What Should Wall Street Analysts Be Saying About The Cultural Demographic Shift?08/24/2015 10:05AM
By Glenn Lopis
“A new type of thinking is essential if mankind is to survive and move toward higher levels.” Albert Einstein said that, but we don’t need to be geniuses to implement new thinking in business. We only need real leadership that’s innovative and courageous enough to evolve and take action now. That’s how we close the growing opportunity gaps within the three pillars of workplace/workforce, external partnerships and the marketplace/consumer. We must see these opportunities everywhere every day and anticipate the unexpected, sow those opportunities and unleash our passionate pursuits, grow those opportunities with a strategic focus and entrepreneurial spirit, and share opportunities with a generous purpose. That’s how we reinvent leadership for the 21st century and sustain growth.
And it starts by asking one question: What are we solving for?
This is the fourth of five articles to help you understand what is required to answer the question and compete in today’s fiercely competitive global marketplace across a variety of industries. The articles detail the insights and frontline experiences shared by leaders of the roundtables at my June 2015 Executive Summit, “Preparing U.S. Leadership for the Seismic Cultural Demographic Shift.” The first article featured Earvin “Magic” Johnson, chairman and CEO of Magic Johnson Enterprises, and Mike Fernandez, chairman of MBF Healthcare Partners. Both use their entrepreneurial spirit and passionate pursuits of excellence to fuel business innovation that most U.S. corporations don’t see. That article – and all six in this series – shows how the Cultural Demographic Shift represents a natural evolution of American enterprise and its business models.
For companies looking to capture the advantages of the shifting cultural landscape, it’s not just about gaining the mindshare of Hispanics and Latinos.
According to the Selig Center at the University of Georgia’s Terry College, the “multicultural economy” will reach $4.2 trillion in purchasing power by 2019 (about 10-fold similar spending in 1990, at $465 billion). Hispanics will represent 74% of the labor force growth. Asian Pacific Islanders, African-Americans and Hispanics will comprise 54% of the U.S. population by 2050. But it doesn’t stop there: Many Hispanics, non-Hispanic whites and other groups are consuming across cultures, with their choices increasingly influenced by the different groups around them.
Consider these other telling statistics from the U.S. census:
• A vast majority – 85% of total U.S. population growth – was multicultural (with Hispanics alone accounting for 56% of the growth).
• In California and Texas, Hispanics make up 52% and 49% of the under 18 population, respectively.
• For every person who retires in the U.S. through 2020, 74% of those new workers will be Hispanic.
Unfortunately, America’s corporate leadership isn’t preparing quickly enough to take advantage of the largest transformation in American markets since the arrival of the baby boomers. Nor, it would seem, is Wall Street expending much energy focusing on this seismic shift.
Deeply curious about what analysts should be saying, I invited Nik Modi, managing director of RBC Capital Markets, to share his views. As an analyst who covers 23 companies, I felt Nik could provide some illuminating insights, and he didn’t disappoint.
His comments to our audience and members of the C-Suite, in general, could be summed up in a single sentence:
“It’s time to invest, but there’s a lack of courage.”
Creating Value Versus Valuation
First, Modi wants corporations to understand that while most of the population growth will emanate from the Hispanic community, the seismic shift is essentially multi-cultural.
“The influence of Hispanics is often understated given their influence on other ethnicities,” he told us. “And a one-size fits all approach to Hispanic marketing…may not resonate with Hispanic consumers because many Hispanics are consuming across cultures and vice-versa.”
Unfortunately, Modi said, CEOs remain so focused on their company’s stock price performance and serve for such a short tenure that most avoid making the necessary and significant investments to truly understand this growing customer base and win their trust and loyalty. With pressure from shareholders, they’d rather kick the can to the next CEO, rather than take a hit on the next quarterly earnings report, he said.
This may sound like a prudent, risk-aversive plan in the C-suite, but Modi says history proves otherwise.
“Near-term thinking is the problem,” he said, noting the countless times CEOs revealed to him that they avoided investing in the future, fearing the stock price would tumble. But history shows that thinking is incorrect, Nik pointed out. “It’s not Wall Street’s fault,” he told our audience.
To prove his point, he walked us through an enlightening history lesson that starts with Proctor & Gamble, the multinational consumer goods corporation.
Founded in 1837, P&G didn’t get its “sea legs,” Nik reminded, until the 1950s, when the company recognized the emerging groundswell of “mass consumerism” it could tap. In capturing this huge shift, P&G, which makes everything from Tide detergent and Pampers to Crest toothpaste, essentially invented advertising, brand management and category management, Nik said.
“And that costs money. They decided to invest heavily in the seismic shift,” Nik told us. “They were also the first to work with big-box stores, and today they’re Wal-Mart’s biggest supplier.”
Did putting long-term thinking ahead of near-term profits payoff for P&G? Nik told us the numbers are clear: The company has “created 3,000%-plus of relative value compared with its peers since 1950, because it made the decision to invest in the future back then,” Nik noted.
Fast-forward a few decades later to the 1990s. Amazon founder Jeff Bezos is named Time magazine’s Person Of The Year. Since then, the online retail giant continues to remake the shopping experience as we know it, Nik reminded.
Amazon continually focuses on innovation, often investing in new technology and loss leaders that improve the customer experience and grow market share. Its efforts boost sales growth by about hefty 15% a year. Despite that, earnings growth remains relatively flat. But lack of profits hasn’t hurt Amazon’s stock price, which has more than quadrupled in the past five years alone.
“CEOs worry about near-term earnings. But Jeff Bezos has been getting a pass from Wall Street for 16 years,” Nik reminded.
Why? As many of us know first hand, Amazon is constantly pushing the boundaries to understand what its customers truly want, and innovating to deliver it.
Next, Nik pointed to Tesla CEO Elon Musk as another example American corporate leaders should observe. Tesla is the first major U.S. auto company established in the last 90 years to succeed. Despite the high bar to entry, Musk was willing to take the risk. Why? “He sees the seismic shift coming and is willing to invest in it heavily,” Nik said, adding that the company’s business model embodies long-term thinking that American CEOs can learn from. Musk’s high-end electric cars will fund a more medium-priced vehicle sometime in the future, and eventually help the company produce cars affordable for the masses.
The take away for today’s CEOs who complain about pressure from shareholders and the markets, is huge: There’s a giant disconnect between what CEOs believe creates value, versus what the markets say creates value, Nik noted.
Instead, companies must invest in their futures, because the “Make no money and invest, invest, invest,” approach taken by Bezos, Musk “creates massive value.”
Taking The Risk
And by the way, creating relevancy and massive value also means companies may be around a little longer. Nik noted that while the average age of S&P 500 companies was once 67 years, in 2012 it was down to just 15 years.
CVS Health is a great example of a company that has bucked current trends to invest in its future. CVS Health Chief Diversity Officer David Casey, who joined our roundtable, reminded our audience of the huge risk CVS took in 2014 by eliminating the sale of tobacco products. In the short term, the company will take an estimated $2 billion hit to earnings. But as CVS Health continues to reposition itself from retail pharmacy to healthcare provider offering, for example, doctor-provided services at its MinuteClinics, the decision was crucial to a more expansive future. Cigarette sales remain incompatible with a health-focused company, Casey told us.
So how does all this bode for corporations that should be investing in the coming demographic shift? I asked Nik.
“If you’re at a start up or venture capital business, the opportunities have never been easier. If you’re at a big company, it’s time to have some courage,” he said.
To underline his point, he brought us full-circle to the Proctor & Gamble of today.
“They hit all their near-term earnings numbers,” he noted. However, a companion chart he produced showed the company losing market share over the past three years, and the stock price underperforming market peers. “Now they’re on the bottom,” Nik said.
So the company that led the last seismic shift, is now falling behind. What lessons should the C-Suite be taking from this history lesson?
Step up. “Stop your near-term thinking, it’s not what the market focuses on,” he said. “Start taking accountability,” Nik said.
Corporations must spend the money and resources to truly understand their new and evolving multi-cultural customer base – and what those consumers actually want. Brands that continue to focus on near-term earnings at the expense figuring out this new wave of customers will lose competitive advantage. What does it say when an actor can beat long-established companies at their own game, in a sense, by catering to an already existing demand? Jessica Alba launched the Honest brand to make environmentally friendly baby products after discovering that so many household items are filled with toxic chemicals. The company was valued at $1 billion in 2014.
“Companies continue to use unnatural or artificial ingredients because they’re cheaper than the real thing,” Nik told us. “The consumer has figured it out and doesn’t want your stuff anymore. The problem is that everyone is going after near-term earnings, not realizing that the consumer is literally abandoning them.”
Adlai Wertman, Marshall School of Business professor at the University of Southern California, previously told our audience that veteran companies aren’t typically motivated to up their game, in terms of ingredients and brand image, unless they see it improving near-term earnings. And so we’ve come full circle.
Biggest Shift Since The Baby Boomers
With that, I asked our roundtable participants for their thoughts, a couple of which I will share with you here. Armando Azarloza, president of The Axis Agency, a multi-cultural marketing firm, placed the seismic shift in perspective we can all grasp:
“The evidence is pretty clear,” he said. “Every study and every analysis points to a new transformative market being developed. We are seeing the greatest explosion in the market economy since the baby boomers, with spending power and influence that rivals anything we’ve seen in this county in the last 60 years.”
As with Nik, Armando urged corporate leaders to understand where the culture is headed, and invest in a long-term strategy.
“I often ask people, ‘in the greater scheme do you want to be Romney or Obama?’ That is a manifestation of where our country is today,” he told our audience. “If you follow the approach Obama followed in his campaign – heavy digital, heavy millennial, heavy multi-cultural…you’re going to be able to win in that market economy in the same way the president was able to win in the voter economy. The problem is, I’m seeing many more Romneys than Obamas.”