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GP 11 January 2006: Up the Down Staircase

Values Go Up, Up, Up.  When advertising was at its most creative, back in the age of radio and early TV, it seemed like every powerful brand had a jingle that made it resonate in the customer’s brain.  We can even remember a very friendly cocktail party in the 1950s where a very young man, Benno by name, no more than 5, dragged his mother away from her guests and led her into the bathroom.  She thought he wanted assistance, but instead he pointed proudly at the toilet where he had done his duty.  And he chortled: “They said it couldn’t be done.”  That was just another advertising ditty which he had made his own.

Amongst those old jingles was “When the values go up, up, up … and the prices go down, down, down....”  It was the handiwork of Robert Hall Clothing, a chain of low-price clothing stores and a division of United Merchants and Manufacturers, Inc.  Both have since gone bankrupt, but they flourished in the heyday of American capitalism when merchants and manufacturers could truly claim to give you a lot for a little.

Prices Are Up, and Values Are Down.  At every turn, now, we confront rising prices and falling values.  Housing, cars, etc.  They are not built to last, and the only thing that does endure is the sticker shock.  On a recent visit to Café des Artistes, a very pretty New York City restaurant with Christy paintings, we and acquaintances have frequented for decades, we found ourselves shoehorned in beside a large, noisy party of diners, disquieted by hit-and-miss service, served a limp appetizer, and terribly disappointed by mediocre desserts from a restaurant that used to serve a stunning dacquoise.  Of course, with hardly a drink on our tab (most of our party was abstemious), the bill was a scorcher, perhaps up 20 to 30% from previous visits.  This is not an uncommon experience in New York and elsewhere these days.

The Sandwich Glass Museum.  Since the early 1990s, American business has had a hard time growing, and has largely been without a strategy.  In the absence of an idea of what to do, it went on a cost-cutting binge that has continued into the present day.  It has cut the muscle out of its products, while taking human beings out of its sales and service, substituting voicemail, interactive telephones and computers, and semi-skilled workers as far away as Asia for people who could really get the job done.  After a while, even this stinginess doesn’t guarantee a good the bottom line, so we are now immersed in an orgy of punishing price hikes.

But there are wonderful exceptions to this rampage of mismanagement.  In this regard, read why Bruce Courson thinks “Rural Museums are Becoming Ancient History” in our “Keeping the Doors Open.”  Attendance has been declining badly at such museums, perhaps because vacationing Americans are giving up motoring, opting instead for airplane travel to distant spots.  Museum directors have been jacking up prices, whereupon attendance just falls further, and then they resort to more kneejerk price increases.

Courson, at the Sandwich Glass Museum, has kept inflation-adjusted admission prices constant, while investing in new attractions.  Lo and behold, his ticket sales are up, and he is more than solvent.  The lesson here for businesspeople, the chieftains on Wall Street (who are primarily cost cutters), and our national policymakers is that torturous cost cutting is a dead end and that the product must be relentlessly enhanced.  It is still possible to be a growth business or a growth institution.  But intelligence has to triumph over oafish greed.

Always Low Cost.  We keep track of Wal-Mart on The Global Province  in “Watching Wal-Mart,” because it simply has become the world’s most important corporation.  Its impact on the U.S. is obvious, but it also waves its wand in Mexico, Great Britain, Canada, Japan, and a host of other countries.  It accounts for a huge fraction of China’s exports.

Obviously its critics are battering it with assaults on its employment practices (it’s the biggest boss after the U.S. government) and its domino effects on the communities it inhabits.  Theirs is quite an indictment, but the facts are not always quite so black and white.  We find ourselves more concerned about Wal-Mart’s abrasive affect on quality—the way it has clearly altered the relationship between value and price, inside and outside its stores.  Undeniably, it is making the substandard commonplace.

A fine woodworker now residing in Alabama recounted to us his despair about Wal-Mart some years ago.  For a while he went there to buy a few tools.  But he discovered that the quality was bad.  He said he knew where to go to get much better prices if he truly wanted to go for shoddy quality.  We think he got it about right: the behemoth does deliver average prices, not low prices, for low quality.  But it buys at terribly low cost, and its suppliers have no choice but to take some of the guts out of their products in order to meet its insatiable demands for lower and lower costs.

The Price of Low Cost.  One cannot over-estimate the harm to society of a philosophy that permeates many of our corporate suites and most of our financial services boardrooms that is summed up in “Low Cost at Any Price.”  First off, it means that our inflation figures are higher than they actually appear to be.  That is, in a better economy, substantial rising value is built into products and services, so, in the best of worlds, you are getting more for your money, even when prices are rising.  We call this a hedonic adjustment.  That’s probably not happening in our present economy.  We would appear to be getting less for our money when we purchase something.

As well, when we think we are “getting a lot for a little” we may be buying exactly what we don’t want.  Darius Lakdawalla at Rand seems to have detected this problem in American public education, which he has written about in “Quantity over Quality.”  There has been a drive, at any cost, to improve pupil-teacher ratios, to reduce so-called “classroom sizes.”  But part of the Faustian bargain here has been a tradeoff where we keep teacher salaries low in order to afford more of them.  You can guess what happens to education under these circumstances.  When we squeeze out quality, we lose it all.

Gordon Bethune.  We don’t fly Continental much, but we probably should—and will. Joseph Nocera’s “His Airline Didn’t Skimp on Cheese” (New York Times, January 7, 2006) tells how Bethune brought Continental back from near-death, its previous chairman Frank Lorenzo having dealt it some heart-rending blows.  In general, Bethune concentrated on getting people there on time, serving meals on very long-haul flights, and preserving other amenities that passengers value highly.  It may not surprise you to learn that Continental has performed immensely better than the other major airlines:

In the third quarter, in fact, despite all the problems facing the industry, Continental made $61 million.  (For the year, however, it expects to post a substantial loss.)  Last year, it also went back to its unions and asked for nearly $500 million in concessions.  You may have missed this.  The Continental negotiations lacked the histrionics that usually accompany labor givebacks in the airline industry.  But the company told its unions that if they agreed to the givebacks, Continental would be able to go into "growth mode" to prepare for a better future—and that is what it has done, buying new airplanes and expanding into places like Beijing and New Delhi.  And because of the trust that had been engendered between management.

One must discount Nocera a bit, for he’s a rose-colored-glasses journalist who glosses over a lot of things.  But Bethune, in a brutal industry, pulled off wonders by delivering a real product, not by gutting it.  We would like to forget the postscript: Bethune finally got kicked out of his job by David Bonderman, the financial engineer at the buyout firm of Texas Pacific.  This is yet another example of the runaway power the Wall Street gang exerts in our marketplaces.

Junk.  The journalist Art Kleiner asks in “Beware Product Death Cycles” “why we are … overwhelmed by junk,” given all the lipservice we paid to quality in the 1980s.  The answer seems simple: In a world of global competition, Asia can make it cheaper than we can, and that’s what it is doing.  Businesspeople, without strategy, have often lost their heads and said that the way to play and profit is to chop out costs, trying to imitate our low cost overseas competitors.

The fact is that we are the high-dollar boys and cannot play low cost roulette.  To spin that wheel is simply suicide for us.  In general we have to do a version of Mr. Courson and his Sandwich Museum, keeping the price of admission low but also creating other products and services that the global competition is not yet offering or can never offer because it is distant from the customer.  For the car industry, about which we will be talking another time, that means a radically different business model that turns dealerships into huge value adders in the customer chain, instead of the weak, hopeless, often hated links they are today. 

Living Well Is the Best Revenge.  We always thought Calvin Tomkins had invented this line that he used as the title for his wonderful little tale about Sara and Gerald Murphy, a New York couple who escaped to Europe from New York in the Fitzgerald years, who surprisingly had some artistic talents of their own, and who came back to business when they had to, Murphy reviving the family-owned luxury goods firm of Mark Cross.  They’re heartening to read about, a whole cut about the American writers they hung out with on the Continent. 

As it turns out, George Herbert, the early 17th-century metaphysical poet and clergyman, owns the distinction of coining this uplifting aphorism, a man of probity who has given us a way out of our present spiritual and economic dilemma.  He makes sure we understand that we cannot get up by going down.  We must live well.  By and large, the only way for us to compete in the world as it is now is for us to drench our products and service with quality and qualities that discerning people care about.  As it happens, that is probably also the only way healthy people can live their lives, because it carries with it the idea of “a job well done.”  The goal is quality of life, not a life of crumbs and crumbles. 

P.S. Up the Down Staircase was a little bit too preachy movie from the 1960s about the earnest attempts of a teacher to do good things in a troubled, inner city school.  But she was trying.

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