of which forty hectares are planted with vines, near the ancient abbey of La Sauve Majeure. Aged for eighteen months, 50 percent in oak barrels and 50 percent in a vat. A very harmonious wine with rich red-fruit aromas and silky tannins. Can be kept under good conditions for five to seven years.
In contrast, the far simpler description on the back of a Yellow Tail Shiraz bottle read:
For three generations, the Casella family has been making wine at their winery in the small town of Yenda in South Eastern Australia. It is here that [ yellow tail ] is created with a simple purpose in mind: to make a great wine that everyone can enjoy. [ yellow tail ] is everything a great wine should be. It’s approachable, fresh, flavorsome, and has a personality all of its own.7
As Casella explained, “We said right from the beginning that we were unpretentious. Heck, we had a kangaroo on the label. We used bright colors. When you turn the bottle around and read the back, the label in no way talks about where the wine comes from, or what the oak barrel maturation was.”8
Bill Deutsch was somewhat apprehensive about the unusual bottle and label designs at first. Using animals and bright colors on wine labels was just not done at that time, but Peter Deutsch loved the new label. Since he liked the wine, Bill Deutsch agreed to take twenty-five thousand cases for the last seven months of 2001.
The next stage in the birth of Yellow Tail was marketing. Deutsch and Casella continued to break from traditional business practices in how they set out to market and sell the new product in the United States, reinforcing its distinctive brand personality. First, they tapped into Americans’ image of Australia as a country of fun and adventure by providing wine-store clerks—many with little wine-selling experience or knowledge of Australia—with indigenous bushman’s hats and oilskin jackets to wear at work. Even delivery-truck drivers were adorned with the stylish Australian clothing, to help retailers identify—and perhaps recommend—Yellow Tail. To stimulate impulse purchases, Deutsch and Casella designed colorful endcap displays to set it apart from the competing brands stacked up on wine store and supermarket shelves.
To appeal to nonconsumers intimidated by wine, Deutsch and Casella deliberately kept the Yellow Tail product line simple and attractively priced. At launch, there were only two varietals—Shiraz and Chardonnay—in two bottle sizes. Introductory pricing was highly competitive: five to six dollars for the standard size and ten to eleven dollars for the 1.5 liter bottles, placing Yellow Tail within the popular-premium category, despite a taste that compared favorably with wines costing considerably more. As the widely regarded wine critic Robert M. Parker noted, “In some circles it is fashionable to criticize wine of this genre, but if the truth be known, these are surprisingly well-made offerings.”9
Yellow Tail wines were an instant hit in the United States. Within six months, sales exceeded 225,000 cases, nearly ten times Deutsch’s initial market forecast. The first batches sold out so quickly that an additional supply had to be shipped by plane at considerable expense. Demand quickly outstripped CFB’s vineyard capacity and additional grapes had to be bought on the bulk market, temporarily cutting into CFB’s thin margins.
By 2002, after only one year on the market, Yellow Tail sales jumped to 1.2 million cases, becoming the number-two Australian wine in the United States. By 2006, sales topped eight million cases, equivalent in volume to Yellow Tail’s next five top Australian competitors combined, and exceeding the amount imported from all French producers.
Competitors responded aggressively to Yellow Tail’s success. Believing the colorful marsupial was the key, many of the world’s wine producers, large and small, responded with hundreds of imitation “critter brands,” sporting labels like Porcupine Ridge, Donkey & Goat, Little Penguin, and Smoking Loon. From 2003 to 2006, nearly one in five of the new wines launched in the U.S. market featured an animal on the label, yet none captured widespread consumer interest. Sizing up his competition in 2006, Deutsch noted, “Stores are beginning to look more like zoos than wine retailers.” He added, “The wine cemetery is beginning to fill up with animal labels that thought they could emulate Yellow Tail, but they missed it completely in price, positioning and taste and many of these wines are now being closed out or dumped; they will be gone in thirty to sixty days.”
Why Did Yellow Tail Succeed?
The story of Yellow Tail reaffirms the prescription for three strategic imperatives to drive profitable growth:
1. Continuous innovation—not for its own sake, but to deliver….
2. Meaningful differentiation—recognized and valued by consumers, enabled by…
3. Business alignment—where all corporate capabilities, resources, incentives, and business culture and processes are aligned to support a company’s strategic intent.
In this case, no breakthrough technology was required for Yellow Tail’s extraordinary success. John Casella is a talented winemaker who created a great-tasting wine at an attractively low price. But there were already thousands of excellent wines on the market. The key innovation was recognizing a unique, untapped opportunity to serve the large number of U.S. consumers that were mostly ignored by thousands of undifferentiated, expensive, and overly complex products on the U.S. wine market. With Yellow Tail, Deutsch and Casella created meaningful differentiation—an approachable, affordable wine for everyday consumption that could be enjoyed by both experienced and new consumers.10 In the process, they broke a number of industry conventions: Kangaroos on the label! Bushman’s hats! Simple language! No barrel aging! Only one bottle shape! As a result, Yellow Tail was dismissed by wine purists, but loved by consumers.
Yellow Tail’s contrarian approach also underscores the third key element driving the brand’s success—the alignment of all the business practices of CFB and DFWS to support the desired brand positioning. As noted in figure 2.4, a number of interrelated strategic and operational decisions went into creating Yellow Tail’s brand persona. The collective result was a wine that was appreciated by a large number of new and casual wine consumers and that had competitive resilience against a multitude of imitators.
Figure 2.4 Yellow Tail’s business alignment
In 2003, over one-fourth of Yellow Tail consumers were first-time wine drinkers—either category-expansion converts from other alcoholic beverages (mostly beer) or new buyers in the alcoholic-beverage category. Purchase patterns also suggested that wine drinkers who shifted from other brands consumed Yellow Tail wine more frequently.11 An increasing number of Yellow Tail buyers, including many recent wine converts, bought more wine, more often, than buyers of competing brands. Casella’s vision to create a wine for everyday enjoyment rather than as a special-occasion luxury had clearly gained acceptance in the marketplace.
Commenting on Yellow Tail’s success in the U.S. market, wine newsletter publisher Jon Fredrikson wrote, “Yellow Tail caught the wave. It’s perfect for the newest generation of wine drinkers and potential wine drinkers…it’s the biggest achievement in the history of wine.”12
How Southwest Airlines Also Avoided a Dogfight by Becoming a Cat
In my business strategy course at Columbia, I often ask MBA students to suggest an industry cursed with particularly awful structural characteristics, at least as assessed by Michael Porter’s Five Forces framework. The sector they most frequently nominate for this dubious distinction is the airline industry.
That’s an excellent choice. The airline industry is highly challenged on each of the five forces we saw in the previous chapter (figure 1.1):
1. Bargaining power of consumers: Multiple airlines typically compete on most routes, and with the advent of the Internet, pricing transparency and the ability to rapidly compare and book fares have put the buyer in control.
2. Bargaining power of suppliers: The airlines’ two biggest expenses—fuel and labor—are strongly influenced by powerful constituencies—oil companies and unions—which makes it difficult for airlines to exercise direct control over their factor costs.
3. Threat of new entrants: Despite its capital intensity and razor-thin margins, the airline industry has always had an irresistible allure. There have been dozens of new entrants to the U.S. airline industry over the past three decades. As Virgin America founder Richard Branson once waggishly said, “If you want to be a millionaire, start with a billion dollars and launch a new airline.”
4. Threat of substitutes: Airline passenger demand in the United States has grown at only 1.1 percent per year over the past two decades,13 and improvements in virtual meeting technologies pose an ongoing threat, particularly to lucrative business travel.
5. Industry rivalry: To make matters worse, the airline industry is cursed—every day, 100 percent of its product inventory becomes obsolete. In contrast, imagine you are in the business of selling canned peas. If your product doesn’t sell on any given day, you can hope to have better luck the following day, perhaps with a promotional offer. But once an airplane departs its gate, the available seats onboard are gone forever. And given the high fixed costs of running an airline, there is a very strong incentive for airlines to place butts in seats on every flight. No wonder there has been intense price competition since the U.S. airline industry was deregulated in 1978.
Given these factors, it is not surprising that the airline industry as a whole failed to meet its cost of capital for decades. According to data from the International Air Transport Association, the airline industry generated an average return on invested capital (ROIC) of 4.1 percent between 2004 and 2011, a small improvement on the 3.8 percent achieved in the 1996 to 2004 cycle. This remains well below the weighted average cost of capital, which falls in a range of 7 percent to 9 percent across the industry.14
Michael Porter noticed the travails of airlines in that this industry falls at the very bottom of a long list of U.S. industries ranked by ROIC over the period 1992 to 2006. In a 2008 reprise of his original article on the Five Forces framework, Porter presented the data shown in figure 2.5 to reaffirm his premise that “bad” industries suffer poor returns.15
Figure 2.5 Average ROIC in U.S. industries, 1992–2006
During this era, Wall Street certainly took notice. In figure 2.6, it can be seen that the stock price of American Airlines hardly budged over the sixteen-year period from 1990 to 2006, during which the S&P 500 grew by 237 percent. None of the other major airlines—United, Delta, Continental and U.S. Airways—appear on this chart because they all went bankrupt during this period (as did American Airlines itself in 2011).
Figure 2.6 Airline industry stock prices
Given all of this evidence, why would anyone want to enter an industry with such dismal performance? The answer with respect to airlines is the same as it was with Yellow Tail wine. If the choice is either to enter a poorly performing industry, playing by the same rules as incumbent market leaders, or to stay out of the business entirely, Michael Porter’s and Warren Buffett’s cautionary advice is well taken.
But there is a third way, and that is to recognize that the industry as a whole may be missing an attractive opportunity to address an unserved market that can be tapped only by playing by a very different set of rules. One airline that chose to become a cat in a dogfight was Southwest Airlines, which launched as an intrastate Texas carrier in 1971, and has since grown to become the largest domestic passenger-carrying airline in the United States.
Initially, Southwest focused on a segment of the market that was poorly or not at all served by traditional airlines—leisure and budget-conscious business travelers who primarily used personal automobiles (or buses) for relatively short trips. As such, Southwest wasn’t just trying to pry market share loose from existing competitors (although like Yellow Tail, they did in fact do so), but also to expand the market by appealing to consumers who previously did not fly.
Prior to Southwest’s entry, the legacy airlines like American and Delta primarily focused on the lucrative segment of price-insensitive business travelers, offering an array of amenities that contributed to the high cost of air travel. Herb Kelleher, the co-founder and CEO of Southwest, recognized that the company could expand and capture a bigger market by making airline travel considerably less expensive (initially 60 percent lower than prevailing coach fares), more convenient (by offering more frequent departures from less-congested airports), and more pleasant (with consistently friendly in-flight service) than competing airlines. But to do so he had to break from established industry norms and strategically align Southwest’s business practices to support meaningfully differentiated air-travel services.
Less Expensive
At first glance, one might conclude that the key to Southwest’s ability to profitably offer lower fares than its competitors reflects its no-frills product offering: one airplane type, relatively short flights, one class of service, no meals, no assigned seats and service from less-congested airports. But an additional consideration was that each of these operational elements also contributed to Southwest’s ability to turn around its inbound flights in half the time taken by competing airlines (or less). Over the course of a day, Southwest’s sub-twenty-minute turnarounds allowed Kelleher to schedule one or two additional flights with the same aircraft and crew—a significant productivity advantage that remains to this day. Established airlines could not replicate Southwest’s productivity advantage, given their route structure, fleet type, labor work rules, multiple-class cabin service, and congested airport locations. Even when legacy carriers tried to mimic Southwest’s low-price service model, their cost structures were not competitive, and nearly all shuttered their low-cost carrier subsidiaries after suffering years of significant operating losses. In contrast, 2015 marked the forty-third consecutive year that Southwest reported a positive net income.
More Convenient
Another benefit of Southwest’s operating practices was greater passenger convenience. Faster turnarounds meant Southwest could offer more frequent departures than competitors. Its emphasis on point-to-point service rather than hub-and-spoke networks reduced door-to-door travel times for many travelers. And by operating from less-congested secondary airports—e.g., Love Field rather than Dallas/Fort Worth International Airport—airport access and on-time airline performance for most customers was enhanced.
More Pleasant
From Southwest’s inception, Kelleher recognized the critical importance of employee satisfaction in delivering a customer-friendly service. Southwest has consistently scored at or near the top of airline rankings for employee and customer satisfaction in an industry better known for sour labor relations and surly customer service.16 For anecdotal illustrations of Southwest’s friendly customer service, try searching for “Southwest Airlines flight attendant” on YouTube for examples recorded by appreciative passengers.
Researchers have studied Southwest for years to understand its hiring, training, and compensation techniques to better understand how the airline has maintained such high levels of employee engagement and customer satisfaction, despite its continued growth.17 Southwest was one of the first airlines to establish profit sharing for all employees (in 1973) and through its first forty-three years of operations, it has never imposed an employee layoff. More broadly, Kelleher insists that Southwest’s positive employee relations primarily reflect a corporate culture that was established and nurtured from day one:
Years ago, the business schools used to pose it as a conundrum. They would say, “Well, who comes first? Your employees, your shareholders, or your customers?” But it’s not a conundrum. Your employees come first. And if you treat your employees right, guess what? Your customers come back, and that makes your shareholders happy. Start with employees and the rest follows.18
In summary, Southwest Airlines had the innovative spark to recognize an opportunity to create meaningful differentiation in the airline industry to attract new and existing customers, and strategically aligned all its business practices to effectively capture market share and profitable growth.
As shown earlier in figure 2.6, while historical market leaders like American Airlines were struggling to avoid bankruptcy, Southwest Airlines emerged as one of the highest market cap gainers on the U.S. stock market for decades.
Can the Yellow Tail and Southwest Cases Be Generalized?
These two case studies illustrate that even in “bad” industries, plagued by considerable structural challenges, newcomers who are willing to break from industry norms and play by different rules can achieve considerable success. And while CFB/DFWS and Southwest Airlines were certainly innovative in strategically aligning their resources to deliver meaningful market differentiation, no miraculous technological breakthrough was required in either case to create value in the marketplace.
This raises the important question of how easy it is to generalize these results. Are Yellow Tail and Southwest anomalies, or are there winners (as well as losers) in every industry? Two Booz & Company consultants, Evan Hirsh and Kasturi Rangan, recently published a clear answer to this question by analyzing the total shareholder return (TSR)19 from 6,138 companies within sixty-five industries spanning every facet of the global economy between 2001 and 2011.20 The results in figure 2.7 show that the variance in business performance within a given industry is considerably higher than the variance in the average performance across industries. In other words, there are individual star performers in every industry, regardless of the performance level of an industry as a whole.
Figure 2.7 Compound annual growth in total shareholder returns, 2001–2011, hi/lo/median by industry
Two other insights from figure 2.7 reinforce this important point. Firstly, the average TSR of firms in the top quartile of this distribution (from auto components through tobacco) is 17 percent or higher. Yet the top performer in every industry achieves a TSR of at least 17 percent, and even in the lowest performing quartile, half of the industries listed have at least one company posting a TSR of over 40 percent for the decade.
Secondly, the difference in average TSR between the “best” and “worst” of the sixty-five industries is only 20 percentage points. In contrast, the top companies in each industry have annual TSRs that are on average 72 percent higher than the average TSRs of the companies in a given industry.
The inescapable conclusion from this analysis is that there are exceptionally high performing companies in every industry, regardless of the structural challenges facing the industry as a whole.
In the previous chapter, I quoted Warren Buffett’s observation that when a manager with a good reputation meets an industry with a bad reputation, it is normally the industry that leaves with its reputation intact. The analysis presented in this chapter would suggest that an alternative viewpoint is more relevant: Enlightened strategy and effective execution can trump industry structure in driving business success in any industry.
As a corollary to the finding that companies can achieve outstanding performance in any industry, it also should be noted that “good” industries—i.e., those that score well in Porter’s Five Forces framework or stand out as stars in BCG’s growth–share matrix—can’t necessarily count on superior performance over the long term. To illustrate this, consider another analysis from Hirsch and Rangan, who not only looked at the performance of sixty-five industries between 2001 and 2011 (see figure 2.7) but also at how these industries performed over the previous decade. As shown in figure 2.8, of all the industries whose financial performance ranked in the top quartile in the decade 1991–2001, only 8 percent were top performers in the following decade. In fact, three-fourths of the former high flyers actually performed below the median in the following decade.
Figure 2.8 Top-performing industries over successive decades
Implications for Job Seekers and Employees
These results suggest that an industry’s past performance is at best an unreliable predictor of future success, and at worst may even suggest the likelihood of a pending fall from grace. This issue is relevant to the legion of MBA graduates and working professionals who aspire to work in “hot” industries. But, as venture capitalist Marc Andreessen cautioned, “MBA graduating classes are actually a reliable contrary indicator: if they all want to go into investment banking, there’s going to be a financial crisis. If they want to go into tech, that means a bubble is forming.”21
Andreessen’s assertion has been echoed by others. For example, in his 1989 Wall Street memoir Liar’s Poker, Michael Lewis observed that “the first thing you learn on the trading floor is that when large numbers of people are after the same commodity, be it a stock, a bond or a job, the commodity quickly becomes overvalued.” This argument suggests the likelihood of boom-and-bust cycles when industries are forced to make a correction after hiring too many MBAs at inflated compensation levels.22
While there is no statistical validity to the claim that MBA preferences can actually predict future industry performance,23 it is true that job seekers tend to flock to industries enjoying strong current performance.24 In the time I’ve been recruiting from or teaching in business schools, the popularity of individual industries has definitely waxed and waned. In some years, investment banking has been at the top of the list, while in other years MBAs have coveted jobs in consulting, technology, luxury goods, or health services.
But based on the evidence presented in this chapter, job seekers should expect that the competitive landscape in “hot industries” is likely to change considerably over time. It is not the industry per se that ensures job security and strong financial performance, but the enlightened management actions of companies like Casella Family Brands, Southwest Airlines, and the other nameless winners depicted in figure 2.7.
The implication for job seekers is a personalized version of the cat-in-a-dogfight metaphor. When the job-seeking herd is moving strongly towards one particular industry, your best bet may be to move in a different direction: choosing a specific company, regardless of current industry performance, based on three considerations:
• A business that really interests you.
• A management team you truly believe in.
• An opportunity where you can make a difference in driving innovation and meaningful product differentiation.
Coda: Have Yellow Tail and Southwest Airlines Continued to Succeed?
As successful as they have been, Yellow Tail wine and Southwest Airlines provide clear examples of how competitive advantages can shift dramatically over time.
After popularizing a new category of affordable, everyday wines and growing rapidly for five years, Yellow Tail sales plateaued at around eight million cases in the mid-2000s. Casella Family Brands and DFWS struggled with several adverse developments in the U.S. market.
In 2005, E. & J. Gallo Winery, the largest U.S. wine retailer, acquired Barefoot Cellars, a mid-sized California vineyard with its own strong populist brand identity.25 Under Gallo ownership, Barefoot expanded its range of wine offerings at price points similar to Yellow Tail. Moreover, Gallo heavily promoted Barefoot on a national scale, and used its influence as category captain with major grocery and retail chains to secure favorable merchandising and promotional support. As a result, Barefoot grew at a compound annual growth rate of 47 percent between 2005 and 2013, overtaking Yellow Tail as the sales leader in the six-to-eight-dollar table wine price range (figure 2.9)26
Figure 2.9 Yellow Tail vs. Barefoot wine sales, 2005–2013, in millions of cases
The Australian dollar strengthened relative to U.S. currency by 40 percent between 2009 and 2013, putting severe margin pressure on CFB’s exports. Given intense price competition in the U.S. wine market and ample supplies of American-grown grapes, Yellow Tail chose not to raise prices to offset adverse currency shifts.
In 2013, Costco, the world’s largest wine retailer and Yellow Tail’s largest customer, announced that it would stop carrying Yellow Tail in favor of its low-price own-brand label, Kirkland.
With a strengthening U.S. economy, consumer wine preferences shifted upscale. As shown in figure 2.10, wines in Yellow Tail’s six-to-eight-dollar price range exhibited the largest decline in sales in 2014, while wines priced at or above ten dollars per bottle enjoyed double-digit revenue increases between 2013 and 2014.27
Figure 2.10 U.S. wine sales trends by price range
Casella Family Brands and DFWS have pursued a number of tactics to re-energize growth, including expanding their product range to include more than twenty varietals, blends, and sparkling wines, offering additional bottle sizes, increasing television advertising, and targeting social media. The company has also considered a number of more ambitious strategic brand extensions, including wine-to-go packaging, frozen sangrias, and expansion into additional alcoholic and non-alcoholic beverage categories. Time will tell if lightning can strike twice in creating a new growth platform for Yellow Tail in the United States.
Southwest Airlines has also had to adjust to a very different business environment in recent years. While the airline industry as a whole has benefitted from consolidation-driven capacity rationalization and declining fuel prices, Southwest has faced stiffer competition. After exploiting its low-cost position against weakened legacy airlines through the early 2000s, Southwest now finds itself sandwiched between increasingly efficient larger airlines like American, Delta, and United at the high end, and no-frills carriers like Allegiant Air and Spirit at the low end (figure 2.11).28 In addition, relatively recent entrants JetBlue and Virgin America have been gaining share by offering customer-pleasing in-flight amenities like roomier cabins, leather seats, and premium snacks at competitively low fares. With intensifying competition, Southwest’s workforce relations—once a significant source of competitive advantage—have grown increasingly contentious, as the airline struggles to control labor costs.
Figure 2.11 Airline Operating Costs, 2005–2013. Competitive cost problems for airlines.
Nonetheless, Southwest has continued to prosper by exploiting the three strategic imperatives for profitable growth. By acquiring AirTran Airways in 2010, Southwest added international service that gives it a strong base for future expansion. Southwest has also maintained its claim for meaningful differentiation by remaining one of the few airlines to not charge fees for checked baggage or reservation changes, and it has improved in-flight amenities, e.g., providing onboard Wi-Fi. Southwest’s continued business alignment to support productive operations has allowed it to maintain cost competitiveness despite having some of the highest wages in the U.S. passenger airline business.29 Between 2012 and 2015, Southwest was one of the most profitable and fastest-growing airlines in the United States, with more than double the stock-price appreciation of the rest of the U.S. airline industry.
In summary, there is no such thing as a bad industry. In any industry, companies that can identify and exploit opportunities to offer meaningful differentiation and strategically align their organizations to effectively deliver products and services can enjoy sustained growth and profitability. However, no company can afford to rest on its laurels, and continuous innovation is a prerequisite for superior performance over the long term.
