Reinventing a company is a time-honored tradition. When Ford (NYSE: F) controlled half of the automobile market, Alfred Sloan took General Motors, a second-rate car company that claimed a relatively paltry one-fifth of the market, and he created the top-selling car company in the world. That worked out fine, of course, until GM's most recent managers turned it back into a second-rate car company again.
There's a difference, though, between reinvention and desperation. Companies today are all too willing to try something -- anything! -- to pull a growth lever. Procter & Gamble's (NYSE: PG) decision to operate a chain of car washes is one of those head-scratchers. On the one hand, an argument can be made for synergies between the Mr. Clean name brand and the business model, but on the other, you're left thinking, "What the heck does Procter & Gamble know about running a car wash?"
Peter Lynch had a good name for such endeavors: "diworsification," a reference to companies that go outside their core competencies to field-test new ideas.
Teen retailer Pacific Sunwear (Nasdaq: PSUN) did just that with disastrous results. The surf-and-skate crowd decided women's shoes was an "underserved" market and launched a chain of shoe stores. Whatever the women's shoe market is, "underserved" isn't what springs to mind. Worse was its foray into so-called urban wear, a misguided venture that never caught on, perhaps because surfer dudes just lacked the street cred to make it in urban apparel.
And Starbucks' (Nasdaq: SBUX) latest marketing gimmicks carry the pungent odor of fear. Beer and wine? Instant coffee? Value meals and dollar menus? Does a day go by without having Starbucks roll out some new initiative? Next thing you know, the company that championed a coffeehouse on every corner will run away from its own name so far that you won't even realize you're in a Starbucks anymore. Oh, wait! They are doing that, too.
Sure, a lot of fashion companies have a tradition of operating separate-but-equal chains. Abercrombie & Fitch (NYSE: ANF) has Hollister. Gap (NYSE: GPS) has Old Navy, but they're natural extensions of their current business. There's less sense, though, in killing off one of those extensions only to resurrect it under a different name -- which is exactly what bebe stores (Nasdaq: BEBE) is doing.
You see, bebe is changing the lights in the marquee of its 62 bebe sport locations to read "PH8" instead. Rebranding your store with a nearly unpronounceable amalgam of "fate" and the streetwise "phat" is hardly a better way of connecting with your customers. Management says the new concept will flog "active street wear and performance products." And that's new and different because ... ? Investors would be better served if management took the hard medicine that PacSun swallowed and do away with the cash-draining chain altogether.
Yet bebe also seems to be afflicted with the Starbucks curse of trying out every idea that was put up on the whiteboard at a brainstorming session. The formerly high-end retailer has opened a low-cost concept store called 2b (what ever happened to using real words?) to cater to a younger and less moneyed clientele. That chain will also act as an outlet for clearance merchandise from the flagship brand. And bebe is launching a line of non-casual shoes. Uh-oh! Where'd we hear that before?
When Starbucks and bebe reposition themselves as discount chains and Procter & Gamble ventures off into businesses in which it has no demonstrated expertise, they're not playing to their strengths. They're playing into the hands of their competitors. Since these new businesses are not likely to generate significant streams of revenue, they risk distracting management and damaging the companies' brands. Investors would be better off if management simply repaired the core franchise, rather than devise some cool new business line or trendy store name to prop up flagging results.
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