Nick's Blog

Over the past year, Target has been replacing their store brand products with redesigned and re-branded “Up & Up” products.  The previous store brand products very clearly took their design and color schemes from the brand leader they were imitating.  For example, their old bottle of ibuprofen closely resembled a bottle of Advil.  This is the tried and true method of packaging store brands: copy the leader’s design as closely as you can without trademark or copyright infringement.

Now, the new Target ibuprofen bottle bears no resemblance to Advil.

From the b-school perspective, this is an attempt to create brand equity and customer loyalty in the Target “Up & Up” brand, rather than just mooch of the brand equity of Advil and other “name brands.”  On the one hand, it’s a good long-term play that tells consumers there is inherent value in the Target brand, not just in being a cheaper knock-off, and it allows them to maintain a unified design look throughout the store.

But it’s a risky strategy that could backfire.  If customers don’t take to the new look by even just a small percentage, it could cost millions.  To mitigate their risk, I’m sure Target did plenty of due diligence in market research and A/B testing.

Store brands are big business.  They’re generally more profitable for the retailer than selling the name brands, and companies like Target even employ third party “testers” to make sure their quality is on par with the name brands.  If we start to see some design or color tweaks to the Up & Up packaging, we’ll know they weren’t performing as well as desired.

Yesterday I received a letter from the United States Department of Commerce:

“About one week from now, you will receive a 2010 Census form in the mail.”

Are you kidding?  I mean, thanks for the heads up, but why not just send the form?

Assuming every one of America’s 114 million households received this letter, and the Commerce Department has a special 50% discounted rate with their friends at the Post Office, they just wasted $25 million of OUR money!  What’s worse, the figure is probably closer to $30 million given the Postal Service’s recent inability to operate profitably.

Unbelievable.  And I’m not even counting the Census TV commercials, one of which aired during the Super Bowl.  Will any of these tactics really improve response rate?

Husky fans, back me up on this.  Every time you see a headline about the movie Hurt Locker — and there have been a lot lately — your brain only processes those keywords and assumes QB Jake Locker has been injured somehow.

Haven’t seen the movie, but already don’t like it for that reason.

I had a chance to see my first NHL game this week.  On Tuesday, the San Jose Sharks played the New Jersey Devils at the HP Pavilion.  Fresh off the Olympic hockey finale, we were ready for more icy action.  We even got an up-close-and-personal view of Sharkie the mascot as he gave a bag of goodies to a kid in the row in front of us.  I’ve decided that hockey is a lot like soccer — there’s not a lot of scoring, but a goal could come at any moment, which makes it interesting.

Except in this game there was plenty of scoring.  The Devils took a 4-0 lead in the 3rd (final) period to completely deflate the Sharks crowd.  It would be basically like being down 28-0 halfway through the 4th quarter of a football game.  There’s always a chance for a miracle comeback, but it’s probably not going to happen.  People started to leave.

But then the Sharks scored.

And then they scored again.

And again.

Three goals in three minutes!  The place was going nuts.  The giant shark head hanging from the rafters that blows smoke after goals barely had time to be reset.

The Sharks then pulled their goalie out to have an extra man on the ice, in a last ditch effort to score again and tie the game.  Ultimately they fell short, but it was definitely exciting.  I’d go back.

I saw these posted on an online marketing blog and thought they were great and applicable to everyone:

1. What should I stop doing?

2. What should I start doing?

3. What should I keep doing?

4. What could I do with less effort?

The other night I was playing Dr. Mario on the Wii online when I notice my opponent has chosen to give her Mii a double chin.  Why, I ask, would anyone go out of their way to create an unattractive digital avatar version of themselves?  If you were playing against people you’re never going to see, wouldn’t you “round up” a little?

Bryn’s response: “Maybe in real life she has a triple chin.”

OK, maybe she was rounding up.

Now there are plenty of “ugly on purpose” Mii’s, designed for the purpose of getting a laugh, and I’m all for those.  It’s just the brutally honest folks that feel the need to give themselves a double chin, a huge nose, or bags under their eyes.  I guess I can admire their attention to detail, but I guess I’m surprised how people depict themselves when given a blank canvas.

Meanwhile, while I was getting philosophical about the perceived digital body images of random strangers, double-chin lady was kicking my ass.

I volunteered to serve as a judge for an Alpha Kappa Psi business case competition, so this past weekend Bryn and I traveled to Reno for the fraternity’s western regional conference.

Having no experience in judging these sorts of things, it was a pretty cool experience.  I was impressed with the analysis and insight offered by the competing teams, as well as their presentation skills.  The case study was on Italian sausage, and I can safely say I learned more about marketing sausage than I ever thought I’d know.

It was also cool to connect with other alumni from the Bay Area and beyond.

I think I’ll have to present a case competition to some local chapter and see what suggestions they have on how to sell more shoes!

Last week there was a break in the weather and I went to Bear Valley with a couple of Bryn’s co-workers.  It was my first time at that mountain, and it was really sunny and warm.  The ungroomed stuff was kind of deadly, apparently it had rained to create a nice layer of crust.  It was pretty grabby and parts had slid in mini-avalanches.  But the rest was good.

A word of warning to future Bear skiers: Lunch Run is not as delicious as it sounds, and it will not lead you back to the lodge for lunch.  Instead it will lead you to the Bear Valley Village, some 2 miles down the road.  Thankfully there was a free shuttle that took us back to the main base area!  It only runs once an hour, so when we only had to wait 20 minutes, we considered ourselves lucky.

Later in the afternoon, we went back to the entrance of Lunch Run, and sure enough, there were probably half a dozen warning signs with text like:

• “Do not ski this run alone.”
• “Ride with someone who has skied Lunch Run before.”
• “No lift access.”
• “No easy way down.”
• “Check shuttle schedule before riding.”

How we missed all those, I have no clue.  But at least it was a good adventure!  And the snow was pretty good when you managed to stay above the ice crust layer.   And there were plenty of fresh tracks to be had, which probably should have been another warning sign.

The next day Bryn and I went to Squaw Valley, where most of the upper mountain was closed due to high winds.  And it was rainy at the bottom…gross.

Should online retailers be responsible for collecting sales tax like brick-and-mortar stores?  Is it “taxation without representation” or something that’s overdue in our ecommerce world?  Should Amazon.com, based in Washington, have to collect sales tax on sales to California customers, even though they have no offices, warehouses, or employees there?

Taxes are basically the price we pay in exchange for government services, right?  If I go to the store and buy a $100 widget, perhaps it makes sense for me to pay a tax since I drove on a public road to get there, and didn’t get shot, presumably thanks to the public police department.  That $100 widget cost $110.  Fair enough.

But what if I bought the same $100 widget from a store in Nevada?  Now I’m not using any California public resources, and neither is the store.  FedEx is the one driving on the roads now, and they got paid from the Nevada store, and sent the required sales tax into the government.  That widget cost $100.  Shipping cost $10, but was included in the price.  FedEx sends $1 to the government.  Fair enough.

In the Nevada store example, the California government gets $1 instead of $10.  (If the customer is Ned Flanders, they might actually get $11, assuming he reports his out-of-state purchases.)  But the fact is that less government resources were consumed, so California should get less.  A single FedEx truck making 50 stops along a route is far more efficient than 50 cars each making one trip to their local store to buy a widget.

I’m not sold that out-of-state stores should be responsible for California taxes.  They don’t have employees driving on our roads or children in our schools.  They can’t vote in California elections, they have no say in how their tax money is spent.  Making them pay would essentially be free money for the state, they get the income from the business activity, but none of the expense.  Taxation without representation indeed.

What about the local widget store that was undercut by their Nevada online competitor?  Economists have a semi-heartless term for this, “creative destruction,” which is a typical ingredient for progress and it’s all well and good until you’re the one getting destroyed.   But in business, price is only one selling point.  Maybe this local widget store has been in business 100 years, has unsurpassed widget expertise, amazing marketing, unbeatable service, and a great atmosphere.  Those are sales points they can compete on, and probably better than any website.

So what’s the solution?  I think something will have to be done on a national level.  There are something like 65,000 different sales tax jurisdictions across the country, and it would be a compliance nightmare unless something was standardized nationally.  However I imagine the congressman that proposes a national sales tax would be voted out of town pretty quick, so that might not happen anytime soon.

In the meantime, state and local governments could consider lowering their sales tax rates.  I think a lot of people would like to “buy local” and talk to a real person, especially for high dollar items, but sales tax rates like Alameda county’s 9.75% are driving people online instead.  They’re already taxing our income and our property; how much is “fair?”

Alternatively, states could spend some money on enforcing the current “self-reporting honor system.”  It probably wouldn’t take much to start a word-of-mouth / social media campaign that they’re auditing people’s online orders and tax payments.  A scared taxpayer is a compliant taxpayer.

Or we could all just move to Oregon.

Evaluating the potential outcomes of passing the “Amazon tax” to force out-of-state retailers to collect California sales tax, the legislature will be forced to make a business design – something government entities are notoriously bad at.  They need to look at revenues and expenses, and the impact on California citizens.  We’ll save the debate about “level playing fields” and what’s fair and unfair for another day.

Revenue

It is likely that some online stores will chose to comply with the new law and dutifully collect the sales tax.  What percentage of overall CA internet sales receipts will this represent?  Hard to say.

Expense

Many large online stores will stop advertising on California-based websites, severely diminishing the earnings of those websites.  This will dramatically reduce income tax receipts for California, and will also reduce state sales tax as the owners of those websites cut back on their spending.  Some will move out of the state entirely and take their entire tax check with them.

The California government will also incur the expense of enforcement.  How will they determine what online stores shipped how much of what to California residents?  There is definitely an audit and compliance cost here.

And then there’s always the legal fees.  The 1992 Supreme Court decision Quill v. North Dakota expressly states that it is unconstitutional for an out-of-state retailer to be responsible for collecting in-state sales tax.  The legislature would be foolish to assume Amazon, Overstock, and others, will simply ignore this fact and not challenge them in the courts.  Lawyers are expensive.

Impact on Californians

Should this bill pass, every Californian who shops online will be worse off.  Even though people are supposed to report their online untaxed purchases on their tax returns, few do.  To the vast majority of the population, it will be seen as a “new tax” — which in today’s political climate might as well be career suicide for lawmakers.

Businesses here that make a living selling advertising online to out-of-state retailers could be devastated when those retailers pull out of California.

Owners of local brick-and-mortar stores will be the first to cry “victory!” But it will be a short-lived celebration.  With the exception of a few big-ticket items, I don’t believe “sales-tax-avoidance” is the #1 reason people shop online.  Convenience, better selection, and lower prices all rank higher.  Does anyone really expect the mom-and-pop bookstores to see a sudden overnight boom in business if this passes?   I imagine they still might have difficulty competing with Amazon’s economies of scale that allow them to offer still lower prices, free shipping, and the biggest selection on the planet, and stay open 24 hrs a day.  And that’s assuming Amazon would collect the tax, which they’ve already said they won’t.

So in the end, no one is better off.

I think the moral of the story, for California lawmakers, is that sometimes the best action is inaction.  By not passing this bill, you almost certainly save money for your state, and make your constituents better off.  Now it’s no longer a business decision, but a no-brainer.  (Insert cheap shot here about how that’s perfect for politicians!)