Friday, July 27, 2012

Leo burnett case study analysis - Research paper


Based on all of the information provided in this case, analyze the Leo Burnett team according to the Team Effectiveness Model in the textbook (portrayed in Exhibit 9-3 and discussed on pp. 133-139). That is, discuss each of these components of the model as they apply to the team at Leo Burnett, and indicate whether each one is likely to facilitate or hinder team effectiveness in this case. (3 points)

Context
o   Adequate resources – Budget problems.  Global versus local budget creating tension and ‘administrivia’ to assign dollars where needed.  Staffing costs higher than anticipated.  OBC does not want to pay more for advertising than originally budgeted.
o   Leadership and structure – Leadership vacuum with personnel changes, and the Toronto brand team leader.  New leader does not know team members or clients well, and may have ability issues (repeated explanations necessary of basic project components).
o   Climate of trust- Members of partitioned teams do not trust each other. (“Non-existent connection” between team members in Toronto and London.)  They are unwilling to take risks, are not candid in commits, and in some cases simply do not connect with each other directly.  Surprises do not help; high presentation results expected for brand introduced just days before. 
o   Performance evaluation and reward systems – reward system built to recognize individual efforts of only a few individuals (annual festival in Cannes, France for usually art director and copy writer).  No significant team reward model discussed.

Composition
o   Abilities of members – vacuum of leadership, (repeatedly explaining basic project components to senior managers, as an example), and inexperience in key roles; example is web site developer taking over for account supervisor after vacancy. Inexperience with product and client relationship.
o   Personality
o   Allocating roles -
o   Diversity – It may be that diversity is adverse in this situation.  The Toronto Office may have a better feel for the market to which they hope to appeal.  This certainly seems to be the case based upon the experience in the Asian market.
o   Size of teams – Originally at 6, the Forever Young brand team expanded as the London Office was tasked to provide creative input.  Up to 10 on the team, across an ocean and an apparent technology divide making logistics a serious issue.
o   Member flexibility -
o   Member preferences -  

Work Design
o   Autonomy – Organizational changes did not allow Toronto to act without London approval.  Many links in organizational chain.
o   Skill variety – The tasks demand several different skillsets; there would appear to be an issue of individuals with inconsistent viewpoints representing the same set of skills to draw upon.
o   Task identity – There is a serious issue with the ability of the team members to identify and complete a specific task based upon the current organization.  Lack of autonomy, communication, and lack of resources require too many people doing too many things too much of the time.
o   Task significance – It seems clear that all understand the significance of the task before them.

Process
o   Common purpose – There is a lack of a common purpose.  This is directly evidenced by such statements as, ‘London and Toronto supplementary creative teams “working independently of each other.”’
o   Specific goals – no clear division of responsibilities
o   Team efficacy – After the Canadian test launch there would appear to be a lack of confidence in leadership, the combined global teams ability to succeed, and the Toronto team’s ability to put together top level creative.
o   Conflict levels – Relationship conflicts are almost always dysfunctional; (possibly evidenced in email regarding Watson regarding Manning’s on the road schedule.  Reduces groupthink though, so there may have been some benefit from differing views.
o   Social loafing – This was occurring, probably because of lack of accountability.  Toronto told London team to “figure it out and they would follow”..


27. Finally, if you were Janet Carmichael, what would you have done differently, or going forward, to improve the effectiveness of this team?  Support your answer with concepts from the textbook (Chapters 8 and/or 9). (2 points)

In hindsight, it appears that the greatest barrier to success for the Forever Young team was the decision to locate the global team in the UK and to require shared production of deliverables for the launch from two teams that were quite informally organized.  Initially, the positioning of the global team may have seemed like a good idea due to anticipated test market (the UK).  However, when it was later determined that the test market would be Canada, there was no restructuring to allow Toronto to serve as the base for the global team.  By not repositioning the global team to Toronto when the decision was made to move the test market, Carmichael was unable to take advantage of the experience of the global team in developing the creative template which would be passed to the satellite team for the local market.  Likewise, the lack of strong in-house capabilities in the UK which were deemed important to the creative template (direct marketing and Web site materials) required division of duties which eroded trust, added difficult virtual logistics to manage, and allowed for social loafing to occur as accountability was unclear.

With little time for major restructuring, I believe the following steps should be undertaken by Janet Carmichael in order to salvage the Canadian launch.
           
1.      Decentralize team control.  This would mean that the Toronto team will almost certainly choose its own creative concept for the television ads, (a risk).  However, by decentralizing, Carmichael will be working with a smaller team size which would have more autonomy, and therefore more accountability for the finished product.  She can expect less social loafing, a more defined common plan and purpose, and can set more specific goals.  She can also set the tone of trust for the group by indicating her belief that the finished product will be top caliber.  Carmichael’s fundamental reservation in requiring the centralized approach of producing the creative in the UK is that “she had always liked the creative that the U.K team had initially produced.”  In this case, based upon the test market results, she would not be making an evidence-based decision.

2.      Assure the availability of resources to the launch.  Transfer remaining budget allocations for Web site development to local budget rather than the global budget.

3.      Establish clear leadership in the Toronto Office.  Based upon the emphasis now placed upon the Toronto creative unit, assign the creative director Shirley Watson as communication lead moving into the product launch.  This assures that someone with experience and established credibility will be able to step into the key role of moving the launch forward.  Also, the case study would indicate that Jacobs and Powell may not be able to sort through difficulties expediently as evidenced by the repeated explanations of project components necessary when Davids was in the lead.

4.      Begin laying the groundwork for restructuring the global team in North America.  (This groundwork might include providing incentives for the Canadian team to work/think more effectively from a ‘global’ perspective).  Certainly Carmichael should look towards hiring more individuals who can fulfill their global team roles, in addition to technical competence when seeking to fill open positions moving forward.

Thursday, July 26, 2012

HP Touchpad Failure: White Space - Unmet Customer needs or growth opportunity:

White Space - Unmet Customer needs or growth opportunity:

White space                                                                

Evaluation of Marketing Strategy:
The original strategy that failed and suggestions for improvement are depicted through following flow charts:
Original Strategy which Failed:         
Suggested Strategy


Suggested Strategy


HP capabilities and what should been its offering

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study - Pricing - Promotion - Place- People MIX

Pricing: Touchpad proved that pricing is the major determinant of buyer choice. At introduction, HP followed a reactive strategy. It priced the product to meet competition, believing it’ll help maintain status quo. This strategy backfired and led to very tepid sales, which led to the product demise. HP tried price skimming too to survive, by announcing a $100 discount. It increased sales marginally. At decline stage, when HP decided to clear the shelves by selling at $99, the product flew out of the shelves and in fact created a hype equivalent to that of Apple. This showcased an elastic demand and that there’s a market for cheap tablets.
Promotion: The communication strategy also is a main factor in product success or failure. The company never elaborated on the POD’s. The features showcased in the commercials were the visual appeal, ease of use and flicking of unnecessary windows. It never focused on the real differentiators like Synergy. It didn’t provide developers any incentive to work on WebOS and also allowed developers access only after the product came to market. So, the product was introduced with minimal applications. Also, it used Russell Brand, Lia Michele and Manny pacquiao as its main message source. These actors’ are definitely not a great fit to sell Technology. They are not experts or considered trustworthy. This led to the low brand attitude.
Place: When the HP Touchpad went on fire sale there was no integrated point-of-sale or inventory count within the HP web sites. The web sites kept showing items in stock, but in reality HP ran out of stock long back.  While all this was happening, no one in HP customer service was well-informed of the plans for the fire sale. They could not confirm orders, availability, price-match guarantees, etc. HP’s inefficient handling of channel partners, created chaos. Neither the new, reduced price policy nor the conditions of sale were communicated to its retail channel partners, including Best Buy, Wal-Mart, Staples, Office Depot, Kmart / Sears, Amazon, Costco, Radio Shack and so on. Apparently none of them got any clear direction about what to do with the sale. There were currently hundreds, probably thousands of customers who are unclear of their orders, who do not know whether they will get a TouchPad or not and who are struggling to get through customer support channels of all these retailers. And it all started with a sale of a tablet which, just 3 days back nobody cared for.
As this train wreck unraveled, HP  had seen a demonstration of every mistake that could be possibly committed on marketing decisions, inventory stocking and tracking, online retailing, channel partner communications, customer relationship, infrastructure scaling, grievance addressing, sales ethics and what not.
People: Though not part of the traditional mix, this factor played a crucial role in the creation and demise of the product. The chaotic six weeks when HP prematurely introduced Touchpad and withdrew it, the customers, investors and even employees didn’t get precise information. This led to low motivation levels among employees and reduction in confidence in investors and consumers.

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study - Marketing Research - Market Segmentation- Marketing Mix

Marketing Research: Marketing is meeting needs profitably. But, in today’s market scenario where customer wields as much power as companies, the profitability applies as much to consumers as to firms. The job is to find not right customers for your products, but the right products for your customers. Hence, market research becomes essential. Identifying the problem is the first step in research. HP saw the existing problem as a need for an alternate to Apple or Android. It failed to realize that the customers wanted an alternate, but preferred Windows based one and not an unknown, new operating system. It just expected the customers and developers to adapt. Reports gathered by BCG as early as 2010, states customers were willing to pay in the range of $105-$205 for a tablet. In spite of this, HP launched a product at a cost equivalent to the competitors’ products. Consumers wanted tablets to read, watch, listen, surf, email wherever they are in the world. Lack of 3G/4G capabilities didn’t allow it to cement its position as a personal entertainment and communication center.


Market Segmentation:  HP’s Todd Bradley, VP, Product group, said in a Bloomberg interview that “Our Focus on kind of ubiquity of products will span from consumer to commercial channels. The Enterprise is as important to us as the Consumer segment and that's why we built a product uniquely suited to Enterprise”. This clearly states Touchpad’s intent to penetrate both consumer and business market. HP instead of starting slow and small wanted to build its presence everywhere without a proper system to back it. The consumer segment had stabilized and HP faced extremely strong competition from Apple. Enterprise customers want a great product at a great price and Touchpad was no match. Customers didn’t view Touchpad as a substitute to iPad. The entry barrier was low, but the exit barrier proved to be very high.
Marketing Mix:
Product Stage and Product: HP enjoys great brand equity. But, its product, Touchpad launched in July, 2011 was then in the introduction stage in the life cycle. It did not gain a good image among customers.  The brand attitude was negative and customers or investors were not enthusiastic about the product. Without allowing the product to mature, it was pulled out the market in 6 weeks which led to its complete decline. The product features had been discussed. The company didn’t deliver good service either. It updated to a New WebOS within days of introduction which discouraged many developers.

HP’s Touchpad and WebOS Failure:Key Proposition and Value Proposition Analysis



HP’s Touchpad and WebOS: Tablets have bifurcated PC market and are taking sales from devices such as Netbooks, PCs and Notebooks. HP, the world’s largest Technology Company was pushed into the tablet market in order to survive. HP’s hardware expertise cannot be questioned but in order to meet the competition offerings it had to build software too. Many companies that decide to modify course do so through acquisitions. HP acquired Palm to enable

control of both the software and the hardware, so as to create a largely seamless user experience like Apple.

Key Proposition:
A - PODs: Touch to share, Synergy, Just Type, wireless charging, Attractive visual, card metaphor
B – POPs: Ability to play Flash, 9.7-inch screen, Price, Better sound system
C- Competition PODs: Great Product, many applications and developers, Light, Fast response, Great Battery Life, rear camera, 3G/4G capability
HP’s key proposition was to offer WebOS as an alternate to Apple’s IOS and Android systems. According to Todd Bradley, Executive Vice President of HP’s Personal Systems Group, Touchpad differentiated itself from the competition through 3 main features – Touch to share, Synergy and Just Type. Touch to share means the Touchpad and HP’s Pre 3 phone can be paired and synched just by tapping them together, and then information can pass wirelessly between them. Synergy refers to a feature in webOS that merges multiple sources of information into one interface. For example, when registering Google and Facebook accounts, all scheduled events appear color coded in the Calendar app. It's also possible to print directly to wireless HP printers. It also features an innovative system of managing different on-screen cards that can be grouped to keep parts of related tasks together. ’Just Type’ allows search of wide range of Web sites and information on the tablet just by tapping an area of the screen and starting to type. HP’s touchpad is the only tablet which allows wireless charging using HP’s inductive charger, It's an optional-extra accessory though. The “card” metaphor, can be used to dismiss an application just by simply flicking a window.
The Touchpad shares a few features with the iPad. Both have 9.7-inch screens and their height and width are nearly identical. When introduced, they were priced the same too: $500 for a Wi-Fi-only model with 16 gigabytes of storage and $600 with 32 gigabytes. Touchpad has the ability to play Flash like Android Systems and unlike iPad. It also has better sound than the average tablet with the Beats Audio speakers found in some of its high-end HP laptops.
Apple’s iPad is considered the best as showcased by its huge market share. Apple has the widest and deepest ecosystem of vetted, third-party mobile apps (Apple Appstore) for its iPads , iPhones and iPod touch devices. Android too attracts developers as many manufacturers use it on their hardware. The gulf is growing by leaps and bounds every day. Apple has 90,000 applications vs. HP webOS’ 300 applications.  The Apple’s Ipad is lighter, has a very quick response, great battery life and also features a rear camera. HP’s first generation Touchpad didn’t have 3G/4G capability like its rivals; it can be used only in places where wifi is supported.
Value Proposition: HP’s TouchPad failed to deliver any significant value. It features hardware that did not have the specs behind it to make webOS shine. Also, when introduced, it was priced equivalent to the superior Apple iPad, which considerably reduced its real and perceived value. Customers didn’t see any benefits for the sacrifice they have to make to move to HP’s touchpad from the iconic iPad.

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study -Why it failed? What went wrong? What could have HP Done ?

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study
This entire case study is posted as different parts as different blog posts (so pls see other posts to get an entire idea)
On August 19, 2011, HP, the second largest PC maker in the world dropped 20% in the New York Stock Exchange. This gigantic fall was triggered by a sequence of events starting July 1, 2011 when the company introduced the HP tablet called Touchpad, powered by WebOS operating system. HP acquired Palm, the maker of webOS, for US$1.2 billion in 2010. By owning WebOS, HP’s strategy was to control both the hardware and software and offer a more unified consumer experience. But, Touchpad with webOS turned out to be something of a toxic asset. Just six weeks after launching the Touchpad, on August 18th, HP cited tepid sales and announced it will discontinue the WebOS-based Touchpad tablet computer and phones. This led to the company’s largest decline in the share market since the market crash in 1987. The drop erased $16.2 billion from the HP market value in just two days. This clearly showcases the investors’ lack of confidence in the company. This report analyzes the company’s long term and short term strategy and how it could have avoided the consumer & investor discontent and gained their confidence instead.
Tablet Market: The Boston Consulting group(BCG) reports that Consumers around the world increasingly see tablets as multipurpose converged devices that are their personal windows onto the Internet and states that Tablet sales are expected to total some 370 million units in five years, achieving a much faster ramp-up than any other consumer-electronics or mobile device. About one-third of the U.S. adult population will own a tablet by 2016, as more people bring them to their workplaces, according to Forrester Research.
Competition Analysis: Apple’s iPad is the world leader in the tablet market and controls a whopping 73% market share according to Forrester Research. Amazon and Barnes & Noble’s vie for second place with a little more than 5% share. Samsung, Sony and Toshiba are trying to gain a place in this luscious market. Most of the players use Android-based OS on their tablets. Innovation has become synonymous with Apple’s name. It enjoys such a huge market share and charges premium because of the high quality of the product it has to offer. When customer’s use an iPad, they see an enhanced product. It has a huge fan base which is very loyal to Apple and its products. It built such a loyal following by being customer centric and promise centric. Actually Ipad is a product people can do without, as it is considered by many as a glorified iPhone. But, Apple has managed to create a “want” by producing an excellent product. Apple overturned the tablet market by offering an ecosystem and not just a product. The success of the iPad, along with the iPhone definitely helped Apple supplant Microsoft as the world’s most valuable technology company last year. Every technology company in the market wants to replicate Apple’s success and sees tablets as a way to achieve it. BCG reports that more than 100 tablets have been introduced since the iPad appeared.

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study - Marketing Mix Strategy

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study
This entire case study is posted as different parts as different blog posts (so pls see other posts to get an entire idea)
Part-2
Market Segmentation: Consumers around the world increasingly see tablets as multipurpose converged devices that are their personal windows on to the internet. Tablet sales are now expected to total around 370 million units within the first five years according to research survey. Approximately half of consumers interested in purchasing a device in the next 12 months are looking at a tablet rather than a net book (see Exhibit 1) and we can also see that between one-third and one-half think it is likely that their tablets will replace their PCS, Laptops, net books. HP’s core business is selling PCs, Laptops and net books fearing that it will lose its customers HP launched  touchpad  with webOS but customers felt it as  bulky and cannot perform at least 25% operations of a Laptop or PC.



From Exhibit 2 its clear that consumers want tablets to read, watch, listen, surf, email wherever they are in the world  HP’s touch pad doesn’t have 3g capability like rival ipad , it can be used only in places where wifi is supported and HP’s touchpad failure was because customers felt that it did not cement its position as a personal entertainment and communication center because of the limited applications supported by webOS.

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study

Hewlett Packard (HP)'s WebOS and Touchpad Failure Case Study
This entire case study is posted as different parts as different blog posts (so pls see other posts to get an entire idea)
Part-1
HP webOS is a mobile operating system, initially developed by Palm, which was later acquired by HP to mount a serious challenge against Apple’s IOS and Google’s Android mobile Operating systems. HP acquired Palm, the maker of webOS, for US$1.2 billion in 2010 so it could use the software in products like the HP Touchpad (ipad like tablet) and in its future mobile smart phones. By owning webOS, HP’s strategy was to control both the hardware and software and gain a more direct relationship with customers in the fast growing mobile market but webOS turned out to be something of a toxic asset.
HP webOS 3-Circle Framework
Key Value Propositions: The main POD of HP’s Touchpad with webOS is the visual style of its Operating system (webOS) which is very attractive -- considerably more appealing than the "geeky" look and feel of Google Android, which is the basis of many tablets in the market .Another difference is that it can display websites that use Flash whereas ipad doesn’t have that capability. But Google’s android does provide this feature.  Another point of difference is that webOS shows you your activities in the form of cards, "not a sea of application icons on numerous home screens", Touchpad has better sound than the average tablet, with the Beats Audio speakers found in some of its high-end laptops. Hp’s Touchpad works with networked HP printers while Ipad and Google’s Android tablets find it difficult to hook up with the networked printers. HP’s touchpad is the only tablet which allows wireless charging using HP’s inductive charger, It's an optional-extra accessory though. Because of Hp’s late arrival to the tablet market , Apple and Google had already snatched up most of the top talented App programmers and so HP was not able to turn webOS platform into a platform that could capture the enthusiasm and loyalty of outside programmers. In an era where the Apps dominated the Tablet market HP’s webos had only 5% of Apple’s IOS apps ,HP’s touchpad was in line for a disaster launch. Customers didn’t like the bulky HP touchpad and felt it do not support enough webOS apps. Customers felt that the touchpad was priced costly because it was months after Apple released the iPad 2, which was significantly thinner and faster, for the same US$500 price tag. With no sales and increased operating costs HP withdrew the touchpad from the market so quickly — and said it would stop making webOS hardware altogether. HP’s TouchPad became a failed piece of hardware that did not have the specs behind it to make webOS shine. HP is the market leader in making laptop ,desktop PCs and printers which shows HP’s strength is hardware than software. Instead of investing and developing a brand new webOS software , HP should have made the touchpad tablet with the reputed Google’s open source Android OS like Samsung and Motorola . But the one thing that HP just learned the hard way with WebOS is that without early user adoption, the developers won’t come, and if the developer’s don’t show up, your device is doomed. People don’t buy iPads just because of the slick commercials ,they buy iPads because they already have iOS apps from their iPhone that they can port over.

Tuesday, July 24, 2012

Duane Reade’s Miracle Makeover entire Case Analysis


Duane Reade’s Miracle Makeover entire Case Analysis Report

“Duane Reade’s Miracle Makeover”

1.      The New York City-based Duane Reade drugstores have undergone what some would consider a ‘miracle makeover’ in re-positioning their retail stores.  Based on our discussions of marketing strategy, consumer behavior, and brand positioning, how did they accomplish this?



Duane Reade began the makeover process by building a new concept to its stores which made customers to think Duane Reade drug stores are not a place to visit but rather a place to be. Duane Reade researched its consumer buying behavior by focusing on the culture, lifestyle, subculture and social class of its New York customers. Duane Reade positioned its stores  as an all in one easy to shop destination by offering medical, grocery shopping, leisure  and dining in one convenient place for its busy New York city customers.
Duane Reade succeeded by fully understanding its customers’ buying decision process by focusing on the different stages of the consumer buying process .Through information search they recognized the problem the customers were facing so they widened the aisles, lowered the height of the shelves, installed better lighting, and removed the posters and displays from windows and changed their queue system. Their redesigned logo “Your City. Your Drugstore.” shows how they addressed geographically concentrated customers of New York city and  in other NY cities they operated.
Duane Reade realized that it has to change the business inside and out to be successful .Duane Reade‘s new store design, private brand re-launch, merchandising mix changes, pharmacy re-focus, new departments, loyalty, improved customer service were all aligned with Duane Reade’s successful brand transformation and helped them position their brand to occupy a distinctive place in the minds of its consumers and target market. Duane Reade’s brand association functioned as a point of difference and helped them succeed. This can be seen by the way they differentiated them from competitors like CVS, Rite Aid by offering an all in one stop shop where customers saw the brand association as personally relevant to them and which fitted their busy New York life and culture. They also used their European and Canadian experience to bring some private label products like Delish and they made their own brownie bites, gummy bears, steel-cut oats, and tomato basil soup which made consumers to visit their store more often.
Duane Reade still has some transforming to do because this year it again ranked last among pharmacies in customer service, as measured by J.D. Power. Though Duane Reade is under new Walgreen’s management, it’s still staffed with the same people and managers from the old Duane Reade’s store so Duane Reade must invest in personality development and training programs to its staff so that it can improve its customer service. Walgreens should plan to bring the Duane Reade brand to a national audience from its New York alone stores so that it can increase its market capitalization.
Duane Reade is in a constant battle with small business owners of New York because of its diversified products it is selling. By selling sushi, frozen, yogurts, draft beers it's homing in on the customer base of nearby dessert/restaurant/bar stores. It is very important that Duane Reade maintains a high quality, low cost products to meet the challenges from their competitors.
One way to expand brand awareness is to increase the use of the Duane Reade brand, they can do this by making the product easier to use-like “small Fun size” packaging and they should sell them in their parent Walgreen’s store. They should also have their products with a benefit like “Supporting Breast Cancer”. Duane Reade should use social networking websites to create awareness of its new products to its Duane Reade fans by doing this Duane Reade can establish a strong brand community which will result in a more loyal, committed customer base.




Duane Reade’s Miracle Makeover


BusinessWeek Logo

September 29, 2011

Courtesy Business week: For the Case Analysis on this case check its under a separate blog entry
Duane Reade’s Miracle Makeover
Draft beer and sushi? Friendly clerks? The once-reviled drugstore chain’s new strategy pays off
For decades, the Duane Reade drugstore chain offered one of New York’s rawest shopping experiences, with the ambiance of a DMV, with really narrow aisles, maybe located in Times Square circa 1973. The layouts were labyrinthine and the merchandise disorganized. The staff was so famously sullen that the blog “I Hate Duane Reade: Service from Hell” used to come up first when Googling the company. In 2007, New York magazine asked the actress Martha Plimpton, a lifelong resident of the city, what she hated most about living there. “The dead-eyed pharmacy people at Duane Reade,” she said. “It’s always a journey into the heart of darkness.”
Now there’s the Duane Reade on 40 Wall St. The chain’s 254th store, just down the block from the New York Stock Exchange and across from a Tiffany’s, is like an extravagant apology to the city. It occupies a 22,000-square-foot space with 28-foot-high ceilings, graceful archways, marble columns, and a gilded air. The Rockefellers ran a bank there. Now Duane Reade offers $10 manicures where David Rockefeller’s office used to be.
The store, which opened in July, also has a hair salon, a juice bar, two sushi chefs, and a holographic greeter. There’s still aspirin and toothpaste, and now there’s a doctor, too. Beauty consultants are available, along with two different machines that provide virtual makeovers. A 20-foot-long stock market ticker flashes above the front windows. “So many men have been asking for haircuts that we decided to do those, too,” says Paul Tiberio, the executive in charge of merchandising and marketing at Duane Reade. “No shaves, though. We don’t want blood.”
Tiberio, dressed in a pinstripe suit, a crisp white shirt, and a tie in the new corporate lavender, is an enthusiastic tour guide. He walks over to the brightly lit refrigerated section and says, “We’ve got everything you would find in a grocery store, except the hanging meat.” At the sushi station, the chefs—two Korean brothers—are preparing for the lunch rush. The improbability of that image is striking. “We had been a little reserved about rolling out sushi in a drugstore,” Tiberio says. “But after we did salads and sandwiches, we thought we could do sushi, too. Now sushi and fresh juice are two of our top five sellers here.” Rounding out the list are bananas, coffee, and Marlboro cigarettes. “This is great,” he says. “You have a dream and it works.”
Duane Reade’s transformation is as noteworthy as any in modern American retail. It occurred mostly during the Great Recession. It involves private equity backers from Oak Hill Capital Partners in Stamford, Conn., and a group of Canadian executives who brought a fresh view of what an American drugstore could be.
In early 2010, Oak Hill sold Duane Reade to (WAG)Walgreens, the nation’s largest drugstore chain, for $1.18 billion, about $300 million more than it paid in 2004. The alternative—that Duane Reade would go the way of Circuit City and Borders—had been just as likely. “Duane Reade couldn’t forever ignore the consumer or it would have gone out of business,” says Bruce Cohen, a retail strategist at Kurt Salmon consultancy. “Now, for the first time, consumers have expectations about Duane Reade. Can Duane Reade live up to that?”
Duane Reade had come by its decrepitude honestly. The company was founded by three brothers, Abraham, Jack, and Eli Cohen, in 1960 and named for the two streets that bordered their first store on Broadway in Lower Manhattan. They pioneered what has come to be known as the (SBUX)Starbucks strategy, opening their second store opposite their first. The Cohens expanded slowly over the years and in 1992 sold the chain of 37 stores to Bain Capital, then run by Mitt Romney, for a reported $239 million. When Duane Reade went public in 1998, there were 67 stores. Six years later, when Oak Hill bought the chain, it had 239 stores. Now there are 256 Duane Reades in New York City, more than there are (MCD)McDonald’s.
“Duane Reade was always overly aggressive because they were the ugly girl,” says Faith Hope Consolo, chairman of the retail division at Prudential Douglas Elliman Real Estate. “They weren’t the one landlords wanted in their buildings; they had leering signage, shampoo bottles in the windows, messy stores.” Duane Reade didn’t have a retail strategy as much as it had a real estate strategy—once it secured a good location, it simply crammed in merchandise. The stores seemed to be everywhere and shopping in them became inevitable. New Yorkers rolled their eyes and complained about being mistreated but went back anyway. In the 1990s, Duane Reade’s sales per square foot were the highest of any drugstore chain in the country.
By the early 2000s, though, Duane Reade was in trouble. Its most profitable store, at the World Trade Center, was destroyed in the 9/11 attacks. During the recession that followed, its tight profit margins got even tighter. Duane Reade’s sales increased slightly from $1.14 billion in 2001 to $1.38 billion in 2003, but its profits fell 80 percent, to $5 million. National drugstore chains such as Walgreens, (CVS)CVS, and (RAD)Rite Aid realized Duane Reade was vulnerable and began moving into the city. Oak Hill, which was founded by Texas billionaire Robert M. Bass, bought the company for $702 million, including debt, in 2004.
It didn’t take long for the executives at Oak Hill to start rolling their eyes and complaining, too. “The operational opportunities were greater than we expected and the challenges were greater, too,” says Tyler J. Wolfram, the Oak Hill partner who oversaw the investment. He’s sitting in a conference room in the firm’s office in Stamford. Wolfram, 45, looks like a more scrubbed version of Matthew McConaughey. He attended Brown University, received his MBA from Wharton, calls colleagues by their initials, and can speak perfect corporatese when necessary. Two public-relations specialists listen in via conference call. Recalling his first months overseeing Duane Reade, he says: “We had to do everything better.”
Among the challenges was the chief executive officer, Anthony J. Cuti, who had been recruited from Pathmark Stores back in 1996. Cuti was fired in late 2005, but that wasn’t the end of Oak Hill’s problems with him. According to his 2008 indictment, a forensic review of Duane Reade’s accounting revealed fraudulent real estate transactions that had inflated the company’s income by as much as 15 percent from 2000 to 2004. At the time of the acquisition, which he helped broker, Cuti received a bonus of some $25 million. The former CEO was charged with securities fraud and misleading investors. He was found guilty last year and this summer was given a three-year prison sentence. Cuti is appealing his conviction. Wolfram declined to comment about the fraud, citing the ongoing litigation.
In 2006, all Wolfram knew was that Duane Reade’s trajectory was downward. It was also involved in an expensive confrontation with its unions, which had taken to calling the chain “Dwayne Greed.” The company was highly indebted because of Oak Hill’s leveraged buyout. Its credit rating had been downgraded four times by (MHP)Standard & Poor’s. “And BusinessWeek called us a zombie,” Wolfram notes genially.
Wolfram hired Richard W. Dreiling as chief executive. Dreiling had been in charge of operations at Longs Drugs in California and quickly improved Duane Reade’s cleanliness and basic organization. As rudimentary as that was, it helped. Duane Reade’s earnings (measured by adjusted EBITDA) went from $42 million in 2005 to $64 million the first year under Dreiling, and to $79 million the second. In 2008, though, Dreiling was lured to (DG)Dollar General as CEO.
Wolfram’s next pick to run the company was John A. Lederer, who had been an executive at the $30 billion Canadian supermarket chain Loblaws for three decades and president from 2001 to 2006. Lederer had resigned as part of a management shake-up; when Wolfram called him in February 2008, he was living on his tomato farm in Ontario. “I told John, ‘Here’s my vision, it’s pretty simple: Duane Reade has to do something different. Duane Reade doesn’t have a soul. We have to figure out who we are and where we are going.’”
Lederer took a look at the hate blogs—“Duane Reade Sucks” had become popular, too—and took a trip to New York, where he saw how traditional even the best drugstores were. After that, he invited Wolfram up to Canada to talk. “I had to stay in his house, in his daughter’s bedroom. He wouldn’t let me stay in a hotel,” Wolfram recounts. “John told me: ‘We’re going to create something that people in the U.S. have never seen before.’”
Lederer took Wolfram to visit Loblaws as well as Canada’s largest drugstore chain, Shoppers Drug Mart, both of which aim to be one-stop shopping destinations. Loblaws’ private label, President’s Choice, was a revelation: It had been modeled on those of European stores such Marks & Spencer’s and offered everything from fudge cookies to mobile-phone service and pet insurance, all of good quality.
Lederer brought in two executives he had worked with at Loblaws: Joseph Magnacca, who took over the merchandising, and Joe Jackman, who ran the marketing. Among their discoveries was that the pharmacy had been run by the guy in charge of construction. “We told the other executives and store managers that without bold and immediate action, we are history,” says Jackman.
Magnacca first decluttered the stores. “We found that if we reduced the number of items by about 10 percent, customers credited us with more variety,” he says. “They could see it, shop it.” Duane Reade used to be more focused on buying merchandise than actually selling it. “Now it’s how much we sell, not how cheaply we can buy,” Magnacca says.
In the fall of 2008, with the recession looming, Lederer and his team began to renovate the highest-profile stores: They widened the aisles, lowered the height of the shelves, installed better lighting, and removed the posters and displays from windows to admit more natural light. They changed the queuing system to one line and added cashiers: some 300,000 people shopped at Duane Reade every day, about 5 percent of the adult population of New York City, and it used to seem that half of them were waiting in line. The executives also reorganized the store into three categories: how I look, how I feel, what I need. “We heard that almost word for word in our focus groups,” says Jackman. “After that, our mantra became ‘New York living made easy.’” They also redesigned the logo and added the hopeful tagline, “Your City. Your Drugstore.”
By the winter of 2008, “People were saying the stores were unbelievable, but we felt like we were just getting warmed up,” says Magnacca, who’s now president of Duane Reade. “We were a 3 out of 10. Then we realized we hadn’t started at zero. We had started at –3.”
The name for Duane Reade’s new private-label food, Delish, came from a focus group, too. When it came to thinking about the products themselves, “we were following the Canadian and European experience,” says Magnacca. “We wanted to create food that people will come here for.” Duane Reade now sells its own brownie bites, gummy bears, steel-cut oats, and tomato basil soup.
As for beauty products, Magnacca introduced the kinds of expensive lines once found only in department stores. In this regard, too, “we mostly get inspiration from Europe, where they are so progressive,” says Magnacca.
Sales of Duane Reade’s private-label products doubled between 2008 and 2010. Its Look Boutiques generated 25 percent more sales among its most loyal shoppers. And overall sales in the remodeled stores usually increased by percentages in the high teens.
Still, the financial situation remained tenuous. Duane Reade could afford to remodel only 23 of its stores by the end of 2009. Oak Hill Capital had originally invested $244 million to buy Duane Reade, borrowing the other $458 million. In 2007, the firm put in $40 million more and two years later it had to raise an additional $125 million to fund the redesign and buy back some debt at a discount. “Everything we did had to make a return because the clock was ticking,” says Wolfram. “This business was negative free cash flow for every year that we owned it up until the last year.” It had also become one of Oak Hill’s biggest and most scrutinized investments.
In the winter of 2009, Gregory D. Wasson, the chief executive officer of Walgreens, went undercover in Manhattan. “I wore a baseball cap and sweatshirt and went into some old and new stores,” he says by phone from Deerfield, Ill. “The moment I decided we should get serious about buying Duane Reade was after seeing their new Herald Square store. After that, I went with three of my executives to a competitor’s location, and it was a traditional urban drugstore—frankly, like we run—with narrow aisles and merchandise stacked high. I said, ‘Duane Reade is creating something new.’ That’s what we were looking to do.”
Walgreens had opened a new store every 16 hours in 2008 and boasts that 75 percent of Americans live within five miles of one of its stores. “By the fall of that year, we had to slow down, step back, and shift our strategy,” says Wasson. “We’re still opening 200 stores a year, more than all our competitors combined. But we’re moving from ‘location, location, location’ to ‘experience, experience, experience.’”
Among Duane Reade’s recently opened stores is one in Williamsburg, the hipster neighborhood in Brooklyn. After Duane Reade leased the space, “we realized they didn’t want us there because we’re a chain,” says Magnacca. “So we asked them what they needed. They said food and beer.” The executives planned a “beer cave” with local brews. “Then one of our merchandise directors said, ‘What about a growler?’ I said, ‘What’s a growler?’” A growler is a half-gallon jug used to transport draft beer, and Magnacca liked the idea. The growler bar has been so popular that he’s put in two others in Manhattan so far.
When Magnacca, Tiberio, and Jackman (now a consultant) began designing the Wall Street store in late 2010 they were ready to see how far they could push Duane Reade, and they thought a revitalized Lower Manhattan was just the place to try. The 40 Wall St. store is doing well, but it’s not something that Walgreens expects to replicate. Wasson says it’s a learning lab. “We could move bits and parts into select locations,” he says. “We’re selling sushi in a lot of drugstores already, but not with the chef. The smoothies might be an opportunity. Who knows? The ability to get a 20-minute manicure or blow dry may be something we can do in certain locations.” Walgreens is going to bring some of what Duane Reade has figured out in terms of food and cosmetics to its 7,760 stores across the country. It’s already offering 10 DR Delish products.
Duane Reade still has some transforming to do. This year it again ranked last among pharmacies in customer service, as measured by J.D. Power. Its score did improve, though, something that’s never happened in the five years the survey has been taken. Duane Reade executives prefer another ranking, which measures how likely it is that a customer will refer someone to the chain; on that score, Duane Reade says it has improved 150 percent since 2008.
Then there’s the informal score: The I Hate Duane Reade blog went quiet after Walgreens bought the chain. These days, if you Google Duane Reade, the blog comes up sixth.
Berfield is an associate editor for Bloomberg Businessweek.