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Posts Tagged ‘Crisis’

A new film this year, “Sully”, tells the story of US Airways Flight 1549 that landed safely onto the water surface of the Hudson River on 15 January 2009 following a drastic damage to the plane’s two engines. This article is specifically about the decision process of the captain Chesley (Sully) Sullenberger with the backing of his co-pilot (first officer) Jeff Skiles; the film helps to highlight some instructive and interesting aspects of human judgement and decision-making in an acute crisis situation. Furthermore, the film shows how those cognitive processes contrast with computer algorithms and simulations and why the ‘human factor’ must not be ignored.

There were altogether 155 people on board of the Airbus A320 aircraft in its flight 1549 from New-York to North Carolina: 150 passengers and five crew members. The story unfolds whilst following Sully in the aftermath of the incident during the investigation of the US National Transportation Safety Board (NTSB) which he was facing together with Skiles. The film (directed by Clint Eastwood, featuring Tom Hanks as Sully and Aaron Ackhart as Skiles, 2016) is based on Sullenberger’s autobiographic book “Highest Duty: My Search for What Really Matters” (2009). Additional resources such as interviews and documentaries were also used in preparation of this article.

  • The film is excellent, recommended for its way of delivering the drama of the story during and after the flight, and for the acting of the leading actors. A caution to those who have not seen the film: the article includes some ‘spoilers’. On the other hand, facts of this flight and the investigation that followed were essentially known before the film.

This article is not explicitly about consumers, although the passengers, as customers, were obviously directly affected by the conduct of the pilots as it saved their lives. The focus, as presented above, is on the decision process of the captain Sullenberger. We may expect that such an extraordinary positive outcome of the flight, rescued from a dangerous circumstance, would have a favourable impact on the image of the airline US Airways that employs such talented flight crew members. But improving corporate image or customer service and relationships were not the relevant considerations during the flight, just saving lives.

Incident Schedule: Less than 2 minutes after take-off (at ~15:27) a flock of birds (Canada geese) clashed into both engines of the aircraft. It is vital to realise that from that moment, the flight lasted less than four minutes! The captain took control of the plane from his co-pilot immediately after impact with the birds, and then had between 30 seconds to one minute to make a decision where to land.  Next, just 151 seconds passed from impact with the birds and until the plane was approaching right above the Hudson river for landing on the water. Finally, impact with water occurred 208 seconds after impact with the birds (at ~15:30).

Using Heuristics: The investigators of NTSB told Sully (Hanks) about flight calculations performed in their computer simulations, and argued that according to the simulation results it had not been inevitable to land on the Hudson river, a highly risky type of crash-land. In response, Sully said that it had been impossible for himself and Skiles to perform all those detailed calculations during the four minutes of the flight after the impact of the birds with the aircraft’s engines; he was relying instead on what he saw with his eyes in front of him — the course of the plane and the terrain below them as the plane was gliding with no engine power.

The visual guidance Sully describes as using to navigate the plane resembles a type of ‘gaze heuristic’ identified by professor Gerd Gigerenzer (1). In the example given by Gigerenzer, a player who tries to catch a ball flying in the air does not have time to calculate the trajectory of the ball, considering its initial position, speed and angle of projection. Moreover, the player should also take into account wind, air resistance and ball spin. The ball would be on the ground by the time the player makes the necessary estimations and computation. An alternative intuitive strategy (heuristic) is to ‘fix gaze on the ball, start running, and adjust one’s speed so that the angle of gaze remains constant’. The situation of the aircraft flight is of course different, more complex and perilous, but a similar logic seems to hold: navigating the plane in air safely towards the terrain surface (land or water) when there is no time for any advanced computation (the pilot’s gaze would have to be fixed on the terrain beneath towards a prospect landing ‘runway’). Winter winds in New-York City on that frozen day have probably made the landing task even more complicated.  But in those few minutes available to Sully, he found this type of ‘gaze’ or eyesight guiding rule the most practical and helpful.

Relying on Senses: Sullenberger made extensive use of his senses (visual, auditory, olfactory) to collect every information he could get from his surrounding environment. To start with, the pilots could see the birds coming in front of them right before some of them were clashing into the engines — this evidence was crucial to identifying instantly the cause of the problem though they still needed some time to assess the extent of damage. In an interview to CBS’s programme 60 Minutes (with Katie Couric, February 2009), Sully says that he saw the smoke coming out from both engines, smelled the burned flesh of the birds, and subsequently heard a hushing noise from the engines (i.e., made by the remaining blades). He could also feel the trembling of the broken engines. This multi-modal sensory information contributed to convincing him that the engines were lost (i.e., unable to produce thrust) in addition to failure to restart them. Sully also utilised all that time information from the various meters or clocks in the cockpit dashboard in front of him (while Skiles was reading to him from the manuals). The captain was thus attentive to multiple visual stimuli (including and beyond using a visual guidance heuristic) in his decision process, from early judgement to action on his decision to land onto the water of the Hudson river.

Computer algorithms can ‘pick-up’ and process all the technical information of the aircraft displayed to the pilots in the cockpit. The algorithms may also apply in the computations additional measurements (e.g., climate conditions) and perhaps data from sensors installed in the aircraft. But the computer algorithms cannot ‘experience’ the flight event like the pilots. Sully could ‘feel the aircraft’, almost simultaneously and rapidly perceive the sensory stimuli he received in the cockpit, within and outside the cabin, and respond to them (e.g., make judgement). Information available to him seconds after impact with the birds gave him indications about the condition of the engines that algorithms as used in the simulations could not receive. That point was made clear in the dispute that emerged between Sully and the investigating committee with regard to the condition of one of the engines. The investigators claimed that early tests and simulations suggested one of the engines was still functioning and could allow the pilots to bring the plane to land in one of the nearby airports (returning to La Guardia or reverting to Teterboro in New-Jersey). Sully (Hanks) disagreed and argued that his indications were clear that the second engine referred to was badly damaged and non-functional — both engines had no thrust. Sully was proven right — the committee eventually updated that missing parts of the disputed engine were found and showed that the engine was indeed non-functional, disproving the early tests.

Timing and the Human Factor: The captain Sullenberger had furthermore a strong argument with the investigating committee of NTSB about their simulations in attempt to re-construct or replicate the sequence of events during the flight. The committee argued that pilots in a flight simulator ‘virtually’ made a successful landing in both La Guardia and Teterboro airports when the simulator computer was given the data of the flight. Sully (Hanks) found a problem with those live but virtual simulations. The flight simulation was flawed because it made the assumption the pilots could immediately know where it was possible to land, and they were instructed to do so. Sully and Skiles indeed knew immediately the cause of damage but still needed time to assess the extent of damage before Sully could decide how to react. Therefore, they could not actually turn the plane towards one of those airports right after bird impact as the simulating pilots did. The committee ignored the human factor, as argued by Sully, that had required him up to one minute to realise the extent of damage and his decision options.

The conversation of Sully with air controllers demonstrates his assessments step-by-step in real-time that he could not make it to La Guardia or alternatively to Teterboro — both were effectively considered — before concluding that the aircraft may find itself in the water of the Hudson. Then the captain directed the plane straight above the river in approach to crash-landing. One may also note how brief were his response statements to the air controller.  Sully was confident that landing on the Hudson was “the only viable alternative”. He told so in his interview to CBS. In the film, Sully (Hanks) told Skiles (Ackhart) during a recuperating break outside the committee hall that he had no question left in his mind that they have done the right thing.

Given the strong resistance of Sully, the committee ordered additional flight simulations where the pilots were “held” waiting for 35 seconds to account for the time needed to assess the damage before attempting to land anywhere. Following this minimum delay the simulating pilots failed to land safely neither at La Guardia nor at Teterboro. It was evident that those missing seconds were critical to arriving in time to land in those airports. Worse than that, the committee had to admit (as shown in the film) that the pilots made multiple attempts (17) in their simulations before ‘landing’ successfully in those airports. The human factor of evaluation before making a sound decision in this kind of emergency situation must not be ignored.

Delving a little deeper into the event helps to realise how difficult the situation was.  The pilots were trying to execute a three-part checklist of instructions. They were not told, however, that those instructions were made to match a situation of loss of both engines at a much higher altitude than they were at just after completing take-off. The NTSB’s report (AAR-10-03) finds that the dual engine failure at a low altitude was critical — it allowed the pilots too little time to fulfill the existing three-part checklist. In an interview to Newsweek in 2015, Sullenberger said on that challenge: “We were given a three-page checklist to go through, and we only made it through the first page, so I had to intuitively know what to do.”  The NTSB committee further accepts in its report that landing at La Guardia could succeed only if started right after the bird strike, but as explained earlier, that was unrealistic; importantly, they note the realisation made by Sullenberger that an attempt to land at La Guardia “would have been an irrevocable choice, eliminating all other options”.

The NTSB also commends Sullenberger in its report for operating the Auxiliary Power Unit (APU). The captain asked Skiles to try operating the APU after their failed attempt to restart the engines. Sully decided to take this action before they could reach the article on the APU in the checklist. The operation of the APU was most beneficial according to NTSB to allow electricity on board.

Notwithstanding the judgement and decision-making capabilities of Sully, his decision to land on waters of the Hudson river could have ended-up miserably without his experience and skills as a pilot to execute it rightly. He has had 30 years of experience as a commercial pilot in civil aviation since 1980 (with US Airways and its predecessors), and before that had served in the US Air Force in the 1970s as a pilot of military jets (Phantom F-4). The danger in landing on water is that the plane would swindle and not reach in parallel to the water surface, thus one of the wings might hit water, break-up and cause the whole plane to capsize and break-up into the water (as happened in a flight in 1996). That Sully succeeded to safely “ditch” on water surface is not obvious.

The performance of Sullenberger from decision-making to execution seems extraordinary. His judgement and decision capacity in these flight conditions may be exceptional; it is unclear if other pilots could perform as well as he has done. Human judgement is not infallible; it may be subject to biases and errors and succumb to information overload. It is not too difficult to think of examples of people making bad judgements and decisions (e.g., in finance, health etc.). Yet Sully has demonstrated that high capacity of human judgement and sound decision-making exists, and we can be optimistic about that.

It is hard, and not straightforward, to extend conclusions from flying airplanes to other areas of activity. In one aspect, however, there can be some helpful lessons to learn from this episode in thinking more deeply and critically about the replacement of human judgement and decision-making with computer algorithms, machine learning and robotics. Such algorithms work best in familiar and repeated events or situations. But in new and less familiar situations and in less ordinary and more dynamic conditions humans are able to perform more promptly and appropriately. Computer algorithms can often be very helpful but they are not always and necessarily superior to human thinking.

This kind of discussion is needed, for example, in respect to self-driving cars. It is a very active field in industry these days, connecting automakers with technology companies for installing autonomous computer driving systems in cars. Google is planning on creating ‘driverless’ cars without a steering wheel or pedals; their logic is that humans should not be involved anymore in driving: “Requiring a licensed driver be able to take over from the computer actually increases the likelihood of an accident because people aren’t that reliable” (2). This claim is excessive and questionable. We have to carefully distinguish between computer aid to humans and replacing human judgement and decision-making with computer algorithms.

Chesley (Sully) Sullenberger has allowed himself as the flight captain to be guided by his experience, intuition and common sense to land the plane safely and save the lives of all passengers and crew on board. He was wholly focused on “solving this problem” as he told CBS, the task of landing the plane without casualties. He recruited his best personal resources and skills to this task, and in his success he might give everyone hope and strength in belief in human capacity.

Ron Ventura, Ph.D. (Marketing)

Notes:

(1) “Gut Feelings: The Intelligence of the Unconscious”, Gerd Gigerenzer, 2007, Allen Lane (Pinguin Books).

(2) “Some Assembly Required”, Erin Griffith, Fortune (Europe Edition), 1 July 2016.

 

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The collapse of a company is not necessarily an outcome of a single calamitous event. More likely, a final collapse will follow a period of several months or years of gradual deterioration in the management and performance of the failing company. The causes are usually a mixture of external events or market factors and not least internal actions or non-actions committed by the company. This seems to be the case with Mega Retailing, the second largest chain of supermarkets in Israel, that practically collapsed this month (January ’16) but the process of its deterioration may be traced through at least five years backwards.

The current Mega retail chain is in fact a successor of a consumer co-operative chain, “Co-op Blue Square”, established in the 1930s. That co-operative existed until the late 1990s when it could no longer sustain itself. Consumers who had a stake in the enterprise were required to sell their shares and a majority stake in “Blue Square” (73%) was acquired by the Alon energy group.

The company, renamed in Israel as “Alon Blue Square”, expanded since 2003 and added more business units in different retail areas. For instance, Alon brought under the rooftop of Blue Square (holding a 78% stake) its compounds of car fueling stations with adjacent trade services. The chain of supermarkets received the new brand name Mega (after going through an earlier short phase under the name “Super Centre”), instituted as a subsidiary in full control of Blue Square, its home company. Yet another critical move saw the establishment of “Blue Square Real Estate”, a subsidiary of the home company, which divorced Mega from control over its physical locations, making the real estate company its landlord. At the end, Blue Square is about to lose the core business that carried its name to begin with.

  • Alon Blue Square also acquired a chain of convenience stores (“am:pm”) that is separate from Mega but competes with it in city centres and neighbourhoods.

Multiple reasons can be given for the poor condition of Mega as proposed in the media. Some blame the high operating costs of Mega on wages and benefits for employees being higher than standard in the food retail industry; it is probably a legacy inherited from the older days of Co-op Blue Square when it was affiliated with a strong labour union. Not to be confused, employees in stores still earn relatively low wages, but with the low margins in the industry, the differences from competitors are claimed to be crucial. On the other hand, the management could be held responsible for keeping deficiencies reminiscent of the culture of Co-op in those older days. The owners on their part did not seem to be interested enough in what was happening to their supermarket company. Mega was lacking in strategic (marketing) thinking and mindset that would allow it to adapt better to new realities of a competitive market and higher standards of servicing and merchandising.

One should not go far to find what is wrong with the Mega chain. The problems of Mega show most visibly and strikingly in its stores. A particular branch is used here as an exemplar to demonstrate some troubling aspects. It is a neighbourhood store in the northern part of Tel-Aviv. The supermarket is not large (estimated at a little less than 300sqm or about 2500sqf) with a main hall (75% of its area) and an extension (two “corridors”). The store was established in the early 1970s and for a decade or two it was considered spacious and modern. The last major renovation took place about fifteen years ago but unfortunately within a few years it has lost much of its newly gained attraction.

There are six columns of displays across the main hall which leave too little space for moving in the aisles between them. In addition, the displays reach high above the head. The whole arrangement of this hall makes a shopper feel lost in space and closed-in. Bad merchandising appears to make the supermarket look crowded and untidy. A whole new concept should have been applied to this store with fewer columns, lower displays (e.g., no more than 1.50m) that would allow shoppers to look beyond the aisle, and fewer product types and brands (SKUs) on offer — in this supermarket ‘less is more’ would be perfectly right. Shoppers obliged to get essential products like bakery and dairy in corridors may find it unpleasant.

Another troubling matter in the store concerns the shopping carts and baskets, or rather the lack of them. To pick-up one of the few shopping carts available one has to pass across the cashiers and away from the entrance. Even if one was lucky to get a shopping cart, he or she would find the cart difficult to navigate with in the aisles, especially as the store, like the whole chain, moved to larger carts definitely not useful in this specific store. What shoppers should have been provided are hand-held baskets (or wheeled baskets), and these should have been arranged in ‘towers’ near the entrance of the supermarket (not hidden under cashier desks). The baskets would serve a much better purpose in the entry area than a large unappealing promotional stand positioned there. As a result, the store also does not have a welcoming and convenient “decompression zone”.

  • Considering the competition in vicinity (e.g., a large supermarket of the leader chain “Supersol” in a nearby shopping centre; a minimarket store across the street), the approach in that  Mega’s store, whether out of flawed thinking or lack of care, could not be affordable.

Similar problems can be found in other Mega stores: (a) A delivery service interrupts and blocks the way out for customers who take home their shopping bags  — delivery boxes are piled in a passage on the exit from cashiers, personnel are handling deliveries in the same area where customers should complete their shopping and leave, and preparing deliveries for some shoppers halts others for long minutes; (b) The staff arranges merchandise on shelves during the day, often blocking aisles with box-loaded shopping carts or boxes left on the floor — shoppers have to make their way competing with personnel on access to displays; (c) Product displays do not look neat and tidy, some items get out-of-place, some are falling to one side or another — even if shoppers are responsible for not leaving items in place, a store worker should always pass by, check and fix displays. If shoppers find a store in good order, clean and tidy, they will (mostly) feel obliged to make an effort to keep it that way for everyone to enjoy.

It does not seem to be a question of good will. Mega stores are missing order and organisation. Moreover, the employees may not have a guiding hand and initiative they need from either general management or store managers to get the supermarkets look and feel the way they probably aim at. In a  presentation (in Hebrew) of a strategic plan from 2013 (Blue Square’s website) the management of Mega shows that on top of every other goal they want the customers to love their stores; Mega’s vision through its history is “At Mega (we’re) listening to you! Always, at every place and in every encounter, because we really care.” Yet the stores could not show for it. The employees may have wanted it to happen but the management was not behind them to show them how, and it is still unclear why store managers were not helping or how well coordinated they were with top management.

A seasoned consultant in marketing and retailing (Galit Moor, “Shopoholist”) told “The Marker” Israeli business newspaper about rivalries and non-coordination between the trade and operational departments of Mega — the trade people would reach agreements with suppliers but operations people would not respect them and not follow them through in the stores, causing confusion and loss of trust of suppliers. She also related to lack of understanding of consumers and not really listening to their concerns, a top management detached from the stores, and mistakes in running stores, particularly failures in dealing with details at the store level (MarkerWeek, 24 July 2015). The management was not focused, undecided whether to compete on price (e.g., to fight off discount chains) or on enhanced customer experience (blending price perception, service, convenience, variety and quality of products), and therefore it must have had difficulties setting clear priorities to staff at stores. It is not too surprising that staff and managers could neither treat properly details of service and merchandising in the stores.

In mid-2015 Mega was in debt of 1.3 billion shekels (~$340m), 700 million shekels of which owed to suppliers and the rest to banks. The delay in payments to suppliers has led to sour relations with them, where some have also froze or reduced further supplies to the retail chain. Mega started with an aggressive plan of cuts, primarily closing stores, but it could not save it at this stage. By the end of 2015, just before the court intervened (stay of proceedings), the debt accumulated to 1.5 billion shekels, half of which to suppliers who largely lost confidence in and patience with Mega.

In the previous decade Mega has expanded while defining three sub-chains: “Mega City” supermarkets for serving neighbourhoods, large central “Mega”-stores, and large discount stores (“Mega Bull”, i.e., “target”). The latter was re-named just three years ago “You” and added more stores.  Mega was actually responding to a move similar in kind by the leading competitor Supersol with their sub-chains “My Supersol” neighbourhood  supermarkets, “Supersol Express”, and large discount stores “Supersol Deal” (a confounded fourth sub-chain of ‘warehouse’ discount stores “Big” was later eliminated). Probably not by coincidence, the restructuring of chains by Mega and Supersol resemble a strategic move by Tesco in the 1990s. The expansion, and especially the establishment of very large stores, has led the Israeli chains, like the British one, into trouble. The suspect reasons are failure to adapt in time to changes in economic atmosphere and consumer behaviour since 2008 vis-à-vis an inadequate reply to the challenge from new discount chains. (It is now revealed that Tesco faulted in delaying payments to suppliers, as Mega did.)

  • Mega operated in total about 185 stores in mid-2015. Initially the plan was to close 32 stores, mainly their “You” discount stores. However, it eventually closed at least 55 stores by the end of the year, and Mega is now left with fewer than 130 stores. Its number of employees was intended to be reduced from 6,000 to 5,000 but actually dropped to 3,500 (most of them were store employees, but the staff in headquarters was also significantly cut).
  • In the first half of 2015 Mega reported sales of 2.6 billion shekels (~$685m), down from almost three billion shekels in same period of 2014. Of total sales, 80% were attributed to the stores Mega expected to keep and 20% to the 32 stores intended to be shut down. In profit, stores planned-to-continue earned 55m shekels whereas stores planned to close lost 577m shekels. As it turned out, the initial recovery plan was not sufficient.
  • Mega is second to Supersol in the food retailing industry yet not so close behind: Supersol’s market share in 2014 was estimated 18% versus Mega with 9% (a ratio of 2:1). The private discount chains held together 28% [stable 45% attributed to open-air markets, groceries and minimarket stores]. It should be noted that according to predictions (2013-2015) the private chains were expected to gain mostly at the expense of Mega with a small but not negligible slide down for Supersol (The Marker, 30 Dec. 2014) — Mega found itself in a classic disadvantageous ‘sandwich’ position.

From start Mega committed to selling at lower prices than other stores in towns and cities. At the same time, it aimed for each store to be an integral part of its community, so that residents-shoppers will feel at home in their supermarkets. However, Mega did not succeed in maintaining its ‘low price’ position according to price comparisons published over time. It is questionable whether restructuring its chain, following Supersol, was necessary and suitable for Mega. The position of Mega City on prices may have been only weakened and diluted relative to its discount sub-chain. Mega has already had a well-entrenched network of neighbourhood supermarkets with emphasis on lowering cost to consumers — it should have concentrated its efforts on this chain. Yet, Mega did not succeed to keep lower prices as well as invest in the shopping experience and product variety in its stores, potentially conflicting objectives; it did not offer thereof a consistent value proposition.

It is difficult to understand how the owners of Alon Blue Square did not notice what was happening at Mega. They are accused of taking high dividends over time (the owners claim they have been misinformed about real profits, ringing bells from Tesco). The owners may have also acted irresponsibly by means of an over-charging rental policy of its real-estate subsidiary towards Mega’s stores.

The interests of the owners at this stage are vague. Blue Square chose to rent properties to chains that took over stores of Mega-You — was it to salvage Mega or to protect other interests of Blue Square? Proposals published to buy Mega retail chain actually focus on Blue Square Real Estate. Truly, one has to buy the properties in order to be able to continue operating stores in them, but that is only due to a status created by the owners that may now play against Mega. Hence, it could be a major difference if the potential buyer is a retailer or a real-estate developer. It is in the public’s and the food retailing industry’s interest that the buyer is required to take over also the supermarket business of Mega and not dispose of it. It is furthermore important that the supermarket industry has at least one other strong retail chain as a challenger to Supersol, not leaving Supersol over-powered against a competition too dispersed among several small and medium chains.

There is not really a good reason to miss “Blue Square” as a co-operative. A new competitive business ownership and directive has had an opportunity to re-create the supermarket chain and its brand. The chain was re-branded as Mega and yet it disappointed because core components of strategy, culture and implementation were flawed. It is now time to re-invent the concept of the chain and its brand. Nonetheless, the title “Blue Square” at Alon without the supermarket retail chain will be quite void and meaningless.

Ron Ventura, Ph.D. (Marketing)

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One of my greater pleasures is to walk around in a bookshop and browse books in topics of personal interest, picking a book from a shelf for a short read, then choose another one, etc. If fortunate, I would find a book or two that are worth purchasing for a full read. A bookshop should be a place where one feels comfortable to examine leisurely books he or she considers buying . Even if one enters a bookshop only to purchase a book he found in an earlier visit or on the Internet, he would likely take the opportunity to look around for some other books before exiting.

Steimatzky is a leading chain of bookshops in Israel, established as a family business in 1925. It operates more than 130 stores across the country. Like a solid rock, nothing would seem to be able to shake or break it. The chain of bookshops appeared to hold firmly even in the face of competition from a new chain (“Tzomet Sfarim”) in recent years. Steimatzky could usually brush off new independent bookshops and small chains quite easily. Therefore, when Steimatzky announced it was in dire financial difficulties last month, the news were received with surprise. Not that challenges were missing, but the chain was tackling them (e.g., renovating shops and changing the concept of its front window displays), and there were no visible indications of a fatal threat to the business.

However, another important event occured in the past decade. In 2005 the family sold its bookshop retail chain to an investment fund, Markstone Capital Group. Difficulties were building up with the rise of online shopping and changes in the behaviour patterns of younger generations for passing time, plausibly convincing the veteran owner and CEO Ari Steimatzky not only to retire personally (after 40 years in management) but also to hand over the business to new owners. The new CEO appointed came from the insurance industry, highly experienced in that field, but, like the people at Markstone, she was not familiar with the book market. Hereon, it is suspected that  the problems with the chain’s management have started, or aggravated.

Markstone and Steimatzky both contributed to the crisis in their actions. It appears that Steimatzky has had cash liquidity difficulties for quite a while and relied on cash infusions from Markstone for financing their high operational costs. It is estimated that the losses of the retail chain accumulated to 84 million shekels (~$24 million) in 2011 and 2012 together. Markstone, on its part, used to take loans and register companies it owns as beneficiaries that would share the debt; for example, Steimatzky was in debt of $20 million as part of a $65 million loan Markstone took from Deutsche Bank, on which Markstone’s executives may have not properly updated the retailer’s management(1). The difficulties were somewhat complicated following a tragic road accident in which one of Markstone’s co-owners was killed while riding his bike. Thereafter, the last cheque from Markstone bounced and the debt of the retailer was exposed.

A deal was made in April with Keter publishing house and the office supply and stationary retailer Kravitz to buy Steimatzky in equal shares (pending approval by the antitrust state regulator). Markstone reportedly bought Steimatzky for about 200m shekels (~$50-55m) whereas it is expected to receive for it around 40m shekels (~$11-12m). Negotiations with another publisher failed earlier. It may be noted that Steimatzky took part in establishing Keter in 2005 but the new management decided shortly to quit its partnership in the publisher.

The relatively young chain of bookshops, Tzomet Sfarim, was founded in 2002. It is owned by two publishing houses (Kineret-Zmora-Bitan and Modan) and its CEO (Avi Shumer). If the acquisition of Steimatzky goes ahead, it would mean that high stakes in the two major chains of bookshops in the country will be held by publishing houses. Steimatzky was known for aggressive dealing with publishers; its tactics were often viewed unfavourably. The negative experience of publishers with Steimatzky is considered a key driver for those two publishing houses to start their own chain of bookshops, as they no longer wanted to be dependent on the dominant book retailer. It soon raised, however, new concerns about the privileges Tzomet Sfarim might give books they publish on display and in advertising and promotions. A new law on the publication and trade of books introduces a measure to correct such unfairness by prohibiting a bookshop from allocating more than 45% of shelf space to books from publishers it is linked to.

Tzomet Sfarim has turned within a few years into a serious challenger. It paved its way into the market primarily through discounts it offered on books. Deals like “two for the price of one” or “3 for 2” are not strange to chains of bookshops worldwide. But Tzomet Sfarim provoked everyone when it offered for instance “four books for 100 shekels” (i.e., each book for about £4). The discount is not necessarily deeper than the 50% one gets per book in a deal of “2 for 1” yet it induces consumers to buy many books, more than they may probably have time to read, and thus boosts sales volume quickly. Steimatzky responded angrily but nevertheless reciprocated with similar deals. This readily started a vicious price war. In contrast to expectations that Steimatzky as the senior and dominant retailer and brand will win, it was at disadvantage. The board of administration of the new competitor was modest whereas that of Steimatzky was expansive, and hence expensive, eventually less fit to tolerate the loss of income from extensive discounts. The deficits and cash flow problems of Steimatzky have been attributed in the business press to the price war on the one hand and its excessive administrative and operational expenses on the other hand.

  • The pervasive discounts evoked criticism about lowering the value of literary work. They outraged authors who complained their income (royalties) from their new books was squeezed and diminished. The law on books recently legislated in response sets new limits on discounts for new books during an “introduction period” and afterwards.

The retail chain of Steimatzky grew mostly in the 1980s and 1990s. New bookshops often replaced independent ones, taking them in as franchisees, and by forcing them out of business. But since 2006 the number of their bookshops actually decreased from 150 to 134. The size of the chain may have created a burden of supervision and operational costs that contributed to its difficulties, requiring to close some of them, but it does not seem to be an immediate cause of the recent crisis. Meanwhile, during the same period Tzomet Sfarim expanded from 42 to 87 bookshops and became a much more significant player in the book market (annual revenue of 300m shekels vis-a-vis 380m shekels for Steimatzky). This time it was Tzomet Sfarim that through their discounts grew at the expense of independent bookshops. Now the two retailers control, about equally between them, 70%-80% of the market.

Steimatzky and Tzomet Sfarim sell books online on their websites, as well as some publishers do. The retailers may have lost some of the local market to overseas online booksellers like Amazon, but that is likely to be only for books in foreign languages, especially in English. First, Amazon and others like it have very little if any to offer in Hebrew. Second, both retailers already concentrate their business on Hebrew books, which Israelis read the most, and offer a relatively small selection of books in English (e.g., some bestsellers, history and politics, art and design). Thus, the overlap between the Israeli retailers and foreign e-tailers should be relatively small. There is a need for Steimatzky, however, to develop and enhance the linkage between its online store and physical bookshops (e.g., buy online, collect in-store; celebrating the design of bookshops with photographs on the website) in order to protect both channels locally but primarily secure traffic of customers in its physical stores.

Under its current management, Steimatky bought a music and video chain of stores (“Tzlil”). Soon after, however, the stand-alone music and video stores were eliminated and their products (mainly CDs and DVDs) were incorporated as a sub-category or department within existing bookshops, though in a small-scale and -scope of offerings. The music & video branch of retail is knowingly in trouble around the world and one may question the justification of adding these product categories to their main business. Yet, joining books with music and video and other entertainment products has become an accepted logic by retailers in different countries to compensate for loss in demand in one category or the other, and expand their variety of products under the same roof (e.g., the French retailer Fnac that offers a range of culture and entertainment products, including books, CDs & DVDs, and electronics like mobile devices and related gadgets). That move can work in favour of Steimatzky rather than against it in this era.

Joining the businesses of books and music & video within the same company can bear risks. The most remarkable story in this regard belongs to the British chain of bookshops Waterstone’s. In that case it was the music & video chain HMV that bought the bookshop chain and put its survival into great risk. The stores of these chains were kept separate but the financial difficulties of HMV in its original business inflicted on Waterstone’s, and certainly did not help it to tackle its own challenges. At first they started closing bookshops to finance some of HMV’s debt and to lower costs, but that was not enough. Eventually, and mainly in hope to save HMV, the Waterstone’s chain was sold  in May 2011 to Russian investor Alexander Mamut. Notably, the new owner appointed as its managing director the owner of a small chain of traditional Edwardian-style bookshops (James Daunt) who has been well entrenched in the book retail business. The bookshop chain appears to be doing well in its process of recuperating and is thinking forward about the design of bookshop environments for the future. It is opening these days its first new bookshop since 2008.

Steimatzky does not have today a flagship library-like bookshop as found in many Western cities. These are usually multi-storey, multi-category bookshops that occupy buildings on main streets or in central shopping districts. Even cities similar in size to Tel-Aviv have such a bookshop (e.g., Waterstone’s bookshop on Deansgate St. in Manchester). A flagship bookshop in Tel-Aviv could occupy two or three floors (e.g., 200-300sqm each) and offer a variety of book titles in Hebrew and English, and perhaps in French, along with a section for music and video (particularly classical and jazz music). The scope of book selection across categories and variety within categories is crucial to the quality of customer-reader experience and increasing the likelihood that shoppers don’t leave without purchasing or ordering books. Operating such large bookshops can be expensive, but a flagship bookshop of this type should also be viewed as an investment in the retailer’s brand equity. It demonstrates prowess of the retailer, richness and professionalism. Tzomet Sfarim recognised the importance of such an asset and opened its “Library” bookshop in the centre of Tel-Aviv, although it occupies only one level and is “hidden” in a shopping centre rather than visible on main street.

The final issue addresses the new form of electronic books (e-books) that can be read on e-reader devices. It has been predicted that the future of reading lies there, and thereof it poses a major threat to physical books. Steimatzky has invested and participated in the launch of an e-reader that specially supports also the display of books in Hebrew (called “e-vrit”) but left the venture in just a year. Book retailers in other countries offer their own-branded e-reader: Barnes & Noble (Nook), Fnac (Kobo), as well as e-tailer Amazon (Kindle).

Tim Waterstone, founder of the British bookshop chain, recently criticised and even ridiculed the projections about the expected death of physical books; he supported his claim that physical books are here to stay on figures that suggest that e-books may be reaching saturation and his confident belief that people in the UK who love reading will continue to prefer books in print. He noted that consumers in Britain spent in 2013 £300m on 80m e-books but £2.2bn on 320m physical books (2). Managing director Daunt agrees and relies on a report by Enders Analysis and Bain & Co. which predicts that the share of e-books out of total book sales will reach 35% in two years but will grow “very slowly” after that. Daunt comments: “An equilibrium has been reached. The place of e-reader within people reading patterns has been established. That figure leaves us perfectly able to survive with the 65%.” He further expressed his belief that the physical book is more pleasurable to hold and read (3).  Steimatzky’s decision to quit its engagement with a Hebrew-support e-reader may have been pre-mature but it is plausible that they won’t need it. Still, they should re-examine their approach to e-readers because e-books will continue to hold a substantial stake in consumer reading.   

The conduct of top executives at Steimatzky and Markstone in the past eight years exhibits a mixture of complacency, over-confidence, and nonetheless confusion. They took upon themselves to improve and develop a business in a domain in which none had deep familiarity and experience. The CEO wanted to make changes in the company, and show the way to the whole market, without the endorsement of a credible and respected figure in the field and industry. Consequently, it was easier to attack and dismiss her as an outsider. Steimatzky under her leadership initiated strategic moves, and then abandoned them after a relaively short period. It also appears that she has set the wrong priorities for the company to deal with. The actions of Markstone at the same time suggest that they treated Steimatzky as a “financial asset” in their portfolio with disregard to the substance of the business in which they invested.

The future of Steimatzky would not be guaranteed without confronting a crucial question: What should the bookshop of the future look like in order to be inviting and attractive to book readers to hang around? Steimatzky may concentrate on books and reading or take the broader view that spans culture, education and entertainment. Three routes to enhancing shopper experience should be examined: (1) a space that makes patrons feel comfortable to stay and explore the shop; (2) a place to meet and socialize (incl. an in-store coffee shop); (3) connecting physical and digital products and services in a larger space: physical (bookshop) and virtual (Internet and mobile).

Ron Ventura, Ph.D. (Marketing) 

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This is a story of genuine consumer protest over the pricing of cottage cheese that turned into a public roar. On the face of it, it looks rather surprising how discontent with the price of a basic food product like cottage cheese can evoke so much excitation. It seems to be the outcome of multiple factors including public agitation, corporate insensitivity, oversensitive government, and media urge to produce headlines and fill airtime.

In May 2006 the Israeli government lifted its price supervision on most dairy products. A few months later an initial increase of nearly 6% in the price of cottage cheese was witnessed. By early 2008 the price was 22% higher. Three more years have passed until two months ago the price for the same cup (250g) reached 7 NIS or 42% increase since before supervision had been lifted. And this month the price peaked to 8 NIS, reflecting a 63% increase in price over 5 years. At that point the consumer public has lost its patience and protest has started to spread.

  • The price of a cup of cottage cheese 250g (9% fat) before lifting supervision was 4.90 NIS ($1.10 or €0.87 at prevailing exchange rates). The price for the same cup of cottage now stands at 8 NIS ($2.35 or €1.63 at current exchange rates). Note however that the Israeli currency has also appreciated against both the US dollar and the Euro, mostly during the last 3 years, which makes the product  appear even more expensive in these foreign currencies.

Cottage cheese is an elementary food item in Israel, popular in breakfast and light meals in general. It frequently accompanies salads. People have not been used to think too long about much of this cheese they buy and eat. The cottage cheese is common particularly among families with children, the elderly, and consumers of lower socio-economic status who cannot afford specialty and more delicate food products. It is probably because the cottage cheese has become such an essential meal component, kind of symbol typical of the country’s diet, that a potential threat to their usual way of life and their well-being led consumers to cry out loud against the price rise. But the price has been rising gradually for five years. Also, prices of other dairy products like soft spreadable cheese and yoghurt have risen by 30% or more. It seems that the price of cottage cheese as a symbol surpassed a tipping point for consumers that ignited the protest, starting on Facebook.

It appears like the food manufacturers and retailers lost sight of the consumers and their sensitivity to price. For a relatively long time, it should be admitted, Israeli consumers absorbed price increases within a range of acceptable prices they are willing to pay for cottage cheese and possibly other similar dairy products. Consumers may have adapted to inflation and shifted this range a little upwards. Yet, marketers got closer and closer to scratching the maximum price consumers can accept and the marketers just would not see this (what has happened to pricing research?). So finally they have reached a price level that consumers simply could no longer tolerate. The marketers have some justification to argue that consumers did not react in a way that would signal a problem in their pricing, but it is still the marketers’ primary responsibility to monitor relevant pricing-related metrics and initiate appropriate steps proactively.

The cottage cheese market (1.5bn NIS in 2010) is dominated by Tnuva which obtains a market share of approximately 70%, the remaining being equally divided between Strauss and Tara. The cottage cheese of Tnuva indeed has the seniority in the market for many decades and the product category is mainly associated with this brand and its cottage house icon. A major source of the problem is seemingly that these manufacturers would not allow a price gap to open between them. Suppose a major brand increases its price but the competitors do not follow, they can signal that they allow the former to keep a price premium and do not encourage further increases. But the competitors act as if they silently agreed (i.e. without their explicit co-ordination) to match each other prices, and only upwards. It is possible they were afraid of entering a price war. On the other hand, it suggests that any of the three were concentrated in internal (e.g., cost, operations) concerns and were reading market signals wrongly. Nonetheless, the responsibility lies not only with the manufacturers; the large food retail chains were also likely to have a role in this process, and they should not be exempt from scrutiny.

However,  the economic implication of the rise in price of cottage cheese probably did not prompt alone an angry protest. The negative emotional reaction can be mainly attributed to a sense of price unfairness by consumers: Why has the price had to get so high? The consumers look for reasonable explanations and when they fail to find one they feel treated unfairly.

  • Consumers were alerted that the rate of increase in the price of the cheese was much higher than that of inflation (approximately 10% vs. 3%  annually, compounded over 5! years).
  •  Consumers tend to be more forgiving for the price increase if they recognise a cause that is external to the firm and not in its control. For example, for a manufacturer it could be higher cost of raw materials. Consumers perceive as less fair price increases that are due to managerial driven cost (e.g., salaries, inefficiency). However, consumers are not familiar with details of the cost of production. They cannot truly tell either if a cost increase rests initially with the manufacturer or the seller-retailer. Without being explicitly informed of potentially legitimate reasons for the price increase they are likely to believe that the marketer/seller is just increasing his profit.
  • An indication of the difficulty of Israeli consumers to make sense of this price surge can be found in a provocative claim made by the protest organizers: a cup of cottage cheese costs more than a litre of fuel (gasoline) for the car. The logic for striking a comparison between these apparently unrelated goods is that they are both perceived as essentials to our everyday lives. Yet, people may say to themselves, we understand that the fuel price is rising because the price of the barrel of oil is so high and rising, but what can explain the rise in price of our cottage cheese? First, people are probably much more aware of the global oil crisis than the growing global food shortages, that food prices are also on the rise — a crisis in the making. Second, however, even if consumers are aware of the general rise in food prices, they may not be able to directly link it to their dairy products (we are being told for instance that Israeli cows are among the most productive of milk worldwide). Third, the more  observant consumers may note that the maximum fuel price under supervision is dropping occasionally when oil prices drop but food prices in the supermarkets never drop even if it is published that shortages in food ingredients have eased and their prices have dropped.

The public protest was initiated by three young men who opened a petition on Facebook and called for a boycott of cottage cheese. A week later they reported that 70,000 viewers signed in support. The protest has since broadened to include additional dairy products. So far, that is a strongly positive and legitimate move. The festival in the media and the political system that followed and took over the popular protest is far more baffling.

The real test of the protest in my view should be in the retail outlets, when consumers cut on their purchases of cottage cheese and other selected dairy products not under supervision. The boycott is planned for July, but if each family or household participates for just one week it can already have a strong impact. I am much less impressed by a protest in front of the computer — what does it mean that people ‘liked’ the protest post on Facebook? A ‘armchair protest’ is too convenient and does not prove real committment as yet. If as some retail chains reported there has already been a major drop in sales of cottage cheese in their stores then that is a good sign.

What has appeared on our TV screens, on the radio, in newspapers, and on the Internet, since the protest came to life is evident of nothing less but a panic reaction. Minutes of airtime reports, long tiring talks, politicians trying to make gains in the role of knights of social justice, and that is just on TV and radio main news programmes and news magazines. The Treasury Minister suggested allowing import of dairy products, alerting different sectors of the industry. Others proposed returning products to supervision, so the government said it would consider that too. The parliamentary (Knesset) committee for economic affairs entered the scene and opened an enquiry. The state comptroller also declared his own investigation.

One may seriously doubt how this turmoil will help to resolve the price issue in a responsible manner and in benefit of the consumers. The problems start with the market structure and the relations between the current local players. Regulation may be appropriate for a few essential products but it should not be adopted before making effort to resolve the issue by other means in co-operation with manufacturers and retailers. Finally, I do not believe that it would hurt the companies so much if they concede and allow prices to drop somewhat to restore peace with their customers. They may learn that they can achieve more by dialogue with consumers in different channels and avoid trouble in due time.

Ron Ventura, Ph.D. (Marketing)

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That the music retail industry is in trouble is no secret. When we look, however, at what happened to major music store chains over the last five years it may become much clearer how serious the crisis is. Here are some highlights:

  • In 2007 Richard Branson decided time was up for Virgin‘s music Megastores and sold his chain of 125 stores in the UK and Ireland in a management-buy-out to a team of executives. The new retail brand Zavvi took place of the Virgin name that after thirty years vanished from High Street in the UK, particularly its famous flagships on Oxford Street and in Piccadilly Circus in London. By 2009 Virgin closed the last of its stores in the US. Stores in other countries were also closed while a few stores may still be found under the Virgin brand  in France, Greece, and in the Middle East. 
  • Zavvi survived no more than a year. It was dependent on a unit of Woolworths (Entertainment UK) as its primary supplier and with the collapse of the veteran retail chain, Zavvi ran into serious difficulties, forced into unfavourable new trade agreements. It entered administration in late November 2008 and within 3 months the chain ceased to exist. 14 of its stores were sold to HMV, 7 others and all stock sold to Head Entertainment, and all remaining stores were liquidated.
  • The once giant American music retailer Tower Records got into troubles already in 2004 when it sought bankruptcy protection and was doomed just two years later in 2006. Great American Group that bought the retailer in an auction soon declared its plan to shut down the music retail chain. All US stores were closed by the end of 2007 and in the following three years many stores overseas were sold or closed down. The stores in the UK closed in fact already in 2003 (Virgin took over its flagship in Piccadilly Circus but as noted above it did not last long).
  •  And now we hear that HMV is in trouble and struggling to keep its head above water. It is threatened by an increasing debt and a difficulty in keeping with terms of a bank loan. To be accurate, it is since January that news of troubles at HMV have been coming in about unsatisfactory sales results over the holidays shopping period and three consecutive warnings of dropping profits. First it announced plans for the UK and Ireland to close 40 music stores along with 20 book stores of Waterstone’s that HMV Group apparently also owns. Then it became known HMV intends to split Watesone’s from its core business in music, video, and games ; this prospect sale is still in negotiations. Analysts predict that break up is inevitable but still express concern that this will not be enough and HMV will be forced to close more stores to avoid administration.  

Explanations given by analysts for these misfortunes are probably not surprising many: the growing shift of consumers to digital download of music, video and games, and the tight competition from stores like supermarkets that sell discs at low-cost. While retailers started offering their merchandise online on their websites several years ago they were quite unprepared for the trend of digital download.

As implied above the problem is centered on but not limited to music. More than ten years ago music chain stores have actually transformed into entertainment media stores in order to expand their business and not be reliant only on music. Yet, the retailers could not cope with the fast technological developments in this field during the years 2000s that altered consumer behaviour patterns. This is not just about low price but also convenience, flexibility of choice and immediacy. True, especially in the early Internet years but even nowadays items can be obtained for free on the net and this phenomenon poses problems for many in the industry, perhaps mostly to the artists. This issue is complex with legal ramifications beyond the scope of this article-post. However, the whole field encompassing the different types of entertainment media has progressed considerably and broadened in the past five years and it would be too simplistic to attribute it squarely to price.

Music stores should not be given up too quickly. There are certain things about the stores — the sights of loaded stands of products, colours and sounds, movement on the floor and buzz — that the Internet and various electronic devices cannot provide. Many private stores, small or niche stores, may still remain but the chain stores were the real engine of this retail industry. It is worth investing much more effort to create a new model for music or entertainment media stores that will retain some of their more traditional virtues in new forms and yet offer new benefits. I suggest two dimensions for development in which strong advantages can be created: personal customization and social interaction. These can be sources for strong shopping values and enjoyment.

Personal Customization

Consumers want to choose more freely their favourite songs and create their own song compilations. They are much less willing to wait for record companies to produce albums and compilations based on their judgements. Consumers are less tolerant towards albums that contain 2-4 really good songs and 8-10 mediocre ones. The choice has to be delegated more extensively to the consumers. This phenomenon is becoming stronger and wider.

Perhaps as some analysts claim there is less justification for the large space of stores we have known so far. Stores may restructure and re-allocate floor space between product displays and personal self-service stations. A shopper will be invited to sit on a stool in front of a flat screen at his eye-level and use a multimedia programme to search and scan the store’s wide selection of music pieces as well as films, TV series episodes or games and choose whatever he or she likes. When the shopper completes, for example, to create a song compilation to his/her taste, an instruction will be given to the computer system to burn it on a CD, DVD, Blue-Ray disc or alternatively be saved on some other memory device such as Disk-on-Key. Appropriate payment arrangements may be devised including advance deposits and pay-as-you-collect at the cashier or pay with credit card at the station. Sessions may be limited in time.

Why doing this at the store and not at home? First, it may be because of powerful utilities of the multimedia programme that makes the shopping experience smoother and more enjoyable — well-designed graphic displays of items planned with consumer search behaviour in mind and friendly tools for building and displaying at any time the content of the shopper’s basket. The display may incorporate information structures such as a matrix or table of a relatively large variety of items , a “ribbon” mounted across the screen (moved left and right) for quick scan in a narrowed-down set of items, or “wheels” that include possibly artists in an inner tier and song pieces in an outer tier. Second, the programme may allow playing songs or showing short samples from film in live-streaming directly from the store’s library (if the system works on an Intranet it may work faster than on the Internet). Third, when required the shopper may consult with a personnel adviser, assuming hopefully that the store employs people expert in various genres of entertainment.

It should be remembered, however, that there are different types of shoppers. We may distinguish primarily between (a) those who come with a more clear and well-defined plan of specific songs, artists, TV programmes etc. that they wish to find and buy, and (b) “explorers” who have a more general idea, perhaps only at the level of a style or genre, of what they want and whom in the “old days” liked to browse through items on display with their fingers. For consumers who do not have well established preferences and who even seek surprising discoveries the old format was simpler and easier to explore and probably less time-consuming compared with a computer application. A multimedia programme with a search engine may be less advantageous for them. In order not to lose those customers the store will have to devise more creative solutions, combining intelligent computer-based cues and guiding tools, physical displays even if more limited than before, and human advice.

Notwithstanding, there are types of music pieces and areas in which it should be sensible to offer physical copies on display. For instance stores can continue to offer films, live concerts,  TV series by season, and games as ready-made products. In addition, areas like jazz and classical music should still deserve special rooms with most space allocated to displays of physical items to accommodate usually more conservative habits of amateurs of these types of music.

Social Interaction

Consumers of entertainment of sorts, especially younger ones (say under 30), prefer to sit in front of the computer at the comfort of their homes, sometimes for hours, surf the network for various music and video pieces. They also like to download pieces onto portable devices such as MP3 players, smartphones and tablet computers. But they do not truly perform this activity all alone. Conspicuously as they sit on their own with the computer they often communicate with friends and relatives, consulting and change ideas or recommendations talking on the phone or chatting in social media communities.

So why not offer these consumers a more lively social way to interact with friends face-to-face  in a store? For that purpose, special sitting sets for 2-4 people can be installed in special areas of the store (not to disturb other customers). At the set a small group of customers-friends can sit together, use each his or her multimedia application to explore and examine favourite pieces while from time to time conversing with each other on their findings. This setting offers people a more natural, direct and open way of socializing, and it has a good chance of producing richer shopping baskets.

These are two directions for developing a new model for music or entertainment media stores that I conceive as promising from a consumer perspective. More generally and beyond the proposed directions, stores will have to create benefits that enrich the whole experience of shoppers during their visit and that the Internet and personal electronic devices (i.e., for online sales and digital download) cannot in their capacity replace (e.g., contact with expert staff, events, sensual stimuli in the store’s scene).  For stores’ owners and managers, the goal is clearly to convert shoppers into happy customers who enjoy returning frequently to the store(s).

Ron Ventura, Ph.D. (Marketing)

Media Sources:

“Branson sells Virgin Music Stores”, BBC News, 17 Sept., 2007

“Zavvi placed into administration”, BBC News, 24 Dec. 2008

“Tower Records victim of iPod era”, Associated Press at MSN Money, 10 Oct. 2006

“HMV prepares for split to stem rising debt“, Financial Times FT.com, 28 March 2011

“HMV in its third profit warning of this year”, The Guardian (online), 5 Apr. 2011

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