Nokia: December 2010
Nokia is the current, and historical, global mobile telephone industry leader. The company, which launched the first personal mobile telephone, has seen its global leadership wane in recent years as a result of the company’s transnational strategy. A failure to adapt to changing consumer trends in vital markets created a perceived absence in critical markets and rapidly declining market share in emerging markets such as China and India. If the company wishes to reverse these recent trends we feel they must adopt a new operating system (OS) and regain a visible presence in the North American market through a more desirable product offering.
TELECOMMUNICATIONS INDUSTRY
Technological Changes
The telecommunication industry has changed dramatically over time. Initially, communication occurred over phone lines. Then, in the 1990’s phone calls were able to take place over data lines. As this trend continued, there became a convergence of the computer and telecommunications industries. This convergence resulted in new products being manufactured to meet customer needs.
The launch of Apple’s iPhone in 2007 revolutionized the market. There had previously been Smartphone on the market, but Apple was the first to use a multi-touch interface with a superior web browser compared to their competitors. A Smartphone has an embedded OS, which allows the phone to perform tasks that previously were only performed by personal computers.
With the Smartphone, came the capability to use this mobile device for more than just voice communication. Depending on the model, Smartphones have the ability to function as a camera, media player, personal navigation device, games, and to make payments, which is routine in Japan and South Korea.
Demographic Trends
In the 3rd quarter of 2010, mobile phone sales grew by 35% compared to the 3rd quarter of 2009. Smartphones alone increased by 96%; however, the increase in Smartphone sales was primarily isolated to mature markets.
In the emerging markets, ‘white-box,’ or no brand phones, accounted for a large portion of the increase associated with the “other” category, which are manufacturers not in the top ten. ‘White-box’ products, being manufactured in China and Asia, have expanded into other markets including India, Russia, Africa, and Latin America. These products meet the needs of consumers who cannot afford the more expensive mobile phones, and the increased sales have impacted the top mobile phone makers. Nokia, the largest mobile phone provider, are particularly vulnerable on their low-end products. Their market share decreased to 28.2% from 36.7% partially due to this trend. “’White box’ competition will continue to cannibalize sales from the major manufacturers, largely by mimicking handsets like iPhone or BlackBerry, while offering more features… at lower price points”, according to Dr KF Lai, CEO of BuzzCity.
Currently, only 5% of Chinese phone users have a Smartphone. However, this market is expected to grow to 50% by 2015. Price is the main inhibitor, but with Smartphones becoming less expensive, they will become more affordable to the masses.
The Indian market, with its surge in economic growth and development, has seen an increased demand for low-priced but feature heavy mobile phones. The mobile phone is now being considered a necessity for communication. Businessmen use them to be available to their clients and much of their business transactions occur over the phone. For the youth of India, the cell phone is a style statement and considered a must have item along with extra features. Experts believe that in the future, the family will own multiple mobile devices.
In India, there are enough cell phones for 45% of the population. According to a United Nations study, more individuals have access to a mobile phone then a toilet. “It is a tragic irony to think that in India, a country now wealthy enough that roughly half of the people own phones, about half cannot afford the basic necessity and dignity of a toilet," states Zafar Adeel, Director of United Nations University Institute for Water, Environment and Health.
Economic Climate
In 2009, the market for handsets decreased significantly. The overall global market shrunk by 7%; however, the demand for Smartphones increased by 15% which helped the telecommunications companies’ weather the downturn. This increased demand for Smartphones, even during the recession, gave a strong signal to the market regarding the shift in consumer buying. Companies currently producing Smartphones focused on improvements to their current product. Those not manufacturing Smartphones considered doing so in order to be part of the trend. The environment quickly became competitive.
With the flood of new innovative phones, it became more difficult for mobile phone providers to differentiate themselves from the competition. The mid-level phone manufactures suffered due to the fierce competitive environment in that market segment. Consumers are becoming more demanding resulting in manufactures increasing R&D in an attempt to remain competitive.
NOKIA BACKGROUND
The Nokia Corporation, who got their name from their headquarters in Nokia, Finland, was formed when three Finnish companies, Finnish Rubber Works, Finnish Cable Works and Nokia Company, merged in 1967. With this merger, the new corporation had four major business units: forestry, rubber, cable and electronics. They manufactured everything from rubber boots, to cables and tires. At the time of the merger, the Electronics division accounted for roughly 3% of total sales for Nokia. During the next few decades, the company aggressively expanded into markets around the world as well as entering new product markets such as manufacturing light bulbs and chemicals. It wasn’t until Jorma Ollila became CEO of the company that they shifted gears and decided to focus solely on the telecommunications industry.
In 1975, the Nokia Electronics department broke off into three distinct groups, one being telecommunications. Then head of the department, Sakari Salminen was determined to make it a significant portion of Nokia’s business portfolio. When the first cellular network, Nordic Mobile Telephone (NMT) Service, was opened in 1981, Nokia was positioned as one of the market leaders due to their geographic location as well as their already established foothold in the mobile phone market. With the establishment of the network, which spanned across several countries including Sweden and Finland, began the rapid expansion of the mobile phone industry. While Nokia was already providing mobile phones for other standards in Europe, they introduced their first NMT mobile phone, the Senator, to the market in 1982.
When Jorma Ollila became CEO of the company in 1992, Nokia shifted focus completely to the mobile phone division. Their efforts to expand the division resulted in selling off all non-telecommunications business units in order to create a clear focus for the organization and increase cost efficiencies. With this shift, Nokia was transformed into one of the world’s leading mobile phone manufactures, with profits increasing 400% and their stock price rising over 2,000% between 1993 and 1999. They were also one of the main developers of Global System for Mobile (GSM) technology. This once again solidified Nokia as a leader in the industry, as GSM technology was chosen as the standard for digital mobile technology in many markets. By 2000, Nokia had supplied GSM technology to 43 countries spanning the United States, Europe, Asia and Africa.
Nokia’s business strategy revolved around highly efficient manufacturing processes and logistics. They outsource only components and kits for their phones, but do all of the manufacturing in house. This allows Nokia to streamline their processing and has resulted in extremely cost effective products – their average cost across all mobile phones surpasses almost all of their competition. As of 2000, they also had manufacturing facilities in more than 10 countries which allows them for increased logistics efficiencies as they are closer to the markets they service.
Innovation has also historically been a key strategy for Nokia. They founded the Nokia Research Center in 1986 which has facilities in seven countries across four continents. This allows them to leverage work-wide knowledge when developing new products for the ever changing demands of mobile phone consumers. The company also places importance on intellectual property and is one of the top five users of the Patent Cooperation Treaty in terms of the number of patent filings the company has. They have been so successful in this arena that nowadays they are not the only users of their patents – they are used across the competition in mobile phone manufacturing.
NOKIA TODAY
Nokia has recently appointed Stephen Elop to replace the outgoing President and CEO, Olli-Pekka Kallasvuo. This was seen as a significant step for the company as it has always chosen a Finnish executive to lead the company. For some, this search for talent outside of Finland is seen as a first step to turning around the company. Elop was previously head of the Business Division at Microsoft and responsible for the Microsoft Office line of products.
Nokia’s new CEO has a number of challenges that have hampered the company that was once known for its market leading mobile devices. In Elops’ own words,
“My role as a leader of Nokia is to lead this team through a period of change, take the organization through this period of disruption…to meet the needs of its customers, while delivering superior financing performance.” – Steven Elop
Since the release of Apple’s iPhone in 2007, the Finnish mobile phone maker has lost nearly 75% of its market capitalization and dropped to a $9.60 share price from a high of $40 in 2007. The reason for this dismal financial performance is the lack of competitiveness in both the budget mobile phone market and the pricier, Smartphone market.
In search of a global presence, the company made a fatal mistake when it came time to enter the U.S. market. They did not understand the intricacies of the market and attempted to market its phone as it did in the rest of the world. For starters, in the United States, consumers typically buy a phone with a two-year contract attached to it. For the carrier, this gives them a sense of stability in terms of a reoccurring revenue stream. Carriers make very little on the sale of each handset compared to the high margin phone and data packages they receive from the monthly billing of each customer.
In Europe and Asia, users are more accustomed to GSM phones, which allow them to insert a SIM card of the carrier they have chosen to use with their handset. The downside to this is that users there often pay full retail price, which in comparison is typically 300-400% more than a contract device.
But why would anyone pay a 300-400% mark-up for the same device? The answer is the freedom to use any mobile carrier, which is convenient when you travel abroad. For example, a user in London with an unlocked device can travel to Paris and insert an Orange France SIM prepaid card and pay a similar rate to what native Parisian would pay for mobile minutes and data usage. In comparison, roaming in Paris with your UK mobile line would incur fees that could greatly exceed the 300-400% markup paid for an unlocked phone.
Nokia’s lack of carrier partners in the U.S. results in an unfamiliarity of Americans with the Nokia name when shopping for a mobile phone. That is not to say that Americans would buy a Nokia device even if they were familiar with the products because of other, superior products and vast competition in the market.
Another disadvantage to Nokia’s strategy is that they are one of the few hardware manufactures left using the Symbian mobile operating system. Sony Ericsson and Samsung, which were previously also using Symbian, have transitioned to Google’s more popular, Android mobile operating system. The main problem with Nokia’s Symbian operating system is that the user experience does not compare to what is offered on Apple’s iOS or Google’s Android operating system. If we think back to when the iPhone was release in 2007, the one thing that separated it from other Smartphones was its ability to deliver a web browsing experience similar to your desktop browser. There was nothing like it at the time. The ability to pinch-to-zoom, and flick your finger to move across websites is still considered the gold standard in mobile web browsing.
Aside from web browsing, the ability to download applications (“apps”) is a feature that Smartphone users desire. Take the success of Apple’s iOS App Store, which features nearly 300,000 apps, or Android’s Market which has over 150,000. The interesting story behind the Apple and Nokia rivalry is that Nokia actually had the ability to run apps before the iPhone came out in 2007. In fact, Nokia saw this opportunity to market its flagship device at the time, the Nokia N95, in ads flaunting its ability to run apps. In one ad, it displays “open to anything.” When the iPhone first came out in 2007, it did not have the ability to download apps and were only allowed to use the applications that Apple installed from the factory. Nokia clearly knew this was a feature that users wanted, but because they did not have a centralized apps store, users were left to search the Internet for downloading Symbian apps.
The lesson learned from this is that mobile users want a central place to download applications. Today, every mobile operating system has some form of an apps store, including Nokia, which recently opened Ovi, its own app store. Currently the store only has 20,000 apps, which is paltry compared to Android and iOS stores. The number is so low because developers and companies do not have an incentive to write the same app for one more platform. Many developers are naturally attracted to the platforms that have the greatest number of users. It does not make sense for them to write an app for iOS, Android, BlackBerry and Nokia. They are simply choosing not to develop Nokia apps. If Nokia wants to continue its global dominance and growth, they will need to court the developer community and work with them to make the platform more attractive. One way may be to increase the developer’s share of revenue for each app sold. Currently, Nokia shares 70% of the revenue with developers, matching Apple’s App Store. They need to do better than match; possibly increase it to 75-80% of the revenue.
RECOMMENDATIONS
It is clear that Nokia’s position as the worldwide leader in the mobile telephone industry is eroding. The company, which grew to dominance through a history filled with acquisitions and mergers, refined its business focus in the final decade of the twenty-first century to emerge the global leader at the new millennium’s onset. However, by 2007 this position of dominance had began to wane and in the past three years Nokia’s future prospects have become increasingly less bright. In order for Nokia to proactively combat this sea of change, we suggest the following: move beyond the Symbian OS and adopt a more industry accepted platform, and develop the North American market through a strategic partnership with an American carrier.
The first, and most important, recommendation is that Nokia free itself from the Symbian OS and adopt a more industry accepted OS. Two OSs that Nokia could easily integrate into its products are Windows Mobile 7 and Google’s Android. Both of these mobile OSs are experiencing rapid growth and acceptance in the marketplace. Symbian on the other hand, has seen rapid loss of market share in recent years with all major third party vendors (Motorola, Samsung, LG, Sony-Ericcson) withdrawing from the platform. Only Nokia and a small handful of Japan specific vendors remain. Similar to the manufacturers who have lost faith in the Symbian OS, so too have other critical groups such as analysts, the press, and the developer community who all feel the OS lacks relevance and credibility.
Currently, Nokia denies any plans to switch to another OS and in November 2010 announced that it had purchased the Symbian Platform and have taken over all new development. In recent years, Nokia has been the major contributor to the code, maintaining their own code repository and only occasionally releasing features to the public repository. On December 17, 2010, all Symbian Foundation public websites, wiki, and code repositories will cease and Nokia will be in total control of development. This move was predicated, in part, on the fact that the company believes it to be more cost effective to purchase Symbian outright and take over development rather than pay the Foundation ongoing licensing and consulting fees. However, if cost control were the company’s primary objective, an adoption of Google’s Android OS would have been a more straight forward and efficient method to manage this expenditure. Google gives Android away for free, it is an OS that has an ever-growing developer community, and would allow Nokia to do what it does best – manufacture hardware.
In addition to Nokia freeing itself from the Symbian OS, another strategic change the company must embrace is a larger stake in the North American market. This can be accomplished with a desirable product offering. In the North American market, Nokia has been bleeding customers in the high-end phone market where Smartphones dominate. Nokia’s newest product offering in this category, the N8, is an excellent product complete with an industry leading 12 megapixel camera, 720p video recorder, Carl Zeiss optics, and several other features that the company could easily leverage to expand its presence in this essential market. However, the N8 is priced at $549 and is not sold with a carrier discount. To be competitive in the price sensitive North American market, Nokia must partner with a service provider. This has been a move Nokia has been reluctant to make in the past as it would require them to relinquish some control. The company’s massive size and global market supremacy has led Nokia to be reluctant to succumb to pressures put forth by partners, but with a North American market share that has diminished to about 7%, better partnerships and a renewed interest in capturing market share are believed to be essential.
If Nokia chooses to move beyond the Symbian OS and adopt an OS with greater industry support, the company will leverage its strengths and ultimately become more competitive. The freedom from OS development will allow Nokia to develop superior hardware which is their strong point. They can continue to design and build superior, high-end products free from the financial burden software development presents. A reallocation of R&D resources from software to hardware will allow the company to bring down unit cost and prove beneficial. Furthermore, a partnership with a North American carrier is needed. Through this, the company will be able to offer products at more competitive price points and grow North American market share. With these strategic recommendations put into action, Nokia will be in position to reverse the company’s recent trending market share loss.
This paper was written as a supporting document to a presentation given by Jeremy Person in Dr. David Reid's Transnational Management class while earning his MBA at Seattle University less than a month prior to Nokia announcing its partnership with Microsoft in November 2010.
REFERENCES
Bartlett, C., & Beamish, P. (2010). Transnational Management (6th ed.). (pp. 420, 513-514). New York; McGraw-Hill/Irwin.
Muppala, N. K. (2010, August). Smartphone Ecosystem. Retrieved November 8, 2010, from http://www.sramanamitra.com/2010/04/08/smartphone-ecosystem-market-share-part-1/print
Smartphone. (2010). Smartphone – Wikipedia. Retrieved November 23, 2010, from http://en.wikipedia.org/wiki/Smartphone
Gartner. (2010, November 10). Gartner Says Worldwide Mobile Phone Sales Grew 35 Percent in Third Quarter 2010; Smartphone Sales Increased 96 Percent. Retrieved November 23, 2010, from http://www.gartner.com/it/page.jsp?id=1466313
Phillips, R. (2010). The rise of White Box mobile phones. Retrieved November 24, 2010, from http://www.webaddict.co.za/2010/11/18/white-box-mobile-phones/
Jingting. S (2010, September 1). Sony Ericsson eyes smartphone market. Retrieved November 24, 2010, from http://www.chinadaily.com.cn/bizchina/2010-09/01/content_11240279.htm
IBN Live - Society. (2010, April 15). India has more cell phones than toilets: U.N. Retrieved November 25, 2010, from http://ibnlive.in.com/news/india-has-more-cell-phones-than-toilets-un/113338-19-93.html
Alexander, M. (2010, October 23). Nokia Finally Tuning Into the Masses. Retrieved November 25, 2010, from http://technology.ezinemark.com/nokia-finally-tuning-into-the-masses-319745960b6.html
Alexander, M (2008, June 6). Mobile Revolution in India. Retrieved November 25, 2010, from http://ezinearticles.com/?Mobile-Revolution-in-India&id=1229132
Nokia (2000, August). “Towards Telecommunications.” Retrieved November 23, 2010, from http://www.nokia.com/NOKIA_COM_1/About_Nokia/Sidebars_new_concept/Broschures/TowardsTelecomms.pdf
Avec Mobile. (2009, December 4). “The Secret Code for Success at Nokia.” Retrieved November 23, 2010, from http://www.avecmobile.com/index.php?id=1309
World Intellectual Property Organization (2006, February). “Profiles in Innovation: Nokia – Honing IP to Business Needs.” Retrieved November 23, 2010, from http://www.wipo.int/wipo_magazine/en/2006/01/article_0003.html
Greene, Meg. Reference for Business. “Jorma Ollila.” Retrieved November 23, 2010, from http://www.referenceforbusiness.com/biography/M-R/Ollila-Jorma-1950.html
Nokia is the current, and historical, global mobile telephone industry leader. The company, which launched the first personal mobile telephone, has seen its global leadership wane in recent years as a result of the company’s transnational strategy. A failure to adapt to changing consumer trends in vital markets created a perceived absence in critical markets and rapidly declining market share in emerging markets such as China and India. If the company wishes to reverse these recent trends we feel they must adopt a new operating system (OS) and regain a visible presence in the North American market through a more desirable product offering.
TELECOMMUNICATIONS INDUSTRY
Technological Changes
The telecommunication industry has changed dramatically over time. Initially, communication occurred over phone lines. Then, in the 1990’s phone calls were able to take place over data lines. As this trend continued, there became a convergence of the computer and telecommunications industries. This convergence resulted in new products being manufactured to meet customer needs.
The launch of Apple’s iPhone in 2007 revolutionized the market. There had previously been Smartphone on the market, but Apple was the first to use a multi-touch interface with a superior web browser compared to their competitors. A Smartphone has an embedded OS, which allows the phone to perform tasks that previously were only performed by personal computers.
With the Smartphone, came the capability to use this mobile device for more than just voice communication. Depending on the model, Smartphones have the ability to function as a camera, media player, personal navigation device, games, and to make payments, which is routine in Japan and South Korea.
Demographic Trends
In the 3rd quarter of 2010, mobile phone sales grew by 35% compared to the 3rd quarter of 2009. Smartphones alone increased by 96%; however, the increase in Smartphone sales was primarily isolated to mature markets.
In the emerging markets, ‘white-box,’ or no brand phones, accounted for a large portion of the increase associated with the “other” category, which are manufacturers not in the top ten. ‘White-box’ products, being manufactured in China and Asia, have expanded into other markets including India, Russia, Africa, and Latin America. These products meet the needs of consumers who cannot afford the more expensive mobile phones, and the increased sales have impacted the top mobile phone makers. Nokia, the largest mobile phone provider, are particularly vulnerable on their low-end products. Their market share decreased to 28.2% from 36.7% partially due to this trend. “’White box’ competition will continue to cannibalize sales from the major manufacturers, largely by mimicking handsets like iPhone or BlackBerry, while offering more features… at lower price points”, according to Dr KF Lai, CEO of BuzzCity.
Currently, only 5% of Chinese phone users have a Smartphone. However, this market is expected to grow to 50% by 2015. Price is the main inhibitor, but with Smartphones becoming less expensive, they will become more affordable to the masses.
The Indian market, with its surge in economic growth and development, has seen an increased demand for low-priced but feature heavy mobile phones. The mobile phone is now being considered a necessity for communication. Businessmen use them to be available to their clients and much of their business transactions occur over the phone. For the youth of India, the cell phone is a style statement and considered a must have item along with extra features. Experts believe that in the future, the family will own multiple mobile devices.
In India, there are enough cell phones for 45% of the population. According to a United Nations study, more individuals have access to a mobile phone then a toilet. “It is a tragic irony to think that in India, a country now wealthy enough that roughly half of the people own phones, about half cannot afford the basic necessity and dignity of a toilet," states Zafar Adeel, Director of United Nations University Institute for Water, Environment and Health.
Economic Climate
In 2009, the market for handsets decreased significantly. The overall global market shrunk by 7%; however, the demand for Smartphones increased by 15% which helped the telecommunications companies’ weather the downturn. This increased demand for Smartphones, even during the recession, gave a strong signal to the market regarding the shift in consumer buying. Companies currently producing Smartphones focused on improvements to their current product. Those not manufacturing Smartphones considered doing so in order to be part of the trend. The environment quickly became competitive.
With the flood of new innovative phones, it became more difficult for mobile phone providers to differentiate themselves from the competition. The mid-level phone manufactures suffered due to the fierce competitive environment in that market segment. Consumers are becoming more demanding resulting in manufactures increasing R&D in an attempt to remain competitive.
NOKIA BACKGROUND
The Nokia Corporation, who got their name from their headquarters in Nokia, Finland, was formed when three Finnish companies, Finnish Rubber Works, Finnish Cable Works and Nokia Company, merged in 1967. With this merger, the new corporation had four major business units: forestry, rubber, cable and electronics. They manufactured everything from rubber boots, to cables and tires. At the time of the merger, the Electronics division accounted for roughly 3% of total sales for Nokia. During the next few decades, the company aggressively expanded into markets around the world as well as entering new product markets such as manufacturing light bulbs and chemicals. It wasn’t until Jorma Ollila became CEO of the company that they shifted gears and decided to focus solely on the telecommunications industry.
In 1975, the Nokia Electronics department broke off into three distinct groups, one being telecommunications. Then head of the department, Sakari Salminen was determined to make it a significant portion of Nokia’s business portfolio. When the first cellular network, Nordic Mobile Telephone (NMT) Service, was opened in 1981, Nokia was positioned as one of the market leaders due to their geographic location as well as their already established foothold in the mobile phone market. With the establishment of the network, which spanned across several countries including Sweden and Finland, began the rapid expansion of the mobile phone industry. While Nokia was already providing mobile phones for other standards in Europe, they introduced their first NMT mobile phone, the Senator, to the market in 1982.
When Jorma Ollila became CEO of the company in 1992, Nokia shifted focus completely to the mobile phone division. Their efforts to expand the division resulted in selling off all non-telecommunications business units in order to create a clear focus for the organization and increase cost efficiencies. With this shift, Nokia was transformed into one of the world’s leading mobile phone manufactures, with profits increasing 400% and their stock price rising over 2,000% between 1993 and 1999. They were also one of the main developers of Global System for Mobile (GSM) technology. This once again solidified Nokia as a leader in the industry, as GSM technology was chosen as the standard for digital mobile technology in many markets. By 2000, Nokia had supplied GSM technology to 43 countries spanning the United States, Europe, Asia and Africa.
Nokia’s business strategy revolved around highly efficient manufacturing processes and logistics. They outsource only components and kits for their phones, but do all of the manufacturing in house. This allows Nokia to streamline their processing and has resulted in extremely cost effective products – their average cost across all mobile phones surpasses almost all of their competition. As of 2000, they also had manufacturing facilities in more than 10 countries which allows them for increased logistics efficiencies as they are closer to the markets they service.
Innovation has also historically been a key strategy for Nokia. They founded the Nokia Research Center in 1986 which has facilities in seven countries across four continents. This allows them to leverage work-wide knowledge when developing new products for the ever changing demands of mobile phone consumers. The company also places importance on intellectual property and is one of the top five users of the Patent Cooperation Treaty in terms of the number of patent filings the company has. They have been so successful in this arena that nowadays they are not the only users of their patents – they are used across the competition in mobile phone manufacturing.
NOKIA TODAY
Nokia has recently appointed Stephen Elop to replace the outgoing President and CEO, Olli-Pekka Kallasvuo. This was seen as a significant step for the company as it has always chosen a Finnish executive to lead the company. For some, this search for talent outside of Finland is seen as a first step to turning around the company. Elop was previously head of the Business Division at Microsoft and responsible for the Microsoft Office line of products.
Nokia’s new CEO has a number of challenges that have hampered the company that was once known for its market leading mobile devices. In Elops’ own words,
“My role as a leader of Nokia is to lead this team through a period of change, take the organization through this period of disruption…to meet the needs of its customers, while delivering superior financing performance.” – Steven Elop
Since the release of Apple’s iPhone in 2007, the Finnish mobile phone maker has lost nearly 75% of its market capitalization and dropped to a $9.60 share price from a high of $40 in 2007. The reason for this dismal financial performance is the lack of competitiveness in both the budget mobile phone market and the pricier, Smartphone market.
In search of a global presence, the company made a fatal mistake when it came time to enter the U.S. market. They did not understand the intricacies of the market and attempted to market its phone as it did in the rest of the world. For starters, in the United States, consumers typically buy a phone with a two-year contract attached to it. For the carrier, this gives them a sense of stability in terms of a reoccurring revenue stream. Carriers make very little on the sale of each handset compared to the high margin phone and data packages they receive from the monthly billing of each customer.
In Europe and Asia, users are more accustomed to GSM phones, which allow them to insert a SIM card of the carrier they have chosen to use with their handset. The downside to this is that users there often pay full retail price, which in comparison is typically 300-400% more than a contract device.
But why would anyone pay a 300-400% mark-up for the same device? The answer is the freedom to use any mobile carrier, which is convenient when you travel abroad. For example, a user in London with an unlocked device can travel to Paris and insert an Orange France SIM prepaid card and pay a similar rate to what native Parisian would pay for mobile minutes and data usage. In comparison, roaming in Paris with your UK mobile line would incur fees that could greatly exceed the 300-400% markup paid for an unlocked phone.
Nokia’s lack of carrier partners in the U.S. results in an unfamiliarity of Americans with the Nokia name when shopping for a mobile phone. That is not to say that Americans would buy a Nokia device even if they were familiar with the products because of other, superior products and vast competition in the market.
Another disadvantage to Nokia’s strategy is that they are one of the few hardware manufactures left using the Symbian mobile operating system. Sony Ericsson and Samsung, which were previously also using Symbian, have transitioned to Google’s more popular, Android mobile operating system. The main problem with Nokia’s Symbian operating system is that the user experience does not compare to what is offered on Apple’s iOS or Google’s Android operating system. If we think back to when the iPhone was release in 2007, the one thing that separated it from other Smartphones was its ability to deliver a web browsing experience similar to your desktop browser. There was nothing like it at the time. The ability to pinch-to-zoom, and flick your finger to move across websites is still considered the gold standard in mobile web browsing.
Aside from web browsing, the ability to download applications (“apps”) is a feature that Smartphone users desire. Take the success of Apple’s iOS App Store, which features nearly 300,000 apps, or Android’s Market which has over 150,000. The interesting story behind the Apple and Nokia rivalry is that Nokia actually had the ability to run apps before the iPhone came out in 2007. In fact, Nokia saw this opportunity to market its flagship device at the time, the Nokia N95, in ads flaunting its ability to run apps. In one ad, it displays “open to anything.” When the iPhone first came out in 2007, it did not have the ability to download apps and were only allowed to use the applications that Apple installed from the factory. Nokia clearly knew this was a feature that users wanted, but because they did not have a centralized apps store, users were left to search the Internet for downloading Symbian apps.
The lesson learned from this is that mobile users want a central place to download applications. Today, every mobile operating system has some form of an apps store, including Nokia, which recently opened Ovi, its own app store. Currently the store only has 20,000 apps, which is paltry compared to Android and iOS stores. The number is so low because developers and companies do not have an incentive to write the same app for one more platform. Many developers are naturally attracted to the platforms that have the greatest number of users. It does not make sense for them to write an app for iOS, Android, BlackBerry and Nokia. They are simply choosing not to develop Nokia apps. If Nokia wants to continue its global dominance and growth, they will need to court the developer community and work with them to make the platform more attractive. One way may be to increase the developer’s share of revenue for each app sold. Currently, Nokia shares 70% of the revenue with developers, matching Apple’s App Store. They need to do better than match; possibly increase it to 75-80% of the revenue.
RECOMMENDATIONS
It is clear that Nokia’s position as the worldwide leader in the mobile telephone industry is eroding. The company, which grew to dominance through a history filled with acquisitions and mergers, refined its business focus in the final decade of the twenty-first century to emerge the global leader at the new millennium’s onset. However, by 2007 this position of dominance had began to wane and in the past three years Nokia’s future prospects have become increasingly less bright. In order for Nokia to proactively combat this sea of change, we suggest the following: move beyond the Symbian OS and adopt a more industry accepted platform, and develop the North American market through a strategic partnership with an American carrier.
The first, and most important, recommendation is that Nokia free itself from the Symbian OS and adopt a more industry accepted OS. Two OSs that Nokia could easily integrate into its products are Windows Mobile 7 and Google’s Android. Both of these mobile OSs are experiencing rapid growth and acceptance in the marketplace. Symbian on the other hand, has seen rapid loss of market share in recent years with all major third party vendors (Motorola, Samsung, LG, Sony-Ericcson) withdrawing from the platform. Only Nokia and a small handful of Japan specific vendors remain. Similar to the manufacturers who have lost faith in the Symbian OS, so too have other critical groups such as analysts, the press, and the developer community who all feel the OS lacks relevance and credibility.
Currently, Nokia denies any plans to switch to another OS and in November 2010 announced that it had purchased the Symbian Platform and have taken over all new development. In recent years, Nokia has been the major contributor to the code, maintaining their own code repository and only occasionally releasing features to the public repository. On December 17, 2010, all Symbian Foundation public websites, wiki, and code repositories will cease and Nokia will be in total control of development. This move was predicated, in part, on the fact that the company believes it to be more cost effective to purchase Symbian outright and take over development rather than pay the Foundation ongoing licensing and consulting fees. However, if cost control were the company’s primary objective, an adoption of Google’s Android OS would have been a more straight forward and efficient method to manage this expenditure. Google gives Android away for free, it is an OS that has an ever-growing developer community, and would allow Nokia to do what it does best – manufacture hardware.
In addition to Nokia freeing itself from the Symbian OS, another strategic change the company must embrace is a larger stake in the North American market. This can be accomplished with a desirable product offering. In the North American market, Nokia has been bleeding customers in the high-end phone market where Smartphones dominate. Nokia’s newest product offering in this category, the N8, is an excellent product complete with an industry leading 12 megapixel camera, 720p video recorder, Carl Zeiss optics, and several other features that the company could easily leverage to expand its presence in this essential market. However, the N8 is priced at $549 and is not sold with a carrier discount. To be competitive in the price sensitive North American market, Nokia must partner with a service provider. This has been a move Nokia has been reluctant to make in the past as it would require them to relinquish some control. The company’s massive size and global market supremacy has led Nokia to be reluctant to succumb to pressures put forth by partners, but with a North American market share that has diminished to about 7%, better partnerships and a renewed interest in capturing market share are believed to be essential.
If Nokia chooses to move beyond the Symbian OS and adopt an OS with greater industry support, the company will leverage its strengths and ultimately become more competitive. The freedom from OS development will allow Nokia to develop superior hardware which is their strong point. They can continue to design and build superior, high-end products free from the financial burden software development presents. A reallocation of R&D resources from software to hardware will allow the company to bring down unit cost and prove beneficial. Furthermore, a partnership with a North American carrier is needed. Through this, the company will be able to offer products at more competitive price points and grow North American market share. With these strategic recommendations put into action, Nokia will be in position to reverse the company’s recent trending market share loss.
This paper was written as a supporting document to a presentation given by Jeremy Person in Dr. David Reid's Transnational Management class while earning his MBA at Seattle University less than a month prior to Nokia announcing its partnership with Microsoft in November 2010.
REFERENCES
Bartlett, C., & Beamish, P. (2010). Transnational Management (6th ed.). (pp. 420, 513-514). New York; McGraw-Hill/Irwin.
Muppala, N. K. (2010, August). Smartphone Ecosystem. Retrieved November 8, 2010, from http://www.sramanamitra.com/2010/04/08/smartphone-ecosystem-market-share-part-1/print
Smartphone. (2010). Smartphone – Wikipedia. Retrieved November 23, 2010, from http://en.wikipedia.org/wiki/Smartphone
Gartner. (2010, November 10). Gartner Says Worldwide Mobile Phone Sales Grew 35 Percent in Third Quarter 2010; Smartphone Sales Increased 96 Percent. Retrieved November 23, 2010, from http://www.gartner.com/it/page.jsp?id=1466313
Phillips, R. (2010). The rise of White Box mobile phones. Retrieved November 24, 2010, from http://www.webaddict.co.za/2010/11/18/white-box-mobile-phones/
Jingting. S (2010, September 1). Sony Ericsson eyes smartphone market. Retrieved November 24, 2010, from http://www.chinadaily.com.cn/bizchina/2010-09/01/content_11240279.htm
IBN Live - Society. (2010, April 15). India has more cell phones than toilets: U.N. Retrieved November 25, 2010, from http://ibnlive.in.com/news/india-has-more-cell-phones-than-toilets-un/113338-19-93.html
Alexander, M. (2010, October 23). Nokia Finally Tuning Into the Masses. Retrieved November 25, 2010, from http://technology.ezinemark.com/nokia-finally-tuning-into-the-masses-319745960b6.html
Alexander, M (2008, June 6). Mobile Revolution in India. Retrieved November 25, 2010, from http://ezinearticles.com/?Mobile-Revolution-in-India&id=1229132
Nokia (2000, August). “Towards Telecommunications.” Retrieved November 23, 2010, from http://www.nokia.com/NOKIA_COM_1/About_Nokia/Sidebars_new_concept/Broschures/TowardsTelecomms.pdf
Avec Mobile. (2009, December 4). “The Secret Code for Success at Nokia.” Retrieved November 23, 2010, from http://www.avecmobile.com/index.php?id=1309
World Intellectual Property Organization (2006, February). “Profiles in Innovation: Nokia – Honing IP to Business Needs.” Retrieved November 23, 2010, from http://www.wipo.int/wipo_magazine/en/2006/01/article_0003.html
Greene, Meg. Reference for Business. “Jorma Ollila.” Retrieved November 23, 2010, from http://www.referenceforbusiness.com/biography/M-R/Ollila-Jorma-1950.html
Jones Soda: Strategic Review and Analysis
Industry - Background The United States Consumer Goods economic sector has a market capitalization of approximately $74,882 billion and is divided between those goods that are either cyclical or non-cyclical in nature.[1] This separation is based upon the level of correlation a particular company’s, or industry’s, equity value is to fluctuations in economic conditions. Cyclical goods are, typically, highly correlated to the economy while Non-Cyclical companies are not. Consequently, the securities of Non-Cyclical Consumer Goods companies are often referred to as defensive stocks and continue to achieve steady profits even throughout economic downturns because they produce and/or provide goods and services that have consistent demand, such as food, beverages, and personal products.
Within the Consumer Non-Cyclical sector is the Non-Alcoholic Beverages sub-industry, which is also referred to as the soft-drinks sub-industry. The soft-drinks sub-industry has a current market capitalization of $1,237 billion and includes global powerhouses such The Coca Cola Company, Pepsico, and Dr. Pepper Snapple Group, as well as more specialized niche players such as Hansen Natural, Reed’s Inc., and Jones Soda.[2] These companies operate in a mature and highly competitive industry that can trace its roots back to the late 1700’s, when Joseph Priestly created soda water after discovering a method of infusing water with carbon dioxide.[3] By 1900, following a series of technological advances and new flavor offerings, the soft drink industry was well on its way with many of today’s modern soft drink brands (Coca Cola, Pepsi, Dr. Pepper, etcetera…) having entered the market. Now, entering the second decade of the 2000’s the soft-drinks industry is highly mature and dominated by The Coca Cola Company and PepsiCo, who hold 41.9% and 29.9%, respectively, market share of retail dollar value.[4]
New market entrants have created a niche within the soft drink industry, which is referred to as the alternative beverage industry. This niche is estimated to be worth an estimated $16 billion and is dominated by Hansen Natural who produces the Monster line of energy drinks.[5] Other participants in this niche include Red Bull, Hornell Brewing, Reed’s Inc., and Jones Soda. While many alternative beverage industry companies are ultimately acquisition targets for the major players due to their small size and inefficient administrative capabilities, others have been able to survive by producing differentiated products and not directly competing with the majors.
According to the latest S&P Industry Report, the fundamental outlook for the soft drinks sub-industry is neutral, with long-term prospects bright for US beverage companies bright in foreign markets, where significant opportunities of consumption growth exist throughout developing and emerging markets.[6] However, for those who operate in the alternative beverage industry the outlook is less clearly defined. Consumption of premium and specialty soft drinks has fallen in recent years as a direct result of the current macroeconomic climate. Furthermore, alternative beverage industry manufacturers cannot rely upon economies of scale to create efficient marketing and distribution networks necessary for growth and effective competition within this highly competitive market.
Jones Soda - Background In 1986 the Urban Juice and Soda Co. was started by Peter Van Stolk as a beverage distributor in Western Canada. By the mid 1990’s Van Stolk had begun developing his own soda products and launched Jones Soda in January of 1996. Fully understanding that the industry is dominated by a few very large and powerful players the Jones Soda sought to differentiate itself within this space by targeting a consumer who was thought to be young and cynical. In an effort to connect more with the target customer base consumers were asked to submit photos that could potentially be used as bottle labels. The result of this uncanny approach to branding allowed Jones Soda to gain a small, but critically important, foothold in the soft drink market and create a unique personality for the brand. In 2000 the Jones Soda Company was incorporated in Washington State and its headquarters was moved to Seattle. This allowed the company to refine its focus on United States sales and distribution and enter a dramatic growth phase.
A year after Jones Soda was launched the company produced gross revenues of $2.4 million. By 1997 gross revenues peaked, with an annual sales figure of $39.83 million in 2007. The company developed a cult following amongst its consumer base because of its ever changing line up of photos that were exhibited on its bottles. From 1997 to 2007 the company received over 1 million photo submissions and used 4,372 different photos for bottle labels. The company created a website for photo submissions that quickly developed in to a social network for Jones’ target customers to, “chat, blog, enter contests, share movies, and download freebies.”[7] Through this medium the company received many customer generated ideas, some of which were carried through and ultimately brought to market, thereby providing consumers with an interactive experience that conveyed a sense of ownership in the brand.
As business grew so too did the penetration of the Jones Soda brand into the domestic soft drink market. The company began establishing relationships with distributors, retailers, and other channel partners. The company also entered into a licensing agreement with QWEST Field, in Seattle, as the exclusive soft drink provider for all Seattle Seahawk home games.[8] In addition, a similar agreement was inked with Alaska Airlines and Horizon Air, who would serve Jones Soda on all of their flights. The QWEST agreement was terminated in June 2010 and the Alaska Airlines and Horizon Air agreement was terminated in March of 2010. Both now serve Coca Cola products and cite consumer demand as the driver for these decisions. These partnerships were critical elements in the company’s strategic vision and were intended to further develop the Jones Soda brand and increase consumer awareness.
The company had expanded rapidly throughout Jones Soda’s first 10 years and achieved four straight years of profitability. On April 16, 2007 the company’s equity value peaked at $31.54 per share making Jones Soda a company with a market capitalization of approximately $827.93 million. From thereon, however, the value of the firm would only fall with the company’s current market capitalization approximately only $33.90 million, a reduction of nearly 96%. Throughout, the same period, ‘07 – ‘11, Jones has seen its gross revenues fall from the 2007 peak of $39.83 million down to $17.53 million. Each year since 2006 has produced negative net income, a shrinking payroll – currently Jones employs only 40, 21 of which are employed in sales & marketing capacities[9], and 4 different CEOs.[10]
Jones Soda - Today Given Jones Soda’s dramatic rise and fall the company has chosen to remain true to its core values moving forward. Jones Soda believes that it has built its brand on its independent counter-culture image as well through the unique and exciting flavors it offers, which are targeted at consumers who prefer alternatives to large, corporate soft drink manufacturers.[11] Marketing efforts are centered on product placement rather than traditional media such as television or magizine advertisments. The company also employs Jones Soda RVs that travel throughout the United States distributing product and interacting with consumers on the streets. While the agreements with QWEST Field and Alaska Airlines and Horizon Air no longer exist, Jones Soda still has exclusive distribution agreements with the Portland Trail Blazers and the New Jersey Nets in their home venues on game nights. These tactics, together with the company’s to its unique labeling strategy, which also includes the possiblity to create custom bottle labels, has allowed to Jones to remain a, currently, viable going concern while moving through a period of massive top line deteriation.
Jones Soda currently offers a number of unique products. These include: a) Jones Soda – pure cane sugar sodas; b) Jones Zilch – a zero calorie soda; c) WhoopAss – an energy drink; and d) Jones Candy – carbonated hard candies. The three drink offerings allow Jones Soda to enter into different niche segments of the soft drink industry and cater to the unique needs and wants of a larger cosumer population. Furthermore, certain product lines, such as WhoopAss, allow Jones to gain a foothold in key channels (like gas stations and convenience stores ) where their products would otherwise be shut out. Moving forward the company intends on building its sparkling beverage portfolio and introducing a new, more natural and lower calorie, product in the natural sparkling segment.[12] The current products and those that are intended to be launched in the near term future are build around the belief that a diversified assortment of product offerings by Jones will benefit the company in a number of ways. The first such method is through the revenue growth possible by expanding the Jones Soda brand into complementary market segments. Next, Jones believes that it can reduce its overall risk profile with a more divesified product portfolio. Finally, the company understands that the critical link in the soft drink industry is the distributor partnerships and a more comprehensive product offering will entice distributors to push Jones products more proactively.
Jones Soda’s Core Competencies In order for Jones Soda to see its strategy on through frution the company must find the resources and capabilities that will produce or allow them to act upon possible competitive advantages. Unfortunately Jones Soda’s competencies have gone by the wayside so to speak and the resources and capabilities are few and far between; the Jones Soda of today is no longer as nimble, innovative or as edgy as it was in 2006 or 2007. Moreover, the company seems to be considering ending the costly sponsorships that are, ironically, quite necessary to reach the mainstream consumer the company aspires to reach; also the company doesn’t have any joint venture or alliance possibilities that could potentially supply resources and capabilties the company could use for its distribution expansion. In the beginning it was innovative consumer engagement, peculiar named and flavored sodas, and brand ambassadorship that created the only obvious competetive advantage the company ever possessed and ultimately, these competencies may just be what keeps the company a going concern.
The consumer engagement competentcy stems from the interactive marketing ethos at Jones Soda Company-this type of marketing is social in nature and attests that “percevied…quality depends heavily on the quality of the buyer-seller interaction,”[13] the leveraging of their social media campaigns, and the ability to create a dialogue with the consumer. The portals for customer engagement are www.myjones.com and www.myjonesmusic.com. The myjones site is where the “open source access” consumer can submit the photographs for possible labeling on a Jones Soda brand or create their own “brand” for a celebration like a wedding or graduation.[14] The myjones site is also where the notion of mass customization is on display. By offering the customization on demand and providing a differentiated product like a personalized soda “brand”, the company puts itself in a position to reap profits off of a low cost and wildly interactive touch point.
The brand ambassadorship is showcased in the sponsoring of alternative athletes like: The Ultimate Fighting Championship fighter Ryan “Darth” Bader and the world champion snowboarder Lindsey Jacobellis. By utilizing the popularity of the ambassadors Jones Soda has been able to place products at events and competitions where these athletes perform and their mutual fans congregate.
Jones Soda’s Limited Control of its Product Jones Soda’s 10-k uses the term “research and development” one time. The company, needless to say, does not put much stock into R&D and unfortunately, this reality severly limits their control over true product development. According to Jones Soda’s 10-k the company contracts the license or right to manufacture Jones Sodas to 3rd party manufacturers and it is these manufacturers that purchase many raw ingredients with one of them being the flavor concentrate or syrup. For some soda beverage companies the flavor concentrate is the most critical component to the brand, competitive advantage, and the company’s market share. For instance, Coca Cola’s flavor recipe is a legendary asset and secret! For Jones Soda, the flavor concentrate formula is a secret actually being kept from them as “the flavor suppliers own the proprietary rights to the flavors.” This is a different approach as a “reliance on 3rd party contract manufacturers…could make management of [Jones Soda’s] marketing and distribution efforts inefficient or unprofitable,”[15] but the predicament does, however, allow Jones Soda to realize cost savings related to this arrangement.
Jones Soda also licenses or contracts out the packaging and manufacturing of their products to 3rd party manufacturers. These agreements call for the “co-packers” to manufacture and store the finished goods either on-site or at other 3rd party warehouses. These co-packers have the bargaining power as they can terminate the contracts at any moment for no reason at all. [16]
Distribution and Logistics Jones Soda has at least 4 distribution channel strategies. One is the Direct to Store Delivery (DSD) channel. The second is the Direct to Retail (DTR) and the third is Direct to the Consumer (B2C) or interactive online e-commerce channel through www.myjones.com and www.jonesoda.com. And fourth is the concentrate soda channel. Each has its own merits and pitfalls and some stores and retail establishments utilize both DSD and DTR and this “blending” is precisely what Jones Soda wants to see happen. Because as the company expands its SKUs in the form of line extensions they hope to “different brands…through alternate channels” in hope so securing more shelf space to get a piece of the “take home market.”[17]The primary channel is the DSD channel with 90% of core case sales sold through this channel. This is an increase from 75% in 2009. The DSD channel utilizes independent distributors and Jones Soda has nearly 160 that currently transport their products. The top 10 distributors make up 44% of the total case sold sales amounts and as consumer awareness picks up, Jones Soda has stated that they intend to rely less on any one distributor.
The company has very little supplier bargaining leverage and is required to sign 1 to 3 year agreements with the DSD distributors. They are also required to pay fees if they bypass these distributors and somehow make the delivery on their own. The company is utilizing Millers/Coors distributors who are willing to carry more SKUs than the Anheuser Bush distributors that are only willing to carry to top selling SKUs of any category. Walmart is one of the larger accounts that the DSD channel services and Jones is currently looking to galvanize the distribution network in order to gain complete access to the 3800 U.S. based Walmarts. The DTR channel’s main contracts are with Canadian subsidiaries of Starbucks, Meijer and Costco. Kroger, which is QFC and Fred Meyer, also carries Jones Soda through the DTR channel. The retailers are responsible for the distribution (pick-up and delivery) of the products.
Overall the capability to get the product to the shelf looks to be improving for Jones Soda. The true test will be whether or not the company can keep up with Walmart’s supply chain demands. If Jones Soda can leverage the AB distribution and stock the Walmart shelves, the distribution capabilities will surely be responsible for it happening. Jones Soda believes the “optimum distribution channels for Jones Soda are the grocery, mass and club channels while the convenience channel provides the biggest opportunity for Whoopass Energy Drink.”
Competition The competitive landscape within the Non-Alcoholic Beverages sub-industry is fierce. Jones Soda does compete with Coca-Cola and PepsiCo for consumer awareness and shelf space in addition to the other alternative “New Age” purveyors; and as consolidations take place and companies with larger pocket books are putting pressuring distributors not to carry Jones Soda,[18] the company is facing steep odds to just utilize the AB distribution network let alone flourish with it. In the 2010 10-k Jones Soda states that it competes directly with market leaders Red Bull and RockStar in the energy drink space and with Hansen’s in both the carbonated soda and energy drink categories.
Hansen’s as we stated earlier is has a “monster” sized market share of the $16Billion alternative beverage category. Its most prominent brands are Hansen’s Natural Soda, Blue Sky, and Monster Energy. Hansen’s core competency, according to one article, is marketing as their ability to outsource the production and manufacturing aspects of their business allows them to focus on the two distinct product category consumers: the all-natural soda consumer and the rough and edgy energy drink consumer. They are beating Jones Soda at Jones’ own game.[19]
Red Bull’s core competency is advertising and creating a brand family. They use a similar tactic that Richard Branson and his Virgin brand family does: they utilize the parenting advantage. Of course without the brand slogan of “Red Bull it gives you wings” and the success of its core products: Red Bull Energy and Red Bull Cola, the company wouldn’t have the competitive advantage in place to utilize the parenting advantage. But because the brand name is so popular the company can put Red Bull in front of any sport team, sports complex or include it in a cocktail: Vodka Red Bull and it will sell. The company also uses guerrilla marketing and street-level interaction with its core consumers. The company utilizes its sponsorships and endorsements perfectly. They have the counter culture locked down and they also take advantage of the mainstream’s consumer’s appetence for performance enhancement.
Jones Soda – Expansionary Strategy in 2007
Until 2007, Jones had been a regional niche player in the softdrink industry, but after successfully leveraging the strengths of its core competencies and achieveing four years of profitablility, Jones Soda Company decided to expand. Jones’ management determined that expansion would require a new strategy to put them on the playing field with large entrenched competitors. This strategy included packaging the majority of their unique sodas in aluminum cans (while still retaining some in bottles) , selling through new additional distribution channels on top of its presence in small stores and skate shops , and lastly spending a lot more money on advertising than in the past. Many, including those on Wall Street, had faith in Jones’ expansion strategy and, believing that it was poised for growth, drove its stock price to its peak of $31.54 per share in April of 2007.
Unfortunately, Jones Soda’s expansion plans did not prove to be as successful as anticipated. Sales of their sodas struggled throughout the remainder of 2007. Regular customers and members of Jone’s cult-like following rejected the new aluminum canning, purchasing only their bottled sodas. The lesser number of new customers it garnered ( most of which did not necessaritly identify with the brand culture) purchased some canned sodas and largely ignored the bottles. Jone’s also failed to achieve the level of distribution and large-scale brand acceptance it required to support expansion. Although the new packaging allowed its sodas to get into new retail locations, Jones’ advertising and selling efforts did not accomplish the necessary task of assimilating (enough) new customers into the culture which had originally made Jones and its sodas popular within its niche market. The majority of Jones’ advertising budget was spent on its huge locally-focused license agreements with QWEST and Alaska Airlines as well an immense sales staff, which promoted sales to and through distributors, and not on a national campaign of advertisements to increase brand awareness. On top of it all, the economy was entering serious recession and new and loyal customers in the domestic market were not purchasing as many premium brand and premium priced sodas as in the recent past.
Jones’ attempt to extend its brand and expand the company, had only resulted in brand cannibalization and brand dilution. This in turn led to weaker sales, and a 2007 net loss of $11.63 million. Although Jones’ strategy appeared to fit because it considered the major elements required for it expand and break into national competition, their execution of the strategy proved a failure.
Jones Soda – 2008 to 2009 Redirection 2008 brought similar results for Jones Soda. Revenues continued to decline resulting in an even greater year-end net loss of $15 million. Given their failures in 2007, Jones decided their strategy was to blame. They realized they had offended loyal customers by diluting the purity of the brand and bottle culture with aluminum cans while attempting to break in national competition with competitors like Hansen’s and Reed’s, and even the big boys Coca-Cola and Pepsi. As a result, they decided to revise their strategy and eventually to replace former CEO John Ricci with a soda industry veteran, William Meisner.
The new strategy would be similar to their original expansionary strategy in terms of distribution and advertising, but had one major exception. Instead of canning their line of uniquely flavored sodas and alienating their customer base, Jones would revert back to bottles and also introduce a host of additional products. These included, but were not limited to, Jones GABA, a juice drink designed to increase energy and focus, Jones Jumble, a mysterious mixture of four of their sodas, and Hispanic Jones, a line of drinks inspired by Hispanic flavors.[20] Jones would also try to reintroduce its own energy drink, WhoopAss, a brand with which it innovatively introduced in the mid-1990’s, but then pulled and failed to re-launch time when competitors introducd their own very successful brands.
The new strategy also focused on continued progress in achieving greater peneteration into new and existing distribution channels. Jones’ new CEO Wiliam Meissner expanded the number of independent distributors it utilized from 140 to 160 and increased retail penetration into Wal-Mart stores to 75%. Jones also plannd to penetrate the convenience store and gas station market with its WhoopAss energy drink, which it hoped would open the door for its other brands. In the face of mounting losses, Jones also decided to drastically cut its sales staff, retaining only twelve employees to ensure adequate force to promote effective sales and distribution.
Jones’ results at the end of its strategy revision and execution were much the same as in 2007. Despite refocusing and labor cuts, sales revenues continued their decline. In addition, their equity line of credit would be closed and forcing Jones to surrender $4.1 million in stock to satisfy their liability. Jones Soda even received and considered offers to purchase the company, including one offer in late 2009 from Big Red Holdings ( a private holding company that owns several soda brands including Big Red, a cream soda-style drink popular in the southern U.S., and NuGrape) for $7.9 million or 0.30 cents per share.[21] With failing strategies, mounting losses, almost no credit availibility, and competitors poised for takeover like predators, Jones Soda realized that something must be done or their end was near. CEO Meisner decided to take one more stab at returning the company to profitability, by revising their strategy yet once again.
Jones Soda – 2010 and Beyond Jones Soda’s most recent annual filing stated, “We intend to build upon our sparkling beverage portfolio in 2011 by introducing a new more natural and lower calorie product in the natural sparkling segment. This will round out our offerings within the sparkling beverage category so that we have product representation over the three main subsets within the sparkling category (carbonated soft drinks, energy, and natural sparkling).” It later states, “the primary strategy is to increase sales by expanding distribution of our products in new and existing markets (primarily within North America).”[22]
The Company’s management recoginzes the need for continued change while getting back to their core competency of making soda. That means they must capitalize on the opportunities that may exist within the current distribution chain they utilize and expanding beyond to reach an even greater market. In a more recent earnings call CEO Meissner elaborated further on the prior strategy stating, “One, increasing our distribution network and capabilities, two penetrating more grocery store chains, three, marketing and fostering distributor engagement in WhoopAss, and four adding a key component to our core brand strategy: an new all natural sparkling beverage in 2011.”[23]
“To execute this strategy the company plans to:
· Move almost exclusively to DSD (direct store delivery)
· Capitalize upon agreement with Wal-Mart
· Tighten up inventory control
· Increase spending on slotting fees and promotional allowances
· Increase grocery store penetration from 8% to 14% in 2011
· Fill the void left as Coke and Pepsi have bought up energy brands that used to be distributed by independents”[24]
Jones Soda Co.’s current CEO and board have finally come to the realization that they need to stop shopping the company around for prospective bidders. This has allowed the focus to return to the strategy of growing and aligning the business with its industry. In the soft drink industry of Jones Soda’s direct competitors only those with annual revenues of over fifty million dollars were profitable in the last fiscal year.[25] This demonstrates the need for Jones Soda to focus on reenergizing and restoring sales to 2007 levels when they were last profitable. Majority of the strategy going forward is accurately tied to the need for growth and explicitly state the areas being targeted for expansion. Previous CEOs have felt the need to further diversify the company’s product offering which diluted the brand and now they recognize the need to return to their roots and more effectively leverage distribution options.
CFO Mike O’Brien elaborated on the primary distribution opportunities being pursued and why. Due to the improved cash position Jones will now be able to expand through Anheuser Bush distributors, which provide superior service quality and access to a greater network of retailers. However, the Company still plans to utilize Miller/Cours distributors for areas being underserved or slower than Anheuser Bush. O’Brien expected expanded sales as a result of more counties being covered and higher revenue velocity due to improved restocking service. In addition, he believes that WhoopAss could be used to fill a gap in the energy drink arena, mainly stocked by gas stations and convenience stores, and allow them to push for additional shelf space. Last they indend to exploit the fact they use pure cane sugar in their products would could allow them to be sold at Whole Foods and other health minded stores.[26]
Jones Soda – Strategic Recommendations Jones Soda’s leadership needs to continue the path of strengthening their distribution network to grow revenues. The need to continue to focus on the historic products before they go down another rapid expansion path, expand where the product is sold rather than extensively increase the types of products being offered. Once a solid distribution network is in place the company can focus their sales team on growing brand awareness in the new markets it reaches. After some sales growth momentum has been achieved the board will need to decide if the company should be sold to a larger beverage company like its former competitors or if it should remain an independent entity.
Due to the niche market and brand followers that are typically drawn to pure cane sugar products, locally owned and direct to store strategies the most advantageous route would be to remain a standalone company. However, as a result of the Company’s short cash position unless they can obtain additional financing past this year the only path forward is a sale to a large conglomerate which can provide a solid structure for distribution and potential economies of scale that a small company cannot achieve. Hansen Natural Corporation may be a good fit based on the pure can sugar offering and the somewhat smaller size compared to others in the marketplace. This could allow Jones to remain a reputable brand with those that avoid buying from large corporations. In the end the saying “Cash is King” sums up the potential path forward for Jones. The board must follow the available funding sources, should their strategies for 2011 not generate enough cash to sustain continued operating growth.
This paper was written as suplemental material to a presentation given by Kegan Kubisiak, Jessica Moore, Jeremy Person, John Sims for MBA 519 Competitive Strategy taught by Dr. David McHardy Reid at Seattle University in June of 2011.
[1] Market capitalization figures from: http://biz.yahoo.com/p/348mktd.html and are current as of June 3, 2011.
[2] Ibid.
[3] http://inventors.about.com/od/pstartinventors/a/JosephPriestly.htm
[4] http://business.highbeam.com/industry-reports/food/bottled-canned-softdrinks-carbonated-waters
[5] Jones Soda 10-k, 2008
[6] S&P Consumer/Non-Cyclical Beverages (Nonalcoholic) Industry Report, published October 23, 2010.
[7] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[8]http://www.seattlepi.com/default/article/Jones-Soda-lands-soft-drink-rights-at-Qwest-Field-1238261.php
[9] 2010 Jones Soda 10-k
[10] Peter Van Stolk 1986 – 2007; Steven Jones 2007 – 2008; Joth Ricci 2008 – 2010; William Meissner 2010 – current
[11] 2010 Jones Soda 10-k
[12] Jones Soda Co. 10-K filing December 31, 2010
[13] Kotler and Armstrong; Marketing: an Introduction 7e. pg. 251
[14] Jones Soda 2010 10-k
[15] Jones Soda Co. 2010 10-k
[16] Jones Soda Co. 2010 10-k
[17] Jones Soda Co. 2010 10-k
[18] Jones Soda Co. 2010 10-k
[19]http://www.thotspots.com/outsmarting-the-competition-in-a-down-economy-part-1-focus-on-core-competencies/ Taken June 7, 2011
[20] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[21] http://seattletimes.nwsource.com/html/seattleshopping/2010563194_jones_soda_considering_sale_to.html
[22] Jones Soda Co. 10-K filing December 31, 2010
[23] Jones Soda Co. Q4 2010 earnings call, March 10, 2011
[24] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[25] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[26] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co
Industry - Background The United States Consumer Goods economic sector has a market capitalization of approximately $74,882 billion and is divided between those goods that are either cyclical or non-cyclical in nature.[1] This separation is based upon the level of correlation a particular company’s, or industry’s, equity value is to fluctuations in economic conditions. Cyclical goods are, typically, highly correlated to the economy while Non-Cyclical companies are not. Consequently, the securities of Non-Cyclical Consumer Goods companies are often referred to as defensive stocks and continue to achieve steady profits even throughout economic downturns because they produce and/or provide goods and services that have consistent demand, such as food, beverages, and personal products.
Within the Consumer Non-Cyclical sector is the Non-Alcoholic Beverages sub-industry, which is also referred to as the soft-drinks sub-industry. The soft-drinks sub-industry has a current market capitalization of $1,237 billion and includes global powerhouses such The Coca Cola Company, Pepsico, and Dr. Pepper Snapple Group, as well as more specialized niche players such as Hansen Natural, Reed’s Inc., and Jones Soda.[2] These companies operate in a mature and highly competitive industry that can trace its roots back to the late 1700’s, when Joseph Priestly created soda water after discovering a method of infusing water with carbon dioxide.[3] By 1900, following a series of technological advances and new flavor offerings, the soft drink industry was well on its way with many of today’s modern soft drink brands (Coca Cola, Pepsi, Dr. Pepper, etcetera…) having entered the market. Now, entering the second decade of the 2000’s the soft-drinks industry is highly mature and dominated by The Coca Cola Company and PepsiCo, who hold 41.9% and 29.9%, respectively, market share of retail dollar value.[4]
New market entrants have created a niche within the soft drink industry, which is referred to as the alternative beverage industry. This niche is estimated to be worth an estimated $16 billion and is dominated by Hansen Natural who produces the Monster line of energy drinks.[5] Other participants in this niche include Red Bull, Hornell Brewing, Reed’s Inc., and Jones Soda. While many alternative beverage industry companies are ultimately acquisition targets for the major players due to their small size and inefficient administrative capabilities, others have been able to survive by producing differentiated products and not directly competing with the majors.
According to the latest S&P Industry Report, the fundamental outlook for the soft drinks sub-industry is neutral, with long-term prospects bright for US beverage companies bright in foreign markets, where significant opportunities of consumption growth exist throughout developing and emerging markets.[6] However, for those who operate in the alternative beverage industry the outlook is less clearly defined. Consumption of premium and specialty soft drinks has fallen in recent years as a direct result of the current macroeconomic climate. Furthermore, alternative beverage industry manufacturers cannot rely upon economies of scale to create efficient marketing and distribution networks necessary for growth and effective competition within this highly competitive market.
Jones Soda - Background In 1986 the Urban Juice and Soda Co. was started by Peter Van Stolk as a beverage distributor in Western Canada. By the mid 1990’s Van Stolk had begun developing his own soda products and launched Jones Soda in January of 1996. Fully understanding that the industry is dominated by a few very large and powerful players the Jones Soda sought to differentiate itself within this space by targeting a consumer who was thought to be young and cynical. In an effort to connect more with the target customer base consumers were asked to submit photos that could potentially be used as bottle labels. The result of this uncanny approach to branding allowed Jones Soda to gain a small, but critically important, foothold in the soft drink market and create a unique personality for the brand. In 2000 the Jones Soda Company was incorporated in Washington State and its headquarters was moved to Seattle. This allowed the company to refine its focus on United States sales and distribution and enter a dramatic growth phase.
A year after Jones Soda was launched the company produced gross revenues of $2.4 million. By 1997 gross revenues peaked, with an annual sales figure of $39.83 million in 2007. The company developed a cult following amongst its consumer base because of its ever changing line up of photos that were exhibited on its bottles. From 1997 to 2007 the company received over 1 million photo submissions and used 4,372 different photos for bottle labels. The company created a website for photo submissions that quickly developed in to a social network for Jones’ target customers to, “chat, blog, enter contests, share movies, and download freebies.”[7] Through this medium the company received many customer generated ideas, some of which were carried through and ultimately brought to market, thereby providing consumers with an interactive experience that conveyed a sense of ownership in the brand.
As business grew so too did the penetration of the Jones Soda brand into the domestic soft drink market. The company began establishing relationships with distributors, retailers, and other channel partners. The company also entered into a licensing agreement with QWEST Field, in Seattle, as the exclusive soft drink provider for all Seattle Seahawk home games.[8] In addition, a similar agreement was inked with Alaska Airlines and Horizon Air, who would serve Jones Soda on all of their flights. The QWEST agreement was terminated in June 2010 and the Alaska Airlines and Horizon Air agreement was terminated in March of 2010. Both now serve Coca Cola products and cite consumer demand as the driver for these decisions. These partnerships were critical elements in the company’s strategic vision and were intended to further develop the Jones Soda brand and increase consumer awareness.
The company had expanded rapidly throughout Jones Soda’s first 10 years and achieved four straight years of profitability. On April 16, 2007 the company’s equity value peaked at $31.54 per share making Jones Soda a company with a market capitalization of approximately $827.93 million. From thereon, however, the value of the firm would only fall with the company’s current market capitalization approximately only $33.90 million, a reduction of nearly 96%. Throughout, the same period, ‘07 – ‘11, Jones has seen its gross revenues fall from the 2007 peak of $39.83 million down to $17.53 million. Each year since 2006 has produced negative net income, a shrinking payroll – currently Jones employs only 40, 21 of which are employed in sales & marketing capacities[9], and 4 different CEOs.[10]
Jones Soda - Today Given Jones Soda’s dramatic rise and fall the company has chosen to remain true to its core values moving forward. Jones Soda believes that it has built its brand on its independent counter-culture image as well through the unique and exciting flavors it offers, which are targeted at consumers who prefer alternatives to large, corporate soft drink manufacturers.[11] Marketing efforts are centered on product placement rather than traditional media such as television or magizine advertisments. The company also employs Jones Soda RVs that travel throughout the United States distributing product and interacting with consumers on the streets. While the agreements with QWEST Field and Alaska Airlines and Horizon Air no longer exist, Jones Soda still has exclusive distribution agreements with the Portland Trail Blazers and the New Jersey Nets in their home venues on game nights. These tactics, together with the company’s to its unique labeling strategy, which also includes the possiblity to create custom bottle labels, has allowed to Jones to remain a, currently, viable going concern while moving through a period of massive top line deteriation.
Jones Soda currently offers a number of unique products. These include: a) Jones Soda – pure cane sugar sodas; b) Jones Zilch – a zero calorie soda; c) WhoopAss – an energy drink; and d) Jones Candy – carbonated hard candies. The three drink offerings allow Jones Soda to enter into different niche segments of the soft drink industry and cater to the unique needs and wants of a larger cosumer population. Furthermore, certain product lines, such as WhoopAss, allow Jones to gain a foothold in key channels (like gas stations and convenience stores ) where their products would otherwise be shut out. Moving forward the company intends on building its sparkling beverage portfolio and introducing a new, more natural and lower calorie, product in the natural sparkling segment.[12] The current products and those that are intended to be launched in the near term future are build around the belief that a diversified assortment of product offerings by Jones will benefit the company in a number of ways. The first such method is through the revenue growth possible by expanding the Jones Soda brand into complementary market segments. Next, Jones believes that it can reduce its overall risk profile with a more divesified product portfolio. Finally, the company understands that the critical link in the soft drink industry is the distributor partnerships and a more comprehensive product offering will entice distributors to push Jones products more proactively.
Jones Soda’s Core Competencies In order for Jones Soda to see its strategy on through frution the company must find the resources and capabilities that will produce or allow them to act upon possible competitive advantages. Unfortunately Jones Soda’s competencies have gone by the wayside so to speak and the resources and capabilities are few and far between; the Jones Soda of today is no longer as nimble, innovative or as edgy as it was in 2006 or 2007. Moreover, the company seems to be considering ending the costly sponsorships that are, ironically, quite necessary to reach the mainstream consumer the company aspires to reach; also the company doesn’t have any joint venture or alliance possibilities that could potentially supply resources and capabilties the company could use for its distribution expansion. In the beginning it was innovative consumer engagement, peculiar named and flavored sodas, and brand ambassadorship that created the only obvious competetive advantage the company ever possessed and ultimately, these competencies may just be what keeps the company a going concern.
The consumer engagement competentcy stems from the interactive marketing ethos at Jones Soda Company-this type of marketing is social in nature and attests that “percevied…quality depends heavily on the quality of the buyer-seller interaction,”[13] the leveraging of their social media campaigns, and the ability to create a dialogue with the consumer. The portals for customer engagement are www.myjones.com and www.myjonesmusic.com. The myjones site is where the “open source access” consumer can submit the photographs for possible labeling on a Jones Soda brand or create their own “brand” for a celebration like a wedding or graduation.[14] The myjones site is also where the notion of mass customization is on display. By offering the customization on demand and providing a differentiated product like a personalized soda “brand”, the company puts itself in a position to reap profits off of a low cost and wildly interactive touch point.
The brand ambassadorship is showcased in the sponsoring of alternative athletes like: The Ultimate Fighting Championship fighter Ryan “Darth” Bader and the world champion snowboarder Lindsey Jacobellis. By utilizing the popularity of the ambassadors Jones Soda has been able to place products at events and competitions where these athletes perform and their mutual fans congregate.
Jones Soda’s Limited Control of its Product Jones Soda’s 10-k uses the term “research and development” one time. The company, needless to say, does not put much stock into R&D and unfortunately, this reality severly limits their control over true product development. According to Jones Soda’s 10-k the company contracts the license or right to manufacture Jones Sodas to 3rd party manufacturers and it is these manufacturers that purchase many raw ingredients with one of them being the flavor concentrate or syrup. For some soda beverage companies the flavor concentrate is the most critical component to the brand, competitive advantage, and the company’s market share. For instance, Coca Cola’s flavor recipe is a legendary asset and secret! For Jones Soda, the flavor concentrate formula is a secret actually being kept from them as “the flavor suppliers own the proprietary rights to the flavors.” This is a different approach as a “reliance on 3rd party contract manufacturers…could make management of [Jones Soda’s] marketing and distribution efforts inefficient or unprofitable,”[15] but the predicament does, however, allow Jones Soda to realize cost savings related to this arrangement.
Jones Soda also licenses or contracts out the packaging and manufacturing of their products to 3rd party manufacturers. These agreements call for the “co-packers” to manufacture and store the finished goods either on-site or at other 3rd party warehouses. These co-packers have the bargaining power as they can terminate the contracts at any moment for no reason at all. [16]
Distribution and Logistics Jones Soda has at least 4 distribution channel strategies. One is the Direct to Store Delivery (DSD) channel. The second is the Direct to Retail (DTR) and the third is Direct to the Consumer (B2C) or interactive online e-commerce channel through www.myjones.com and www.jonesoda.com. And fourth is the concentrate soda channel. Each has its own merits and pitfalls and some stores and retail establishments utilize both DSD and DTR and this “blending” is precisely what Jones Soda wants to see happen. Because as the company expands its SKUs in the form of line extensions they hope to “different brands…through alternate channels” in hope so securing more shelf space to get a piece of the “take home market.”[17]The primary channel is the DSD channel with 90% of core case sales sold through this channel. This is an increase from 75% in 2009. The DSD channel utilizes independent distributors and Jones Soda has nearly 160 that currently transport their products. The top 10 distributors make up 44% of the total case sold sales amounts and as consumer awareness picks up, Jones Soda has stated that they intend to rely less on any one distributor.
The company has very little supplier bargaining leverage and is required to sign 1 to 3 year agreements with the DSD distributors. They are also required to pay fees if they bypass these distributors and somehow make the delivery on their own. The company is utilizing Millers/Coors distributors who are willing to carry more SKUs than the Anheuser Bush distributors that are only willing to carry to top selling SKUs of any category. Walmart is one of the larger accounts that the DSD channel services and Jones is currently looking to galvanize the distribution network in order to gain complete access to the 3800 U.S. based Walmarts. The DTR channel’s main contracts are with Canadian subsidiaries of Starbucks, Meijer and Costco. Kroger, which is QFC and Fred Meyer, also carries Jones Soda through the DTR channel. The retailers are responsible for the distribution (pick-up and delivery) of the products.
Overall the capability to get the product to the shelf looks to be improving for Jones Soda. The true test will be whether or not the company can keep up with Walmart’s supply chain demands. If Jones Soda can leverage the AB distribution and stock the Walmart shelves, the distribution capabilities will surely be responsible for it happening. Jones Soda believes the “optimum distribution channels for Jones Soda are the grocery, mass and club channels while the convenience channel provides the biggest opportunity for Whoopass Energy Drink.”
Competition The competitive landscape within the Non-Alcoholic Beverages sub-industry is fierce. Jones Soda does compete with Coca-Cola and PepsiCo for consumer awareness and shelf space in addition to the other alternative “New Age” purveyors; and as consolidations take place and companies with larger pocket books are putting pressuring distributors not to carry Jones Soda,[18] the company is facing steep odds to just utilize the AB distribution network let alone flourish with it. In the 2010 10-k Jones Soda states that it competes directly with market leaders Red Bull and RockStar in the energy drink space and with Hansen’s in both the carbonated soda and energy drink categories.
Hansen’s as we stated earlier is has a “monster” sized market share of the $16Billion alternative beverage category. Its most prominent brands are Hansen’s Natural Soda, Blue Sky, and Monster Energy. Hansen’s core competency, according to one article, is marketing as their ability to outsource the production and manufacturing aspects of their business allows them to focus on the two distinct product category consumers: the all-natural soda consumer and the rough and edgy energy drink consumer. They are beating Jones Soda at Jones’ own game.[19]
Red Bull’s core competency is advertising and creating a brand family. They use a similar tactic that Richard Branson and his Virgin brand family does: they utilize the parenting advantage. Of course without the brand slogan of “Red Bull it gives you wings” and the success of its core products: Red Bull Energy and Red Bull Cola, the company wouldn’t have the competitive advantage in place to utilize the parenting advantage. But because the brand name is so popular the company can put Red Bull in front of any sport team, sports complex or include it in a cocktail: Vodka Red Bull and it will sell. The company also uses guerrilla marketing and street-level interaction with its core consumers. The company utilizes its sponsorships and endorsements perfectly. They have the counter culture locked down and they also take advantage of the mainstream’s consumer’s appetence for performance enhancement.
Jones Soda – Expansionary Strategy in 2007
Until 2007, Jones had been a regional niche player in the softdrink industry, but after successfully leveraging the strengths of its core competencies and achieveing four years of profitablility, Jones Soda Company decided to expand. Jones’ management determined that expansion would require a new strategy to put them on the playing field with large entrenched competitors. This strategy included packaging the majority of their unique sodas in aluminum cans (while still retaining some in bottles) , selling through new additional distribution channels on top of its presence in small stores and skate shops , and lastly spending a lot more money on advertising than in the past. Many, including those on Wall Street, had faith in Jones’ expansion strategy and, believing that it was poised for growth, drove its stock price to its peak of $31.54 per share in April of 2007.
Unfortunately, Jones Soda’s expansion plans did not prove to be as successful as anticipated. Sales of their sodas struggled throughout the remainder of 2007. Regular customers and members of Jone’s cult-like following rejected the new aluminum canning, purchasing only their bottled sodas. The lesser number of new customers it garnered ( most of which did not necessaritly identify with the brand culture) purchased some canned sodas and largely ignored the bottles. Jone’s also failed to achieve the level of distribution and large-scale brand acceptance it required to support expansion. Although the new packaging allowed its sodas to get into new retail locations, Jones’ advertising and selling efforts did not accomplish the necessary task of assimilating (enough) new customers into the culture which had originally made Jones and its sodas popular within its niche market. The majority of Jones’ advertising budget was spent on its huge locally-focused license agreements with QWEST and Alaska Airlines as well an immense sales staff, which promoted sales to and through distributors, and not on a national campaign of advertisements to increase brand awareness. On top of it all, the economy was entering serious recession and new and loyal customers in the domestic market were not purchasing as many premium brand and premium priced sodas as in the recent past.
Jones’ attempt to extend its brand and expand the company, had only resulted in brand cannibalization and brand dilution. This in turn led to weaker sales, and a 2007 net loss of $11.63 million. Although Jones’ strategy appeared to fit because it considered the major elements required for it expand and break into national competition, their execution of the strategy proved a failure.
Jones Soda – 2008 to 2009 Redirection 2008 brought similar results for Jones Soda. Revenues continued to decline resulting in an even greater year-end net loss of $15 million. Given their failures in 2007, Jones decided their strategy was to blame. They realized they had offended loyal customers by diluting the purity of the brand and bottle culture with aluminum cans while attempting to break in national competition with competitors like Hansen’s and Reed’s, and even the big boys Coca-Cola and Pepsi. As a result, they decided to revise their strategy and eventually to replace former CEO John Ricci with a soda industry veteran, William Meisner.
The new strategy would be similar to their original expansionary strategy in terms of distribution and advertising, but had one major exception. Instead of canning their line of uniquely flavored sodas and alienating their customer base, Jones would revert back to bottles and also introduce a host of additional products. These included, but were not limited to, Jones GABA, a juice drink designed to increase energy and focus, Jones Jumble, a mysterious mixture of four of their sodas, and Hispanic Jones, a line of drinks inspired by Hispanic flavors.[20] Jones would also try to reintroduce its own energy drink, WhoopAss, a brand with which it innovatively introduced in the mid-1990’s, but then pulled and failed to re-launch time when competitors introducd their own very successful brands.
The new strategy also focused on continued progress in achieving greater peneteration into new and existing distribution channels. Jones’ new CEO Wiliam Meissner expanded the number of independent distributors it utilized from 140 to 160 and increased retail penetration into Wal-Mart stores to 75%. Jones also plannd to penetrate the convenience store and gas station market with its WhoopAss energy drink, which it hoped would open the door for its other brands. In the face of mounting losses, Jones also decided to drastically cut its sales staff, retaining only twelve employees to ensure adequate force to promote effective sales and distribution.
Jones’ results at the end of its strategy revision and execution were much the same as in 2007. Despite refocusing and labor cuts, sales revenues continued their decline. In addition, their equity line of credit would be closed and forcing Jones to surrender $4.1 million in stock to satisfy their liability. Jones Soda even received and considered offers to purchase the company, including one offer in late 2009 from Big Red Holdings ( a private holding company that owns several soda brands including Big Red, a cream soda-style drink popular in the southern U.S., and NuGrape) for $7.9 million or 0.30 cents per share.[21] With failing strategies, mounting losses, almost no credit availibility, and competitors poised for takeover like predators, Jones Soda realized that something must be done or their end was near. CEO Meisner decided to take one more stab at returning the company to profitability, by revising their strategy yet once again.
Jones Soda – 2010 and Beyond Jones Soda’s most recent annual filing stated, “We intend to build upon our sparkling beverage portfolio in 2011 by introducing a new more natural and lower calorie product in the natural sparkling segment. This will round out our offerings within the sparkling beverage category so that we have product representation over the three main subsets within the sparkling category (carbonated soft drinks, energy, and natural sparkling).” It later states, “the primary strategy is to increase sales by expanding distribution of our products in new and existing markets (primarily within North America).”[22]
The Company’s management recoginzes the need for continued change while getting back to their core competency of making soda. That means they must capitalize on the opportunities that may exist within the current distribution chain they utilize and expanding beyond to reach an even greater market. In a more recent earnings call CEO Meissner elaborated further on the prior strategy stating, “One, increasing our distribution network and capabilities, two penetrating more grocery store chains, three, marketing and fostering distributor engagement in WhoopAss, and four adding a key component to our core brand strategy: an new all natural sparkling beverage in 2011.”[23]
“To execute this strategy the company plans to:
· Move almost exclusively to DSD (direct store delivery)
· Capitalize upon agreement with Wal-Mart
· Tighten up inventory control
· Increase spending on slotting fees and promotional allowances
· Increase grocery store penetration from 8% to 14% in 2011
· Fill the void left as Coke and Pepsi have bought up energy brands that used to be distributed by independents”[24]
Jones Soda Co.’s current CEO and board have finally come to the realization that they need to stop shopping the company around for prospective bidders. This has allowed the focus to return to the strategy of growing and aligning the business with its industry. In the soft drink industry of Jones Soda’s direct competitors only those with annual revenues of over fifty million dollars were profitable in the last fiscal year.[25] This demonstrates the need for Jones Soda to focus on reenergizing and restoring sales to 2007 levels when they were last profitable. Majority of the strategy going forward is accurately tied to the need for growth and explicitly state the areas being targeted for expansion. Previous CEOs have felt the need to further diversify the company’s product offering which diluted the brand and now they recognize the need to return to their roots and more effectively leverage distribution options.
CFO Mike O’Brien elaborated on the primary distribution opportunities being pursued and why. Due to the improved cash position Jones will now be able to expand through Anheuser Bush distributors, which provide superior service quality and access to a greater network of retailers. However, the Company still plans to utilize Miller/Cours distributors for areas being underserved or slower than Anheuser Bush. O’Brien expected expanded sales as a result of more counties being covered and higher revenue velocity due to improved restocking service. In addition, he believes that WhoopAss could be used to fill a gap in the energy drink arena, mainly stocked by gas stations and convenience stores, and allow them to push for additional shelf space. Last they indend to exploit the fact they use pure cane sugar in their products would could allow them to be sold at Whole Foods and other health minded stores.[26]
Jones Soda – Strategic Recommendations Jones Soda’s leadership needs to continue the path of strengthening their distribution network to grow revenues. The need to continue to focus on the historic products before they go down another rapid expansion path, expand where the product is sold rather than extensively increase the types of products being offered. Once a solid distribution network is in place the company can focus their sales team on growing brand awareness in the new markets it reaches. After some sales growth momentum has been achieved the board will need to decide if the company should be sold to a larger beverage company like its former competitors or if it should remain an independent entity.
Due to the niche market and brand followers that are typically drawn to pure cane sugar products, locally owned and direct to store strategies the most advantageous route would be to remain a standalone company. However, as a result of the Company’s short cash position unless they can obtain additional financing past this year the only path forward is a sale to a large conglomerate which can provide a solid structure for distribution and potential economies of scale that a small company cannot achieve. Hansen Natural Corporation may be a good fit based on the pure can sugar offering and the somewhat smaller size compared to others in the marketplace. This could allow Jones to remain a reputable brand with those that avoid buying from large corporations. In the end the saying “Cash is King” sums up the potential path forward for Jones. The board must follow the available funding sources, should their strategies for 2011 not generate enough cash to sustain continued operating growth.
This paper was written as suplemental material to a presentation given by Kegan Kubisiak, Jessica Moore, Jeremy Person, John Sims for MBA 519 Competitive Strategy taught by Dr. David McHardy Reid at Seattle University in June of 2011.
[1] Market capitalization figures from: http://biz.yahoo.com/p/348mktd.html and are current as of June 3, 2011.
[2] Ibid.
[3] http://inventors.about.com/od/pstartinventors/a/JosephPriestly.htm
[4] http://business.highbeam.com/industry-reports/food/bottled-canned-softdrinks-carbonated-waters
[5] Jones Soda 10-k, 2008
[6] S&P Consumer/Non-Cyclical Beverages (Nonalcoholic) Industry Report, published October 23, 2010.
[7] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[8]http://www.seattlepi.com/default/article/Jones-Soda-lands-soft-drink-rights-at-Qwest-Field-1238261.php
[9] 2010 Jones Soda 10-k
[10] Peter Van Stolk 1986 – 2007; Steven Jones 2007 – 2008; Joth Ricci 2008 – 2010; William Meissner 2010 – current
[11] 2010 Jones Soda 10-k
[12] Jones Soda Co. 10-K filing December 31, 2010
[13] Kotler and Armstrong; Marketing: an Introduction 7e. pg. 251
[14] Jones Soda 2010 10-k
[15] Jones Soda Co. 2010 10-k
[16] Jones Soda Co. 2010 10-k
[17] Jones Soda Co. 2010 10-k
[18] Jones Soda Co. 2010 10-k
[19]http://www.thotspots.com/outsmarting-the-competition-in-a-down-economy-part-1-focus-on-core-competencies/ Taken June 7, 2011
[20] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[21] http://seattletimes.nwsource.com/html/seattleshopping/2010563194_jones_soda_considering_sale_to.html
[22] Jones Soda Co. 10-K filing December 31, 2010
[23] Jones Soda Co. Q4 2010 earnings call, March 10, 2011
[24] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[25] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co.
[26] 1st Annual Pacific-Northwest MBA Case Competition – Jones Soda Co
Contact Mr. Person
