I was reading an article in the Wall Street Journal last week whose thrust was that the supermarket industry is facing increasing competition from non-standard grocery stores. True, And, yes, there are relatively new discount entrants in the US like the closely-linked German discounters Aldi and Lidl, seeking to build on their substantial success in Europe over the past decade or more. But, as the article points out, this process of change has been going on in the US for at least a century, with the supermarket replacing mom-and-pop stores during the first half of the period. Warehouse clubs, Walmart, dollar stores, Trader Joe’s (owned by the Aldi/Lidl family since 1979), Whole Foods…have all successfully attacked the supermarket hegemony in the almost half-century I’ve been watching the stock market.

I got my introduction to segmenting early in my investing career. I had begun covering the lodging industry, adding to my energy and tech (I barely know what a microprocessor was) responsibilities. I happened to attend to conference in held by a big, and growing, hotel conglomerate. The featured speaker was a marketing executive the firm had hired away from a big packaged goods company.

His message was simple:

…the iron law of marketing, he said, is: you don’t offer chocolate at your ice cream stand until demand for vanilla (the world’s #1 ice cream flavor) has peaked.

In the domestic hotel industry, he continued, we’d come to that inflection point. Cookie cutter hotels were everywhere. Growth for a given hotelier could only come through segmentation–high-end low-end, resort, extended stay, franchising, time shares…

That was a real eye-opener for me.

Two things the speaker didn’t say:

–for us as investors–not inside a company or maybe not even that knowledgeable about an industry–when we see chocolate and strawberry on the menu, it’s an extremely strong signal that the pure growth story is over

–it’s important to understand that a substantial part of the revenue new flavors are likely going to generate will come from cannibalizing the existing revenue base. So that base may need a lot of management effort/luck simply not to decline. Intelligent managers will go to the new multi-flavor menu immediately. They understand that sales will be lost in the legacy business, but they want those sales redirected to another arm of the same company. They will also understand that this is an unusually good opportunity to get new revenues from heads-in-the-sand managers of other firms who are in denial and spend all their efforts on businesses whose best-by date has come and gone.

Historically, US Steel, or the US big-three auto firms Ford, GM and Chrysler, are examples of the denial phenomenon. Bed, Bath & Beyond is a more recent one.

more tomorrow