Chronicle Of A Branding Class Foretold

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Greater Impact Through For Profit?

“Education will give the next generation the tools to fight poverty and conquer disease” (UNICEF)

Whilst at college in the UK, a friend of mine there set up a charity called READ International in 2004 that aimed to improve access to education in East Africa by relocating books which are no longer needed in UK secondary schools to Tanzania. The idea of collecting books from students and distributing them abroad was born out of one the founder’s travels in Tanzania, where he observed first-hand a distinct lack of access to educational resources and decided to take direct action to address the issue. READ expanded across college campuses in the UK and to date has donated over 1.3 million books to Tanzania. I could not help comparing READ to Better World Books, both organizations founded in the early 2000s and with a similar social agenda, but one a charity and the other for-profit. 

The door to a library created by READ

Whilst massively successful in its own right, would READ be making an even greater impact had it pursued a for-profit model similar to Better World Books? The for-profit model has allowed Better World Books to secure larger amounts of funding, pursue multiple acquisition strategies, cover overhead expenses, and achieve greater overall scale. For example, compare READ’s 1.3M donated books to Better World Book’s 15M+ (that is not to mention Better World book’s $18M literacy funding or other initiatives). Furthermore, READ eventually pivoted its model and stopped donating books - likely due to the fact that the collection and donation of books was simply unsustainable for a charity. Instead, the organization now continues to address the gap in provision through the creation of libraries in secondary schools. Research shows that donating books are good place to start, but that there needs to do more done to ensure the books are used to their full potential. The libraries they help create function as both a home for these books and a vibrant learning environment for pupils.

Better World Books now too faces its own challenges. With AmazonSmile allowing Amazon customers to support their favorite charitable organization on Amazon’s dime every time they shop, Better World Books needs to differentiate itself further in an ever more aggressive and low margin business. Unlike other socially focused organizations like Tom’s, Patagonia, or Warby Parker, Better World Books sells products that are no different than what its competitors sell. It therefore is limited to the two options of acquiring customers through price or loyalty. As competing on price is nigh impossible, it should strive to achieve a balance of still offering affordable books whilst emphasizing its social mission to drive loyalty from conscious consumers. It should also seek to gain funding from social investors to avoid the pressures of having to scale too quickly and ignoring its core causes. Whilst growth may not come as quickly as with other for-profit corporations, such a strategy should allow Better World Books to continue making the enormous impact its model has allowed for over the last decade. 

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Making The Invisible Visible

Until 2002, Intel had done a fantastic job of ‘ingredient branding’, essentially creating a well-known brand of itself with well-known qualities that enhanced perceptions and marketability of other brands or products. Similar to other companies like Gore-tex, Shimano, Merino Wool, and Dolby Digital, Intel had used a strategy of calling out unique feature or performance to increase the acceptance of personal PCs. 

As Intel deliberates whether to branch out into other products in 2002, one massive consideration is that specs are becoming meaningless in the technology wars. Whilst consumers in the 90s obsessed over amount of RAM, processor speeds, etc. (a consumer behavior pattern that Dell took massive advantage of), consumers in the new millennium began to focus more on experience rather than hard numbers. As computers kept going more mainstream, listed specs looked like gibberish to most people. Further, the web took over and most computers quickly became more than fast enough for the majority of users. Specs became a thing that only PC gamers cared about. Choices about technology for consumers became more emotional, a shift that contributed to the rebirth of the Mac and which Apple recognized early and adopted an advertising strategy on. Remember the “I’m a Mac” ads?

Accordingly, if Intel is to branch out into other products, it needs to focus less on numbers (eg. 286, 486, 400mhz Pentium etc.), and tie the qualities of power and performance (which its chips provide) with the more ephemeral feelings of pleasure that consumer gadgets provide, whether it be communicating with loved ones, capturing special moments on smartphone cameras, or being creative on the devices.  Intel began to adopt such a strategy with its digital media campaigns and should continue to do so as it expands its portfolio. 

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From Chic To Chav

Chav (/ˈtʃæv/ chav) is a pejorative epithet used in Britain to describe a particular stereotype. The word was popularised in the first decade of the 21st century by the British mass media to refer to an anti-social youth subculture in the United Kingdom. The Oxford English Dictionary defines "chav" as an informal British derogatory, meaning "a young lower-class person who displays brash and loutish behaviour and wears real or imitation designer clothes". ~Wikipedia

British rap act Goldie Lookin' Chains’ Vauxhall ‘Chavalier’

One brand that became particularly subject to such ‘real or imitation designer clothes’ was Burberry. By the early 2000s the company's check pattern had become the uniform of the chav. Bouncers and taxi drivers learned to turn away young men sporting Burberry baseball caps and jackets. When Daniella Westbrook, a soap actress who lost her septum through chronic cocaine use, was photographed with the Burberry check adorning herself, her daughter and her pushchair, the brand became a national joke in England. Its elite reputation a victim of its own success. 

The photo of Daniella Westbrook that Britain’s tabloids went to town with

Whilst Rose Marie Bravo did much during her time at Burberry to alleviate this association, she perhaps did not take this popularity of the brand among non-target consumers seriously enough. At one point she even remarked that “I'm a chav...Me and Kate Moss." This despite the fact that Burberry had admitted it was failing to shake off its "chav" association and confessed retail sales in the UK were "subdued" as a result.

Burberry’s problem with subculture associations was particularly bad due to the prominence of its highly recognizable trademark check, which featured on many of its ‘low-entry-price’ products. Lower-priced products, including bags, scarves and caps, enabled aspirational consumers, who would not normally be able to buy into a brand, to do so. To some extent therefore, a trade-off exists for a brand like Burberry between huge sales growth and brand dilution as less relevant consumers buy into their products. Bravo achieved growth and a rejuvenated brand positioning for Burberry but at the expense of a link to problematic subgroups. The downside of such success is the lack of control over those who buy and associate themselves with the brand.

To continue Burberry’s transformation to beacon of cool, and ensure that the ‘chav’ image does not spread to its overseas markets (which luckily had not been affected), Burberry should continue to buy back licenses, crack down on counterfeit versions of its clothes, introduce more daring designs and advertising campaigns using leading photographers and models, and perhaps most importantly, be bold enough to restrain the use of the classic Burberry check. Launching the Brit perfume in England with the check designed bottle would do no favors for the brand in 2003. 

A fresher, younger, more modern, and restrained Burberry campaign featuring Emma Watson

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How Did Virgin’s Airline Business Weather The Virgin Galactic Crash So Well?

On Oct. 31, 2014, the space tourism company Virgin Galactic suffered a serious accident during a SpaceShipTwo test flight, resulting in the loss of the spacecraft. One pilot died in the crash, while another suffered injuries. The news was broadcast globally and images like the above flashed across our collective screens. With Virgin’s branded house strategy, there is always the risk that a negative event will spill into its other brands. And with space flight closely related to civil aviation, one might have thought that with Virgin’s named splashed across the debris, Virgin America, along with counterparts Virgin Atlantic and Virgin Australia, would have been affected. After all, perceptions of an airline are crucial to its business. Malaysia Airlines, for example, has suffered huge financial losses in the wake of two recent separate aircraft disasters. If an airline is perceived as unsafe, customers will stay away.

However, although the Galactic crash was a tragedy and did not do any favors for Virgin’s master brand, it did not appear to affect Virgin’s airline side of the business. Data from online travel agency Orbitz showed that there was no significant difference in bookings of Virgin flights following the crash. It appeared public confidence had not been lost. Why was this the case? Perhaps it is due to the fact that there was no market confusion between the airline and sub-orbital tourism brands. Most consumers might put space travel in a very different mental category from routine airline trips. Also, Richard Branson was very vocal about responding to the commercial space travel disaster. He was praised for responding quickly to the crash, traveling to the scene and setting a tone that indicated he was serious about finding the cause of the crash. According to Tim Calkins, a professor of marketing at the Kellogg School of Management, “The fact that he responded so well will help the Virgin brand weather this setback.”

A more sinister explanation is that Virgin Galactic attempted to distance the company and the Virgin brand from the disaster by referring to the test pilots as Scaled Composites employees. Virgin Galactic’s official statement on 31 October 2014 read: “Virgin Galactic’s partner Scaled Composites conducted a powered test flight of SpaceShipTwo earlier today. [...] Local authorities have confirmed that one of the two Scaled Composites pilots died during the accident”. This was in strong contrast to public communications previously released concerning the group's successful flights, which had routinely presented pilots, craft, and projects within the same organizational structures, as being "Virgin Galactic" flights or activities of "the Galactic team".

Given the prominent branding of Virgin Galactic, in my opinion the former explanation is the more likely and that the public was indeed able to disconnect the Galactic and Atlantic/America/Australia brands. Virgin was lucky this time round but the incident highlights the potential dangers of the branded house strategy. Virgin appears to know this all too well, and in Virgin America’s SEC filing for its IPO, it rightly noted that “negative publicity related to the Virgin brand name could materially adversely affect our business.” Here is hoping to no further accidents across the Virgin Group. 

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Service With A Smile

Having been born in Singapore, and grown up predominantly in Hong Kong, there was one line in the Singapore Airlines case that rung very true to me - that of when a Singaporean would start a complaint with, “I can’t be a proud Singaporean and have an airline like this!”. As strange a concept as it may seem to obsess over an airliner, both Singapore Airlines and Hong Kong’s Cathay Pacific (as well as their hub airports Changi and Chep Lap Kok) are built into the very fabric of society in their respective cities, and are a source of pride. That is because there is a strong culture of service and hospitality in the region, and who better to exemplify such traits to guests and customers than the airliners flying in such travelers from abroad. 

Like Singapore Airlines, Cathay Pacific has won accolades for its service, having won Skytrax’s "World's Best Airline" award four times, more than any other airline. It too has focused its branding around its staff, after realizing, with the aid of customer surveys, that what made it stand out in the eyes of its passengers was not the “hardware” — the seats or film selections — but the service it provided and its employees. Consequently, for a recent campaign, instead of pitching routes, prices, or on-board features, Cathay Pacific took a decidedly different approach by focusing on real employees who make the airline’s service stand out in a campaign that let the flying public know that “People. They make an airline”. Not too dissimilar to Singapore Airline’s Singapore Girl, Cathay used employees who work in different areas as spokespeople, sharing details about their backgrounds in ads executed for print, television, online, and outdoor placed in cities around the world. Customers are invited to get to know Mona, a senior purser, who likes to crochet. And Ben, a cargo reservation sales officer, who has recently taken up sports photography. And Tony, who plays in a rock band — and who also happens to be the chief executive of the airline.

The campaign was reportedly the most successful the airliner has ever carried out. Humanizing the brand appears to have paid dividends though it has had one particularly interesting consequence. In 2012, a dispute with cabin crew over pay and working conditions resulted in the crew threatening industrial action that included withholding smiles from passengers. It was embarrassing press for an airliner that has prided itself over its ‘great people’. Luckily a settlement was reached and passengers flying that Christmas were greeted with a smile after all. 

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From a Chinese love affair with Lafite to Concha y Toro?

Tuhao is a Mandarin word that can be roughly translated as nouveau riche. Every society has its own make of nouveau riche and the tuhao seem to borrow excessively from all of them. Flash suits, lavish banquets, gold watches, and, in recent years, a bacchanalia involving investment-grade reds. However, amongst all the Bourdeaux and Burgundy, no other bottle has captured the Chinese imagination like Château Lafite Rothschild. Now the world’s biggest market for red wine (from 2,000 hectolitres in 2000 to 538,000 hectolitres in 2012), consumers in China went from zero to Lafite in less than two decades - even if at least half of all Château Lafite sold in China is presumed fake. Three bottles of Chateau Lafite’s 1869 vintage each sold for a record price of HK$1.8 million ($230,000) at a sale in Hong Kong a few years back, underlining Asia’s dominance of the auction market for trophy label wines. Some attribute the wine’s success to the simple fact that the name ‘Lafite’ is easier to pronounce for Chinese consumers, especially when compared to some of the longer French names. But of course a primary reason is the fact that the Chinese covet Lafite not just for its quality, but for its amazing ability to convey wealth and status. According to Asia's consumer expert Radha Chadha, “what Louis Vuitton is to bags, or Mercedes is to cars, Lafite has become to fine wines in China—an easily recognizable symbol that speaks money”. 

This phenomenon is not unique to China. Study after study, blind tasting after blind tasting, have proven the sensory limitations of the mind. Our expectations of wine are too often more important than what’s actually in the glass. When we sip on wine, we don’t taste the wine first, and the cheapness or expensiveness second. We taste everything simultaneously, in a single gulp of this wine is an premium Latour, or this wine is from a cardboard box. As a result, if we believe a wine to be cheap, it will taste cheap. And if we think we are tasting a premier cru, then we will taste a premier cru. 

Yet despite all of this, there appears to be a sea change in the consumption of wine. Millennials have stormed the wine market and adopting wine at a faster rate than any other generation. Having less to spend and becoming increasingly more educated about the apparent negative correlation between price and happiness, they care less about Robert Parker scores and more about transparency and authenticity. Concurrently, although the number of people in China with large disposable incomes, tuhao or not, is large and growing, sales of Bordeaux have rapidly slowed. A total of 685 million bottles of Bordeaux wine were sold in 2014 - an 8 per cent drop on the previous year. What has caused this? Well within China, Xi Jinping’s crackdown on visible signs of corruption and conspicuous consumption within the Chinese Communist Party’s 90 million members and officials has resulted in some high profile arrests, a major slump in Macau gambling, and a continued down-market for luxury goods. China's wine market is therefore finally doing what it should have done at the beginning. It's easing back into user-friendly, entry-level wines.

All of this to say that if Concha y Toro wants to target the world’s largest red wine market, as well as the Millennial generation, now is the wrong time to get into luxury. Instead of abandoning the lower end of the price spectrum, it should adopt the ‘top down’ strategy whereby the firm exploits the prestige of its high-end wines to expand into the basic segment whilst capturing shifting consumer attitudes to wine. 

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Yesterday Samsung said it expects to report about 5.9 trillion Korean won ($5.4 billion) in operating profit for the quarter ended March 31, a decline of 30.5% from the same period a year earlier. Final results are due later this month but the decline would represent the sixth consecutive year-over-year fall in quarterly profit. Such decline has largely been attributed to to the failure of Samsung to innovate with its flagship handset, the Samsung Galaxy. The Galaxy S5, which was released last Spring, had far lower sales than expected and resulted in a drop in market share from 32.3% to 25.2% over the past year. The loss in market share was attributed primarily to growing pressure from competitors – especially in the growing low-end smartphone market, and an already saturated market for high-end smartphones. By the end of 2014, it was reported that sales of the S5 were 40% down on the previous S4 model. Using Roger’s Five Factors, could this have been predicted earlier?

Relative Advantage: This is the factor that probably contributed most to the lack of adoption for the S5. Samsung did not innovate enough with the S5 to offer better benefits, software, productivity or services, relative to Chinese upstarts such as Xiaomi or Oneplus, which offered a similar value proposition, but at a far lower cost. Relative to the higher end iPhone which released a larger variant last year to combat Samsung, not only could the S5 not compete with the iPhone’s software, productivity or services, but also with the more subjective benefits such as social status or prestige. 

Compatibility: Whilst the S5 did stick to certain values and experiences of the potential adopter, namely the Android platform it runs on, and the fact that it has a replaceable battery and SD card (all of which adopters of previous generations of the phone loved), the S5 was nevertheless not compatible with what the more mainstream consumer would have expected from a phone of that price in 2014. More premium materials and an unadulterated version of Android would have been more compatible with consumer expectations rather than the technical improvements Samsung had made. 

Complexity: Due to what is admittedly a slightly unfair reputation Samsung had built itself with ‘Touchwiz’, its custom version of Android, its software was perceived as relatively difficult to understand and use compared to both other Android phones, as well as the iPhone. 

Trialability & Observability: These two factors are probably least responsible for the lack of adoption of the S5. Samsung is a marketing machine and its phones are both very available for trials (eg. at BestBuys and at Samsung pop-up stores), and visible to consumers (through the advertising blitz Samsung undertakes with each release).

In hindsight, it is easy to see why the S5 was not as highly adopted as expected. Samsung has learned a lot from the last year and significantly revamped its new flagship phone, the S6. There is a buzz for the new devices, which has resulted in the company adding $11B to its market value since the phones’ announcement in early March. And whilst applying the five factors to the new devices suggest that adoption should increase from the S5, nothing is certain. 

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Opportunities for the Trans-Pacific Economy

On a particular Saturday in March this year, I walked across the MIT campus and came across two regional business conferences taking place concurrently at different locations – the MIT Asia Business Conference and the MIT Latin American Conference.  Given that the target demographic of both conferences were Sloan MBA students and that they were both competing for audiences from what is a limited pool, I recall thinking that the organizers should have either bundled tickets or partnered so as to allow guests to attend both conferences. Having completed The Impact of Business on Urban Development in Latin America Study Tour, I now realize now that allowing such a cross pollination of the conferences would not only have improved attendance, but more importantly, have allowed participants to appreciate just how great the synergies are between the two regions and how much opportunity there is for both to expand business relationships, trade, and foreign investment.

Growing up in Asia, Latin America was never really on the radar from a business perspective. That is because before the 1990s, there was little trade between the regions due to trade barriers, communication difficulties (language), geographical remoteness (it takes a day to fly between the regions), poor transport connections, and few cultural, diplomatic and business ties. However, Asia has now overtaken the European Union to become Latin America’s second biggest trading partner after the United States. This growth can be attributed to: (i) falling trade barriers; (ii) strong demand for Latin American commodities and food from China and other Asian economies; (iii) Latin America’s significant and expanding regional market for Asian industrial goods and FDI; (iv) advances in communication technology as well as better logistics; and (v) the spread of free trade agreements (FTAs) across the Pacific.

It was fantastic to learn about how AJE Group managed to penetrate the Asian markets, but was also disappointing that it was the only company we visited on the Study Tour to do so. I would like to see more Latin American companies be bold with expansion strategies into Asia. Given the synergies between Asia and Latin America, governments across both regions should emphasize the growth potential for cross-Pacific cooperation and there should be concerted efforts to open up markets, cut redundant regulations, boost education and promote cooperation in trade and investment between the two regions. The two regions’ have economies that are highly compatible, comparably sized populations, and robust economies with average projected annual growth of over four per cent. By increasing ties, all countries involved stand to benefit. Asia can provide capital and expertise to upgrade Latin American infrastructure and promote internationally competitive industrialization. Asia needs commodities for its growing markets and Latin America has abundant natural resources. Asia needs food for its large population and Latin America has fertile agricultural land. In the midst of a world still struggling to recover from the global economic recession, Latin American and Asian countries are coming to recognize the benefits of increased trade and investment with one another. The outlook for the Trans-Pacific economy seems bright.

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We capped of the trip with a whirlwind visit to Patagonia. I’ll let some of the photos I took do the talking: http://goo.gl/IUzXjI

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Landmarks in Lima

Whilst in Lima, it was a pleasant surprise to find ourselves in two of Lima’s landmark buildings whilst meeting with companies. At first glance, Lima is not the most attractive place - it inhabits a desert between the Pacific and the Andes. Much of the colonial core did not survive a huge 1746 earthquake that triggered a tsunami. The Spanish rebuilt and reinforced, and the majority of historical gems date from the latter half of the 18th century onwards. A far more original period in Lima’s architectural development came after 1968, when the left-wing military dictatorship adopted brutalism as a means to instill monumentality in its institutions. Migration ballooned during civil unrest in the 1980s and 1990s, as millions fled the violence in the Andes. Yet since the millennium boom, it is ocean-front condominiums and sprouting bank towers that have been changing the landscape. Sadly, most lack imagination. However, the aforementioned two buildings are exceptions.

1. Torre Interbank

When visiting Interbank, we found ourselves at the top floor conference room of this building inaugurated in 2001. With 19 storeys of convex glass-and-steel, reinforced by a titanium mesh, this building mimics the bend in the motorway and is backed by a heliport. It is shaped like a sail blowing Interbank into the future and sits on a stone wall that imitates Inca masonry. 

2. The Westin Hotel & Convention Center

Although we did not actually enter this building, we had a fantastic view of it from the headquarters of Grupo Breca, which actually owns the building. The rapid growth of Peru’s economy at the start of the millennium created a market for high-end business travelers, prompting the Westin chain to launch its first South American hotel. The 30-storey glass and steel tower rises 118.5m above a bustling intersection. It was the tallest building in the country on completion in 2011. 

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Corona - Staying true to the fact that people drink marketing?

In 1997, Corona managed to topple Heineken as the number 1 imported beer brand in the United States. Achieving this ambitious goal in such a short time frame can be attributed to the strong message Corona sent through its “fun, sun and beach" advertising. As Michael Foley of Heineken remarked, “Beer is all marketing. People don’t drink beer, they drink marketing”. And whilst Modelo focused on communicating to consumers the ephemeral experience drinking a Corona would elicit, whether it be good times, holidays, refreshment, perfect weather or relaxation, Heineken (to its detriment) concentrated on highlighting the product quality of the beer. Such a strategy by Heineken appeared to ostracize consumers, perhaps because the message came across as arrogant compared to the unpretentious and fun nature of Corona’s advertising. 

All of which had me confused after watching a recent advertising campaign for Corona Light, which pitches the brand as the choice for people who are "ready for a light beer you can actually taste”. The guiding message of fun is still engrained in the advertisement, but product quality (i.e. the taste) is now also a focus - not too dissimilar to Heineken’s old strategy. So what has changed? Are consumer palates now more refined? Is the ‘fun, sun and beach’ message becoming passé? Or is a fundamentally different strategy required for light beers?

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Black & Decker’s Professional End User Dilemma

Despite having created the portable power tools business in the USA and maintaining the #1 market share position in Consumer and Professional-Industry segments, Black & Decker struggled to capture market share in the Professional-Tradesmen segment and held only a 9% share in 1991. There was a major discrepancy between awareness of B&D and product image, and this can be attributed to several factors, including not aggressively partnering with emerging retail distribution channels such as Home Depot and Lowe’s, the coloration of its products, and the fact that the consumer B&D segment was so strong it was potentially cannibalizing the professional segments. 

B&D faced three options at the time, to harvest the professional-tradesmen channels, get behind the B&D name with sub-branding, or drop the B&D name from the professional-tradesmen segment. My initial thoughts are that the latter option would be the best, as the B&D name had become too tarnished through brand-stretch. The association was only valuable for letting consumers know about the ‘ease of service’ and fact that B&D ‘stands behind products’. Utilizing the DeWalt name, which had a strong awareness rating and a positive disposition towards it, would allow B&D to differentiate itself from the consumer segment. It could color the products differently, begin selling those products in the portfolio with a leadership position (including the largest corded drills segment) whilst focusing on product development for those in the weak/competitive positions, and still offer the same service and warranty attributes favored so much by Tradesmen (though this might be more apparent to consumers with a sub-brand). 

I am keen to understand the pros and cons of creating a new brand for this segment. It would undoubtedly require a large investment of capital and time by B&D, might have unintended consequences on the consumer brand, and might not have quite the brand awareness/favor that is expected. Creating different brands has worked well for other companies very well. Lexus by Toyota is a great example of this. But at the same time, Acura and Infiniti (by Honda and Nissan respectively) failed to reach the same heights as Lexus. What are the considerations a company should take into account when implementing such a strategy? And how does it best execute on such an initiative? 

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Chile cool: art, music and graffiti in laid-back Valparaíso

"Valparaíso has an ambience akin to a smaller, seaside, Latin version of Berlin." My favorite city in the world (Berlin) crossed with a culture I've recently begun to really embrace (Latin)?  I think I'm really going to like Valparaíso.

I've heard  a lot about it in recent months and how it is one of Latin America's most creative cities, having attracted Chilean artists, writers, rebels, bohemians, and musicians. It is nice to see that the country is investing in what is now Unesco world heritage centre, with a $73m investment programme. Though I'll be curious to see how gentrification is being received by both locals and artists (also in the Barranco District in Lima). 

The following BBC podcast has an fascinating segment about Inti Castro, Chile's most famous street artist. His massive colourful murals can be seen on buildings across Santiago and Valparaiso where he was born in 1982. He started out when he was a teenager with a gang of graffiti artists painting by night, but today he travels all over the world, invited by governments and privates institutions to paint vast murals:

http://www.bbc.co.uk/programmes/p02kbhp9

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Witches of Chiloé

Something a little different. Notes on a tradition of witchcraft in southern Chile which continued into the late 19th century. 

"Members of the Righteous Province claimed to possess the ability to fly, using a special word, arrealhue, as they leaped into the air, wearing a magical waistcoat that gave them the power to defy gravity. Each novice was expected to fashion his own waistcoat; this was done by digging up and flaying a recently interred Christian corpse" 

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Takeaways: Chile telecom stats for Jan-Sep - BNamericas

The telecoms sector is performing better than other sectors of the Chilean economy. Chile only has a population of 16.7m yet has 23m mobile phones in the market. Its prepaid mobile sector is expanding, and more-positive government policies are encouraging investment in communication services and infrastructure. Growth in Chile does face some significant hurdles—not least being the need to make Internet access more affordable and available to all. But more than outweighing the risks are opportunities that range from developing mobile apps in Spanish to outsourcing and sharing network infrastructure.

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The Best Place for Retailers? Chile. Uruguay Is Pretty Good, too

According to AT Kearney's 2014 Global Retail Development Index, Chile ranks as the best place in the developing world for retailers. The ranking takes into account a country’s wealth, logistical and regulatory environment, and overall riskiness to “persons, property and principles.”

The high ranking (the first time Chile has come top of the list) can be attributed to years of economic and political stability, which have helped Chile build one of Latin America’s most sophisticated retail environments. Chile’s GDP grew 4.4 percent in 2013 and is expected to grow at roughly that rate through 2016. Physical infrastructure investments and a business-friendly regulatory environment also indicate that retail growth will continue into the future. 

Consumers with disposable income  are supporting modern retail expansion. Retail sales were $98.52 billion in 2013, and over the next four years sales are expected to increase a total of 13 percent. Additionally, grocery retail sales per capita represent only 28 percent of retail sales, the lowest rate in Latin America, indicating Chileans’ growing appetite for nonessential items and aspirational purchases. Chile also has one of the world’s more developed e-commerce markets. Seven out of 10 Chileans who use the Internet in Chile made two to six online purchases in 2013, with the average household spending $158 per year online.

New store formats, particularly outside of Santiago, are also opening up opportunities. Low-budget stores, small boutiques, and corner stores are growing in rapidly expanding suburban areas where speed and convenience are crucial.

Peru also ranked well in the index, at a respectable 13th. The environment is represented by controlled inflation (less than 3 percent), a growing economy, and business confidence. Prudent fiscal policy and monetary discipline remain the pillars of Peru’s economic policy, with a market-friendly approach that encourages private investment under the framework of a national plan for industrial development. Middle-class consumers remain the focus in Peru. Private-label products have grown in popularity in Peru because of their high quality and affordable prices. Lima, the capital, has more than half of Peru’s malls, and clothing brands. Gap, Pili Carrera, and Lippi have opened stores in the city. Starbucks is using Peru for its South American growth strategy, with plans for more than 100 stores by 2015. El Corte Inglés and Walmart are among the international retailers that plan to enter Lima and other Peruvian cities by 2015.

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Should Business Keep it in the Family?

In last week's class we briefly touched on the role of family businesses in Chile. I felt that group was generally dismissive of the virtues of such business empires (myself included), probably due to the fact that nepotism and succession based on who you are, not on what you know, is presumed. However, I wanted to dig deeper into whether such businesses are in fact just another way to ring fence wealth and privilege, or if they can be a solid basis for creating enduring companies in the 21st century business ecosystem. 

I was surprised to learn that more than 30% of the world's biggest firms (sales over $1bn) are family businesses. In addition, according to Dr John Davis of Harvard Business School, family companies are about 2/3 of all businesses globally - even in the United States. International studies in over 15 countries have demonstrated that family companies on average perform better and are models of enterprise and sustainability. Family companies last on average twice as long as other forms of enterprise. This can be attributed to the fact that they often take a longer term perspective as they want to take care of the welfare of their children and so forth. Furthermore, they take on less debt, have more stable financial characteristics, and nurture relationships with customers, employees, and suppliers, that tend to last longer term. In the best run family companies, the sense of entitlement is not found and meritocracy is center stage. 

In Latin America, family-controlled conglomerates dominate the private sector. They are strong partly because the extended family itself is strong. According to anthropologists Larissa Adler Lomnitz and Marisol Perez Lizaure, “There is no clear-cut separation between family interest and business interest, or between the person of the owner and the legal personality of the firm.” 

Historically, the logic of the family business and of protectionism in Latin America from the 1930s onwards combined to discourage growth through specialisation, which might have led family run firms to conquer foreign markets and become multinationals in their own right. Instead, family firms typically diversified, both horizontally and vertically, easing the succession problems which strike such firms every generation or so. Diversification was also a response to foreign-exchange controls or import barriers which made breaking out of the home market difficult or impossible; and it provided a defense against the region's extreme economic and political volatility.

Another reason for the strength of the family business, and the corresponding lack of large public companies in Latin America, is the weakness of the legal framework. On gaining independence, Latin American countries adopted the French system of civil law. This French civil-law tradition provides markedly less protection for outside minority shareholders and for creditors than either Anglo-Saxon common law or the civil-law systems of Germany and Scandinavia. 

This weakness of the legal system has had two main consequences. The first has been to inhibit the development of capital markets in Latin America. Latin America's stockmarkets remain small in relation to the size of the region's economies and lack depth: many of the companies listed on the exchanges are unattractive to investors because few of their shares are traded. This creates a vicious circle in which many entrepreneurs prefer not to issue public equity because they think the market will undervalue their firms. The second consequence of an ineffective legal system is that firms dislike dealing with outsiders because they fear they will not be able to enforce contracts. It is safer to rely on relatives or close friends in whom they can have 'confianza', or trust. This, too, has encouraged diversification and vertical integration in family business empires.