The Raw Prawn

The March 2005 issue of Inc. Magazine has a tremendous article about China. It's adapted from Ted Fishman's China, Inc., and contains a great summary of the major China trends/issues that business leaders should know about. They are:

1. China's economy is much larger than the official numbers show.
2. The growth of China's economy has no equal in modern history.
3. China is winning the global competition for investment capital.
4. China can be a bully.
5. China's economy is an entrepreneurial economy.
6. The most daunting thing about China is not its ability to make cheap consumer goods.
7. China is closing the research and development gap -- fast.
8. China now sets the global benchmark for prices.
9. China's growth is making raw materials more expensive.
10. No company has embraced China's potential more vigorously than Wal-Mart.
11. There are hidden costs associated with doing business in China.
12. Piracy is a problem.
13. China's heavy buying of U.S. debt has lowered the cost of money in the U.S.
14. Americans and Chinese have become reliant on each other's most controversial habits.

Top-notch. Definitely worth the read.

Related Posts
- Great ideas from China
- The Thirsty Dragon
- Pollution and development, as seen from space

In 2003, Toyota started a new brand called "Scion", aimed at American 20-somethings. In order to succeed in this market, they've done a lot of interesting things to build their "cool", such as putting on a great urban/graffiti art tour, hosting big popular nightclub parties monthly in 6 metros, a tour of "cult music films" on college campuses, and distributing a magazine that includes funky pictures of customized Scions.

In Toyota's latest move, they've decided to start a record label. The sole purpose of it is to give exposure to up-and-coming musicians, building Scion's "street cred". What's really interesting is that Toyota views this as purely a marketing play: they have no intent to make money off of the venture.

Scion does not take any profit from the releases, and it allows the artists to own their own master recordings, said Jeri Yoshizu, Scion's manager of sales promotions. The goal, she said, is simply brand extension by association with underground music.

"If we did make money, it would not have such a positive effect," she said. "We don't want to cross that line."

I really like Toyota's approach with Scion's marketing. It's easy for car companies to just use their tried-and-true typical marketing strategies, but Scion's has been very unique. Rather than blanketing the country with lots TV & magazine ads, it's focused on smaller, very targetted campaigns. If you want a brand to be "cool" and have "street cred", grassroots is certainly much more effective than mass media. It's important to note that they view 20-somethings as pretty jaded about marketing, and so they've purposefully tried to position themselves as simply facilitating these "hip" events, and gone to great lengths to make sure they don't come off as phoney.

And it's been very successful, selling almost 100,000 cars in 2004. I'll bet their marketing spend was also a fraction of the typical auto new product launch.

Many people don't like the styling of Scion's current range (primarily the xB), and that has probably depressed Scion's success quite a bit. It's amazing though that their marketing campaign has been so effective that they've still had great sales despite that. A good marketing campaign is generally worthless if people don't like the product, after all.

It's tough to tell how big that "turned off" group is, and how its size has changed over time. I know I initially hated the xB's design, but it's really grown on me.

As time goes on, I'm sure they'll add more variety to the product line, and there won't be as big of an emphasis on the xB. Toyota has a stellar track record in designing popular cars, so I have no doubt that their product will improve. If they keep up the innovative marketing, they'll have a winner on their hands.

Another thing I like about Scion: how they've balanced offering options and keeping manufacturing simple.

They've kept manufacturing costs down by giving the standard model lots of features, and then offering very few factory options: just tranmission and color. But rather than churning out cookie-cutter cars, they offer lots and lots of cosmetic/sound customizations. These are dealer-installed, however, simplifying the manufacturing process. The customer ends up with more choice: she can walk into the dealership, pick a Scion off the lot, and then pick the customizations she wants, rather than only choosing from the features of the cars on the lot. It's these customizations that really make a car feel uniquely personal.

Related posts on The Raw Prawn
- McDonald's uses graffiti to woo the US Latino market

Further Reading
- Detroit Auto Show: Scion's Promotion Manager's presentation on their "underground" marketing
- Forbes: Scion's Smart Moves
- BusinessWeek: What does Gen Y want in a car?

This is 3M's new security glass product demonstration/publicity stunt.

They took the side of a bus station in Vancouver, and instead of putting a regular old ad on the side, they encased stacks of dollar bills behind their security glass.

It's very cool, very eye-catching, and they got a lot of free publicity.

There are, of course, some caveats. Only the bills on the top are real money (CA$500 worth), the rest is paper, and if you broke it you couldn't keep it. People were only allowed to use their feet to try to break it (no sledgehammers), and a guard was posted to make sure people followed the rules.

But those kinds of details aren't usually noticed when you're doing a publicity stunt... the idea that this is very strong security glass that 3M stands by was still the focus. Very cool.

Where did 3M get the idea? Whenever someone talks about the value of a product demonstration, the most common example is the extremely successful Corning salesman, whose chief sales tactic was hitting a piece of security glass as hard as he could with a ball peen hammer. He was Corning's top salesman by a large margin, and once he shared his secret, Corning gave ball peen hammers to all of its salesmen. 3M took this tried and true sales tactic, and turned it into a creative publicity stunt. Well done.

(via Marketing eYe)

It's faint, but it's there...

From the AP:

MAHABALIPURAM, India - Archaeologists have begun underwater excavations of what is believed to be an ancient city and parts of a temple uncovered by the tsunami off the coast of a centuries-old pilgrimage town.

Three rocky structures with elaborate carvings of animals have emerged near the coastal town of Mahabalipuram, which was battered by the Dec. 26 tsunami.

As the waves receded, the force of the water removed sand deposits that had covered the structures, which appear to belong to a port city built in the seventh century, said T. Satyamurthy, a senior archaeologist with the Archaeological Survey of India.

via Sepia Mutiny

Related Reading
- Is the prevelance of the Broken Window Fallacy due to people trying to look on the bright side of things? - Catallarchy
- Descent into the Maya Underworld - The Raw Prawn

Welcome to the Presidents' Day edition of Carnival of the Capitalists, the weekly round-up of business and economics blogs.

While you're here, please take a look at a few of the other posts. The Raw Prawn primarily deals with business, economics, and international politics, so if you're here for the Carnival of the Capitalists, you'll probably find a few things to interest you :)

Update: A number of people have asked about the meaning of "The Raw Prawn". For those who don't own a Strine-English Dictionary, here's how my co-blogger Reena explained it in the comments at Slacker Manager:

The Raw Prawn is named after an Australian phrase "to come the raw prawn". The idiom is usually heard in negative constructions, such as the catchphrase, "Don't come the raw prawn with me!". It basically means "don't try to deceive me/ misrepresent the situation".

Business

Ankesh Kothari at Marketing eYe (one of my favorite business blogs) writes about how to use props and cardboard sculptures to attract people to your store, with some funny examples from Belgium.

Barry Ritholtz at The Big Picture points out that Napster's subscription-based unlimited music download service allows one to quantify exactly how much free downloads cost the music industry.

Frank Scavo at the Enterprise System Spectator thinks that
IT is often a source of competitive advantage.

Adam Crouch at The Raw Prawn analyzes the top 10 Superbowl ads, and discusses what made them successful.

Arnold Kling at EconLog looks at how the internet is changing newspapers' business model, and the commenters discuss how papers will have to adjust.

Yvonne DiVita at Lip-sticking gives five nuggets of information on how to get more women to shop at your website.

David Foster at Photon Courier thinks that customer service operations are being simultaneously overmanaged and undermanaged.

Martin Lindeskog at EGO discusses whether gold is still a good investment or not.

Roger Nusbaum at Random Roger's Big Picture says that while economic growth may continue to surge in emerging markets, investment returns in these areas may not.

Jay Solo at Accidental Verbosity pokes fun at a company for not only using spam for marketing, but for also getting its own slogan wrong in the email.

Anita Campbell at Small Business Trends writes about the connection between religion and entrepreneurship.

Joshua Sharf at View From a Height covers the further adventures of Richard Notebaert, as he continues his Qwest to acquire MCI.

Matt Fisher at Financial Planning 101 points out how sales incentives at brokerage houses can create a big conflict of interest.

Ironman at Political Calculations writes that the string of recent journalism scandals is a result of problems with the internal culture of these organizations.


Goverment

Patri Friedman at Catallarchy wonders if the Broken Window Fallacy is a reflection of human nature's tendency to look at the bright side of things in the wake of a destructive event.

Steve Conover at The Skeptical Optimist has an interesting chart explaining that the budget surplus in the 1990s was due to the "peace dividend".

Tim Worstall takes issue with the EU's attempt to increase regulation in the airline sector

David Tufte at voluntaryXchange looks at the Utah Article Delivery service, and uses it to explain what happens when you have a 3rd party payer system.

Jim Glass at Scrivener.net takes a look at Paul Samuelson's views on social security in 1967, when he said, "the beauty of social insurance is that it is actuarially unsound."

Nicole Robbins at Law & Entrepreneurship News discusses a new workers' compensation program in China that "will allocate up to twenty years salary in the event of death of injury from work related accidents that are determined to be the fault of the employer."


History

Warren Meyer at Coyote Blog has a fascinating post celebrating the contributions of John D Rockefeller and Cornelius Vanderbilt. He covers how Vanderbilt did more to fight monopoly in the US than anyone else in history, and how Rockefeller should get much of the credit for saving the whales.

Brian Gongol at Gongol.com shows that slavery in the United States could have been ended at less expense by a full-scale slave buyout than by the Civil War. Very interesting!

Gus Van Horn has a review of the documentary Ayn Rand: A Sense of Life


Taxes

Doing your taxes? Then you may be interested in what David Gross has to say at The Picket Line. Even though US Federal Income Tax officially kicks in at an income of $15k, he points out various adjustments you can take to allow you to earn up to $29k without the IRS taking a bite out of it.

Joe Kristan at the Roth & Company Tax Update blog writes about a bill in the Iowa senate that would give artists a tax credit for donating their work.


Trade

Andrew at Anyletter writes about the value of trade, using sugar as an example.

M. Simon at Power and Control has a post explaining that the choice isn't between more immigration or less immigration, but between more immigration or more outsourcing.


Blogging

Wayne Hurlbert at Blog Business World writes about how to avoid Google filters that lower a page's position in search engine result pages.

David St. Lawrence at Ripples writes that blogging is not a zero-sum game, and that the medium gets more interesting as more people blog.

As a business blogger, I'm pretty much obligated to comment on the biggest advertising event of the year, the Superbowl. There was a lot of ruckus this year about ads being pulled in order to avoid controversy, but a lot of great ads still made it.

Here is my take on the top 10 ads of the Superbowl. How did I evaluate them? Effectiveness. My standard was, "if I were the CEO, how pleased would I be with the agency/employees that created this ad?"

Without further ado, here they are, with links to their video clips:

1. GoDaddy.com - TV Censors Hearing (full "web only" version here)

GoDaddy.com is a domain name registration and hosting service. They had two primary objectives with this ad: 1. Achieve some name recognition, and 2. Drive people to their website.

How did they do it? They created an ad that really stood out from the crowd, and created a bit of controversy. The "wardrobe malfunction" during last year's Superbowl caused Fox and their advertisers to be hypersensitive, and the result was a bunch of highly sanitized ads.

There's a reason that ads during prior Superbowls often featured crotch-biting dogs and farting horses... that's the kind of humor that goes over well with the Superbowl's core audience: male sports fans in their 20s and 30s, gathering with friends to watch the big game. But after the Janet Jackson mishap last year, Fox and their advertisers made sure that none of the commercials would offend an 80-year-old grandmother. This ad was like an oasis for the Superbowl's core viewing audience.

Fox managed to let this one slip through, but it was not smooth sailing for this commercial. GoDaddy.com actually paid for two 30-second spots. After this first one ran, officials at the NFL called Fox to express their anger and "urge" Fox to pull the second GoDaddy.com ad. While GoDaddy missed out on a second spot, this action brought even more press coverage. Their ad had been all over the news in the week leading up to the Superbowl, and then this guaranteed more coverage for a week or two afterwards. They're still working on getting a refund, but even if they don't, GoDaddy.com definitely got its money's worth.

They are now the only domain name registration service with big name recognition. If anyone in America thinks, "I'm going to start a website... where do I go to get alexsmith.com?" you KNOW that GoDaddy.com is the name that will come to mind.

The other thing I really liked about the ad was how they used it to drive people to their website. That's much more important for GoDaddy.com than most other advertisers, simply because their website is where the sale takes place. The commercial focuses on a tank top that starts to fall off of a dancing model, and then at the end it says, "see more coverage at GoDaddy.com". The result: their website traffic increased 378%. And in case you weren't paying any attention to what the actress was saying, you're greeted with a big, eye-catching "Domains for only $3.99!" when you visit the site. This also happened to be the most replayed commercial of the Superbowl, according to TiVo.

What a coup.

2. Ameriquest Mortgages - Cat and spaghetti sauce, Robbed

Not only were these ads the funniest of the Superbowl (in my opinion), they were also very effective at promoting Ameriquest's product. "Don't judge too quickly. We won't" is great message for a mortgage company looking to attract applicants. The ads portray Ameriquest as a company that looks at the "whole picture" of a customer, rather than being scared away by initial warning signs.

3. Anheuser-Busch - Hero Salute

This commercial did not make people laugh, and it didn't even allude to the product at all. But yet it was very effective.

As a public service ad, it was great. It was emotional, and evoked a sense of pride. Up until the very end, I actually thought this was an Army recruiting ad. Those who put their lives on the line deserve to be honored, and this spot did a great job of that.

And yet it still managed to help sell Anheuser-Busch products. American beer doesn't exactly have a great reputation (in many cases for good reason). It's a pure public service ad, but it also helps to turn country-of-origin into a net plus for many beer consumers, by subtly linking patriotism and drinking American beer. And I'm sure many people in the armed forces will knock back a Bud or two to thank Anheuser-Busch for putting this ad during the most expensive broadcast of the year.

I wonder how many people know that Anheuser-Busch gives free admission to its theme parks to military personnel and their families? They could have easily mentioned this in the ad, but they consciously chose to avoid any commercialism in the spot. Wise choice.

4. Volvo - My other rocket is a Volvo

Giving away a trip to space? Prizes don't come much bigger than that, folks. Wow. The ad itself wasn't that remarkable, it's the contest that gets high marks... very memorable. The contest website is also very well-done. In order to sign up for the contest, you have to affirm a few statements about the XC90 SUV. The statements are pretty surprising and attention getting, and they do a great job of getting people interested in learning more about the product. Bravo.

I also like that it portrays the XC90 as a "rocket". Volvos are percieved as very safe, but very boring. I believe that one of the primary reasons that SUVs have done so well is that they are essentially minivans that dads aren't embarrassed to drive. A Volvo SUV could be in danger of being thought of as more like a minivan than a truck, because Volvo's brand image is so tied to ultra-safety-conscious soccer moms. Hyping the fact that it has a V8 and is like a "rocket" definitely helps. It's not as effective as Dodge's decision to use Hemi engines, but it still helps. Bonus points for hiring a firm to monitor the online buzz around the ad.

Also great exposure for Virgin. One of Virgin's big challenges over the next few years is to build up its brand identity in the US. They've succeeded in being one of the most recognized brands in the UK and Australia, but they're not too well known in the US. It's a big market, and one that should be extremely receptive to Virgin. Virgin Galactic has the potential to create a very shiny halo for the rest of the Virgin companies, helping boost the company's innovative image around the world. I think promoting it in this way during the Superbowl is a superb move, even though it's not exactly a mass-market product.

5. Olympus - m:robe groove

Very funky, very unique. Olympus was trying to portray the m:robe as cooler than the iPod, and they suceeded. Hits at OlympusAmerica.com were up 363%

6. Cadillac - Under 5

Cadillac is going after BMW head-on with their new V-series high-performance luxury cars. A bunch of excellent shots of the car's beautiful design, as it travels backwards into a tunnel, and then is shot out like a bullet. Does a great job of portraying the V-series (and by extension Cadillac) as a high-performance brand, rather than an old man's car. The ad was a bit slow at times, but still well done. Visits to Cadillac's website were up 171%

7. CareerBuilder.com - Monkeys - The Boss, Phone call, Meeting

Captures many people's frustrations with their workplaces. Bonus points for the monkeys in human clothes

8. Nationwide - Life comes at you fast - Science project, Draft, MC Hammer

Many people don't carry non-vital insurance like renter's/homeowner's insurance, even when the cost is very low, because they assume that it won't happen to them. This ad does a good job of reminding people that, well, "shit happens".

9. Pepsi - iTunes - #1 #2

I think the Pepsi-iTunes linkup is great, and this ad reminds people of it. Why drink Coke, when you get a free song for drinking Pepsi? Portrays people's attachment to music, and the role it plays in their lives.

10. Bud Light - Skydiving

Many people's favorite ad... it even scored #1 on USA Today's Ad Meter. It's definitely funny, but I don't really see it selling any more beer. We've come to expect this from beer ads in the US, and any benefit that Bud and Miller got from these kinds of ads was captured long ago, and new ads aren't really increasing marketshare. I could see this working well for a different industry, or even a smaller beer company, but I don't see it selling more Bud Light. How many people even remembered it was for Bud Light 5 minutes after the ad?

Honorable Mention: Diet Pepsi - P. Diddy's Diet Pepsi truck (Extended version)

Like the Bud Light ad, I don't really see this selling more Diet Pepsi. But it's really funny, so it deserves an honorable mention.

Further Reading
- USA Today's Ad Meter ratings - They measure how much people liked the ad, not how effective the ad was at attracting customers. Still very interesting though

The airline industry has been having a lot of trouble over the past few years, and it looks like it's getting even worse.

The most commonly cited problems:

• High fuel costs
• High labor costs due to union strife
• High fixed costs for the planes, which can make a short-term decrease in air travel deadly
• Cut-throat competitors, willing to take a loss in order to keep flying, combined with consumers that have become more price sensitive with the rise of online flight search engines
• Competition from "low cost" carriers like Southwest and Virgin Blue

So what do you do if you're Boeing, and your customers are going bankrupt left and right? You help them solve their problems.

The Chicago Tribune has an excellent in-depth article about Boeing's 7E7 "Dreamliner", which is being billed as a step-change in aviation. Why? Because this plane will be made from plastic. Commercial planes have always been made with metal, but this will be the first major commercial plane made from lightweight carbon fiber. They've been used in military planes for quite a while, but cost isn't really an issue for those. As Boeing-competitor Airbus's Chief Commercial Officer said:

"Have you seen the B2 fly by at almost $1 billion a copy?" asked Leahy at Airbus. "It only has two seats."

But Boeing believes they can make it happen. What does this mean for its customers?

The biggest and most obvious impact is on fuel costs. Using plastic composites lowers the 7E7s weight enough for it to be 20% more fuel efficient than the 767, the jet it is intended to replace.

There are also big maintenance benefits:

The biggest wear and tear on an aluminum airplane comes from pressurizing and depressurizing the cabin thousands of times over a lifetime of takeoffs and landings. Inflating the fuselage like a balloon to achieve cabin pressure wears on the aluminum skeleton and the joints between the hundreds of metallic skin panels. Corrosive moisture also builds up inside a jet. Over time, this all adds up to maintenance. A composite fuselage, on the other hand, won't corrode.

Less maintenance = fewer aircraft mechanics = lower labor costs. And the less time an aircraft spends getting repaired, the more time it can spend in the air.

Boeing's 7E7 also creates a better experience for their customers' customers: airline passengers. The strength of a composite fuselage allows it to withstand much greater pressure:

it can be blown up to the equivalent of 6,000 feet of altitude rather than 8,000 feet, which can help decrease fatigue on long flights without increasing an airline's maintenance budget. Stronger, more resilient carbon also means the 7E7 can have a more humid cabin and bigger windows--a big plus for passengers.

Boeing's 7E7 provides a good example of "thinking outside the box", of finding a revolutionary way to change your product to meet your customers' needs. In this case the product change may actually be able to help keep some of its customers alive.

"It became really obvious to us that the business model has to change," explained Mike Bair, the 48-year-old Boeing executive who heads the 7E7 program. "There are some notable exceptions, but, in aggregate, our customers can't make money with our product."

As for when:

Assembly of the first 7E7 is likely to occur in late 2006 or early 2007, with the jet entering airline service in the first half of 2008.

The article has a lot of other interesting stories, including how Boeing has shifted some of its risks (and rewards) onto its suppliers, by making them partners. It's also worth reading the story of how they got from "it's impossible to make a commercial aircraft out of that" to Tuesday's public preview of a rivetless, seamless, one-piece carbon composite fuselage.

Final note: Do you have any frequent flier miles on airlines that you rarely fly, that you know you'll never be able to redeem? Why not donate your airline miles to the Red Cross or the Make-a-Wish Foundation

More info about the 7E7
- The vital stats on the 7E7
- The 7E7's advantages
- Where the various components of the 7E7 are being made
- How the plane is made

Further Reading
- The Economist on the state subsidy dispute between Boeing and Airbus
- The article in next week's issue of The Economist about the Airbus A380, and how it will fare against the 7E7

Update: Results! John points out that Canada's federal government has taken up my suggestion, and is matching some of its citizens' donations. I wish I'd emailed this to Paul Martin, so I could take credit :-P

By now I'm sure everyone has heard about the earthquake and resultant tsunamis, and the massive devastation they've caused. As of now, the death toll has climbed to 80,000, with no sign of stopping. 80,000. The number is so huge that it's almost abstract. To put it in perspective, that's bigger than TWENTY-FIVE 9/11s. And things aren't going to get better anytime soon, with disease, lack of clean drinking water, and a host of other problems on their way. The power of the quake itself was apparently equivalent to a MILLION atomic bombs, causing the earth to "wobble" on its axis.

In addition to the human cost, there is of course the economic cost. It's even threatened the very existence of the Maldives, famous as a posh vacation destination, whose average elevation is only 1 meter (3 feet). India's Andaman and Nicobar Islands, as well as their tribal inhabitants, haven't faired well either.

The Tsunami Help Blog that has sprouted up is also a good source of information about where to donate. Amazon.com's donation page for the Red Cross has already raised US$3.5mm, from 58,000 donors.

Regarding relief efforts, there has been a big uproar lately over comments made by Jan Egeland, the UN's Undersecretary-General for Humanitarian Affairs. Regarding the relief efforts by rich nations, he said:

We were more generous when we were less rich, many of the rich countries. It is beyond me why we are so stingy. Actually foreign assistance for many countries now is 0.1 or 0.2 percent of gross national income, that is stingy.

Now, he may well have been right, in the sense that the initial pledges from the rich nations was not nearly enough to deal with the disaster. But it's always poor form to look a gift horse in the mouth. A day or two after his comment, the total pledged has reached US$250mm.

(Note: Australia has been very un-stingy, with an impressive amount coming not only from the national government, but from the state governments as well. At least those high taxes are being put to good use.)

Update: "Factory" points out in the comments that Australia's tax burden isn't actually as high as I thought it was.

In the US, Egeland's comment was taken as a direct swipe. I had to hunt down his actual quote to find that he had talked about rich countries in general -- all of the coverage I had seen/heard made it appear as though he was aiming directly at the US. This has caused an understandable amount of outrage -- the US gave 40% of all international aid last year, for a total of US$2.4 billion, just from government aid. Even that figure is dwarfed by private donations from US citizens. That's estimated at a staggering US$34 billion every year -- 1/5th of the GDP of Denmark. Denmark is typically cited as the most generous nation, because they spend the highest proportion of their GDP on government foreign aid -- 1.04%.

To the sure, the US's initial pledge of $15mm was pretty meager. After Egeland's comment, the amount was upped to $35mm, with a promise of more to come. I'd assume that the additional funds were already in the works, because of how quickly the number was upped.

There are two primary issues facing the US government now. The primary one, by far, is how to help the most -- how to free up more resources to give more, how to identify specific needs, and how to ensure that the aid is used most effectively. A distant second is how to solve their PR problem: how to make sure that the US has an image that's in line with the donations and aid of the government and its citizens.

My proposal: government matching funds.

For every dollar that an American citizen/resident donates, that dollar will be matched by the government. Matching pledges has been shown to be extremely effective in non-profit fundraising, because people get double the bang for their buck, leading them to donate more.

The federal government already does this to a certain extent for all charitable donations. Charitable donations can be written off on your taxes, decreasing your taxable income by the amount donated. So in a sense the government is matching 30 cents or so for every dollar donated, and this is commonly cited as one of the main reasons why private giving is so huge.

How much stronger would this effect be if the money was matched dollar for dollar, or even 50 cents for every dollar? The publicity and excitement that would surround such an announcement would get people riled up, break through the post-holiday clutter, keep the disaster at the front of the mind, and drive a lot more private donations. The US government would be able to do a lot more good than if they just donated that money straight out.

In addition, it would be a great solution to the PR problem. It puts the spotlight directly on the generosity of the American people. The goodwill would likely generate healthy dividends, and could even benefit American security, through decreased recruitment and sympathy for terrorism.

Certainly there are major hurdles to making this happen. If the government were to match donations to private charities, there would have to be an "officially approved charities" list, and there would be disputes about whether religious charities could be on it. A more feasible way would be to set up a government-administered fund that people would donate to, and that the matching funds would also go into. There would certainly be a decent amount of administrative overhead and hassle, but that should be overcome by the increase in donations. There would, of course, have to be some sort of cap, because it would be impossible to get $34 billion worth of aid approved by Congress, on top of the $2.4 billion in there to begin with. But that's pretty standard when matching funds are given.

The biggest roadblock, however, would be the fact that it would probably set a precedent. When future calamities occur, from natural disasters to terrorist attacks, there would be calls to do this again. There would be cries of, "isn't this suffering large enough? Don't you care about the victims?" Taken to the extreme, that would get us to a spot basically identical to today, where the government provides matching funds for all charitable donations, just that they would be matching at a higher rate.

The precedent issue is certainly a concerning one, and I don't see a clear resolution for it. But the idea of setting federal matching funds for private tsunami-relief donations is certainly an interesting one, and something that deserves further discussion and consideration.

Hopefully we'll see a few gazillionaires stepping up to the plate to do this on a smaller scale, matching funds for specific charities. Some have already given large sums as outright donations, so we can probably expect it to happen.

Sidenote 1: Many companies match their employees' charitable contributions. Be sure to check with your employer.

Sidenote 2: Can you imagine if this had hit on Dec 26, 1999, less than a week before Y2K? There would have been mass panic, around the world -- a significant portion of the world's population would have believed that the apocalypse was beginning. At least be thankful that the panic and damage has been confined to one region, rather than multiplying the world over.

Further Reading
- Fascinating and very detailed map of the tsunami's path - Japan's National Institute of Advanced Industrial Science and Technology
- FAQ about the earthquake - The US Geological Survey, which also has loads of technical data about the quake online
- Should you send money to tsunami victims? - Tyler at Marginal Revolution
- Concerns About Wasted Tsunami Aid - NPR

I've posted before about the move by McDonald's towards more healthful food, and also about their unorthodox marketing techniques. Frequent commenter Salas raises a related point: If healthful food is so great for McDonald's, what about Hardee's, which has taken the opposite tack?

Hardee's, meanwhile, last month added the Monster Thickburger to its menu. With two one-third-pound beef patties, four strips of bacon, and three slices of cheese, the burger has 1,417 calories and a whopping 107 grams of fat.

McDonald's Corp.'s Big Mac, with 560 calories and 30 grams of fat, doesn't even come close.

Conventional wisdom says that if you want to survive as #2, be the opposite of #1. Get all the customers that don't like what #1 has to offer.

A great example of this is Target. While other retailers have been facing financial ruin in the face of Wal-Mart's rock-bottom prices, Target has been thriving. Why? They've positioned themselves just slightly upmarket. While Wal-Mart is seen as being dingy, Target is seen as a source for "cheap chic" -- stylish, high-quality products at very low prices. Their prices are slightly higher than Wal-Mart's, but the quality is perceived to be better, so they're still able to make a good "value for money" proposition.

It often pays to ignore conventional wisdom, but in this case the conventional wisdom really is wise. If there's a diverse range of preferences, it's inevitable that the #1 player won't be adequately addressing many of them. Addressing them is the key to surviving as #2, and is often your best shot at becoming #1 yourself.

The healthful food strategy of McDonald's has been a phenomenal success with families and health-conscious people, but that's only part of the fast-food market.

I did construction work in high school, and we ate fast food almost every day. In fact, if you go into a fast-food restaurant at lunch-time, it'll be jam-packed, generally with blue collar workers. There will be some office workers, but most of them are more health-conscious, and have a full hour for their lunch break, so they're more likely to go to traditional restaurants.

People who do manual labor, on the other hand, often don't care if food is fattening, as long as it's good -- they'll be working it off anyway. Besides, counting calories is "girly". "Real men" want a thick, juicy slab of meat -- the more the better.For those who haven't been manual laborers: I can't emphasize the importance of "macho-ness" enough. The tougher you are, the more respect you get. It makes sense when you're working in a dangerous field -- who wants to work with a wuss, whose fear and lack of endurance gets in the way of getting the job done?

These guys are extremely important. They make up most of the lunch trade, which is fast-food's busiest time of the day.

The "Monster Thickburger" at Hardee's is a perfect fit for this demographic, and they've done a terrific job at marketing it. Their ads feature a muscular guy, with the slogan "they're not for little boys, so they don't come with little toys." Brilliant. Absolutely brilliant.

I can see the fast-food market evolving such that McDonald's is the favorite among families and women, Hardee's is the favorite for the blue collar lunch trade, and Taco Bell picks up the people who feel like Mexican food that day.

What's left for Burger King and Wendy's?

Burger King has been trying to beat McDonald's at its own game, and been reasonably successful at it. They've imitated the family-attracting strategies of McDonald's, building quasi-"play places" and quasi-"Happy Meals", while trying to position themselves as being higher quality.

For all of the reasons I discussed in my post about the strategy of McDonald's, I think that Burger King will be left in the dust in their competition with McDonald's for families (unless they change their strategy). But they'll likely continue pursuing it, due to the big investments they've made in building playgrounds in their restaurants.

One big thing that has been boosting them for the past few years is luck: Burger King signed a toy deal with DreamWorks SKG, while McDonald's signed one with Disney. Disney's movies have performed so badly lately that McDonald's is even trying to get out of their contract, while DreamWorks movies have done very well.

At the end of the day, fast-food is first and foremost a convenience game: if your restaurant happens to be the first one someone sees when looking for food, you'll get the sale. The plethora of Burger Kings really helps here. But many fast-food restaurants are grouped together -- it's common to see McDonald's, Burger King, Wendy's, and Hardee's all next to each other. Burger King will likely lose marketshare in these match-ups, and Hardee's will continue to grow and expand, until it has a level of ubiquity on par with McDonald's and Burger King.

As for Wendy's, the one thing they have going for them is their hours -- if you're looking for quick food at midnight, it's either Wendy's or a 7-11 burrito. It works well: every time I've been to a Wendy's at these hours, there's been a huge line-up in the drive-thru. But you don't want your competitive advantage to simply be that you're open later. McDonald's or Hardee's can easily do the same thing, and wipe out your advantage. I don't see anything other than hours that Wendy's has going for it.

So if I was advising Burger King or Wendy's, what would I say? Here are the options, as I see them:

1. Beat Hardee's with the blue collar lunch crowd.

Their Monster Thick Burger is a new brand proposition for them. It shouldn't be too tough to knock them from that perch and beat them, especially since Burger King and Wendy's have far more restaurants than Hardee's does.

2. Dominate Breakfast

The breakfast trade is also something that is often underestimated by outsiders. I remember doing a case study in an MBA class about fast-food's morning coffee sales, and it really surprised me how big it is.

All of the fast-food restaurants are basically doing the same thing in this space, and there's a lot of room to differentiate. Carl's Jr (owned by Hardee's parent) is doing some interesting stuff here with a breakfast burger.

Adding new types of breakfast food won't be enough to "dominate breakfast" however. Why not offer breakfast food all day? Remember the bit from Big Daddy where Adam Sandler was so excited about being awake early enough for the McDonald's breakfast? Many other people would also like a sausage and egg muffin later on in the day. But the real reason for doing this isn't for those afternoon sales -- though that's a big side benefit. The real reason is to get people hooked. To associate your chain with damn good breakfast sandwiches. This will "grow the pie" of breakfast customers by getting more people interested in having a fast-food breakfast, as well as diverting people who already go to a fast-food joint for breakfast to your chain, rather than the competitor.

Sheetz gas stations are also doing some really cool things in the breakfast space, in a way that also ties well with #4. But that is a topic for a future post.

3. Go Upscale

This is what Arby's has been doing lately. They've been offering "homecooked"-type food, at a premium price. Things like entire roast chickens, Chipotle-style burritos, steak, etc. They've also begun renovating their restaurants with much nicer decor: fireplaces, big solid chairs, nice carpeting, and flat-panel screens.

I've been convinced for years that high-end fast-food is a neglected and potentially very profitable niche. The small Madeline's chain of French food does this well, and is much more upscale than Arby's, but I haven't seen it much elsewhere. It's doesn't take a rocket scientist to figure out that many people with above-average income are very busy. They would love to be able to get high-quality, fancy-restaurant-caliber food quickly, and they'd be willing to pay a premium for it. But this is an almost completely ignored niche.

Doing this requires a very large capital outlay to renovate existing restaurants. There's also the question of brand: will people be willing to believe that Wendy's is now upscale? Going all the way with this, to fancy-restaurant-caliber food, will definitely be very difficult and risky with their existing brands. But making an Arby's-style move to this space, going half-way, can work well. As with #1, if Burger King or Wendy's is willing to make this move, their ubiquity will help them to beat out Arby's, despite their headstart.

4. Be the Kings of Speed

People eat fast food because it's convenient. If you have to wait in line for 10 minutes, you're not much better off than if you went to a sit-down restaurant. If Burger King or Wendy's can nail this, they can trump the advantages that McDonald's has.

There's a lot of room for improvement in efficiency. Why have the people who collect the money and pass out the food also be the ones who take the order? This causes unnecessary delays, because they can't take money or hand over food right away, because they're busy taking an order. McDonald's has experimented with using a centralized call center to take orders, and I remember reading about one fast-food chain developing software to predict someone's order based on what car they were driving. The electronic readouts some chains use to show your order, as well as how much you need to pay, cut down on delays from customers counting money and making sure their order is right.

There's bound to be many more ways to increase efficiency. And once you get to the point of being much faster than your competitors, hype it. Why not offer a time guarantee, like pizza chains do? "Less than 5 minutes in the drive-thru, or it's half off".

5. Find a different niche

There's bound to be other niches out there. Find one and claim it. Don't keep chasing the shadow of McDonald's.

Related Posts
- Goodbye Golden Arches: McDonald's UK to replace logo with a question mark (temporarily)
- McDonald's uses graffiti to woo the US Latino market

This past week's issue of The Economist had an interesting survey of Indonesia. On the cover of the magazine, in the upper-right corner, was the following:

INDONESIA AT A CROSSROADS
A Survey, After Page 50

To a normal reader, there's nothing out of the ordinary there. But Simpsons fans aren't normal people.

In the "Catch Me If You Can" episode that aired earlier this year, Homer and Marge got upgraded to First Class. As they were enjoying living the life of the jet-setting upper class, Homer said:

Look at me. I'm reading The Economist.
Did you know Indonesia is at a crossroads?

This isn't the first time The Economist has made subtle references to that joke. When the episode first ran, they printed it, under the title "Our kind of Doh". The same issue carried an article entitled:

Investing in Indonesia
At a crossroads

(this older reference is via The Quantum Pontiff)

Tariffs artificially raise the price of imported goods. If the tariffs are large enough, there can be a big incentive to smuggle otherwise legal goods, in order to evade the tariff and sell the goods at a lower price.

An example: Pakistan's high tariffs and predominantly poor population has led to a massive flow of smuggled goods from Afghanistan. Rather than paying exorbitant prices for a TV, many people will make a trip to the Smugglers' Bazaar on the outskirts of Peshawar, not far from the border with Afghanistan. The scale of this trade is staggering -- US$2.5 billion per year, making up 40% of income generated in Pakistan's NorthWest Frontier Province and tribal areas, and employing tens of thousands of people.

Another example: Cigarette smuggling between states in the US. Smugglers will buy a large volume of cigarettes in states with low tobacco taxes, like Virginia and North Carolina, and resell them in states with high tobacco taxes, like New York and New Jersey. It may seem like cigarette taxes aren't large enough to make it worth the trouble, but a carton of cigarettes that sells for $75 in New York City will only cost $20 in Virginia. Cigarette smuggling has gotten a decent amount of coverage recently, since it has been uncovered that some smugglers funnel the profits to Al Qaeda and Hezbollah.

But the most fascinating case of smuggling legal goods to evade tariffs/taxes is this:

Border guards have unearthed a 3km pipeline used for smuggling liquor from neighbouring Belarus where it can be purchased much more cheaply.
....
The thin pipe ran just a few centimetres beneath the ground, under several roads and a riverbed, and ended next to a Lithuanian's private home in the village of Eisiskiai.

The AP reports that:

It's the fourth such pipeline discovered since 2002 and the longest.

Vodka, which is much cheaper in Belarus, is constantly being smuggled across the border and distributed in mostly rural areas.

A small bottle of legally imported vodka costs about 16 euros ($US28), but homemade vodka smuggled from Belarus typically sells for 4 euros (US$7) a bottle.

This is a recent phenomenon for Lithuania. When Lithuania joined the EU in May 2004, part of the package was, of course, accepting the EU's trade policy.

(via The Econoclast)

On the subject of Vodka Arbitrage:

Vodka is typically filtered using carbon or charcoal. It removes many of the impurities, and makes it "smoother". When you see "triple-distilled" on a bottle, that's what they're referring to.

Vodka isn't the only thing that carbon is used to filter, however. Water filters from companies like Brita also use carbon.

It seems inevitable that some enterprising alcoholics would put two and two together, and try to filter cheap vodka using a Brita water filter. The result was surprisingly good:

Coming into this experiment, I had some doubts as to the methodology as well as the subjective manner in which the results would be judged, not to mention a healthy distrust for anyone who would voluntarily drink Vladimir vodka warm and straight.

Amazingly, though, after the 4th filtration, I came to a startling conclusion: The Filtered vodka tasted better than the control fluid (Ketel One). It was smoother, and had a very delicate aftertaste. Of course, people may claim that it is the aftertaste that is what really gives vodka its flavor, but if you're drinking Vladimir, I certainly hope you weren't drinking it for taste!

Concerns about their methodology are addressed here.

They performed this experiment on Vladimir Vodka, which was the absolute cheapest vodka they could find. They don't specify how much it costs, simply saying this:

Vladimir is a steal. It is, however, painful to drink, has a repugnant aftertaste, and posesses a bouquet reminiscent of rubbing alcohol.

To an economist, this is very surprising. If it is very cheap and easy to turn bad vodka into good vodka, why don't more vodka producers do it? Why sell bad vodka for $3, when you can sell good vodka for $4, and presumably see huge sales? (The $1 cost differential is completely ungrounded, but it feels like a reasonable estimate)

One answer is that many customers want to buy the absolute cheapest vodka possible, without regard to taste, because they will be using it for mixed drinks, where the taste of cheap liquor may be masked. These customers would actually rather buy the bad vodka for $3, even if they could buy good vodka for only a dollar more.

You would expect to see some $4 premium vodkas, however. There would be no room for a marketing budget, and so consumers might doubt a $4 bottle of vodka that claimed to be "premium". But "Two Buck Chuck" proved that a good product at an ultra-ultra-low price will create more than enough buzz. And that's for wine: a product where price is seen as a quality signal more strongly than for almost any other product.

Is there a "Virgin Vodka" in the works? :)

(Update: Apparently Richard Branson has been there, done that. Virgin Vodka was released in 1996, and there was even "Virgin Vodka Flyer", an alcoholic energy drink. Ultimately it was shut down, because "the market was seen to be too price-sensitive. A move towards commodity status was seen as detrimental to the Virgin brand as a whole, not just the vodka.")

But as a consumer, does it pay for you to do your own filtration, if you want a premium vodka without the price?

They report the price of their "control" vodka, Ketel One, as US$11.09 for a 1.75 litre bottle. So you'd want to keep the cost under $11.

My guesstimate of how much a rock-bottom bottle of vodka costs is $3. A Brita water filter costs $5 (assuming that you already have the pitcher that it goes into, making the pitcher price a sunk cost).

The authors of the "study" believe that a filter is only good for one bottle, though they have not proven this. If that's the case, then you can produce $11 vodka for $8, pocketing the $3 and whatever utility you get from having pulled off such a scheme.

Mark Cuban, co-founder of Broadcast.com, owner of the Dallas Mavericks, reality TV show host, and blogger, has decided to start a new hedge fund.

The focus: Sports gambling

I know next to nothing about sports gambling, and I think it's fairly silly when people say, "Investing is just another form of gambling." You'll lose money in the long-run playing blackjack, while you'll make money in the long-run investing in an index fund.

That being said, sports betting does seem like a good opportunity for those with a lot of specialized knowledge. Many (if not most) people who bet on sports are betting on emotion, not on analysis. They're betting for their favorite team, not for the one that has the has the highest probability of winning given weather conditions, past performance in similar match-ups, etc.

I did try sports gambling once. Back in June, everyone and his brother was talking about horseracing. Why? Because a horse named Smarty Jones looked like he might win the Triple Crown -- the first such winner in 25 years. When it came time for the third and final race, the Belmont Stakes, I made the assessment that the "stock" in Smarty Jones was overvalued. I know absolutely zero about horses and horseracing, but I do know about people behave, particularly with their money. People were excited, and wanted to be able to say they bet on the horse that won the triple crown -- to have that betting stub to show their grandkids.

Apparently you can't really bet that a particular horse will lose, you can only bet on which one will win/place/show. Tradesports.com, well-known for their fascinating poltical betting/prediction markets, does allow you to "short" a particular horse, so I shorted Smarty Jones. I took no view on whether he would win or not, just that he was overvalued, so when the price of the "Smarty Jones to win" contract lost value in the minutes before the race started, I went ahead and took my gains and pulled out, rather than actually betting on the outcome of something I know nothing about. I made a little bit of money (but far more utility :)), though I do wish I'd stuck it out...

Anyway, Mark Cuban says:

Most casual gamblers, who are the majority of the money spent, go to vegas expecting to lose money. It's part of the entertainment experience. People put money in mutual funds and in their brokerage accounts and pick stocks expecting to make money. They don't find any value in losing money on a stock, fund or other traditional investment. That changes the opportunity completely.

How efficient can a market be when the majority of investor expect to lose money? The sportsbooks know this. They know the difference between smart and stupid money.
They set odds in order to attract as much emotional, stupid money as it possibly can.

He also raises a very good point about the quality and quantity of available sports information:

When you think about betting on sports, there really is far better information about your local sports team than there is about any local business in your market. The local papers cover the team every day. The local TV station gives a report about every game. There are radio stations who cover them for hours at a time. That’s far more information than you get about Tyco or Computer Associates or NFI.

In sports, when someone does something wrong, they pretty much tell you the next day or two. Someone suspended -- You know it. Someone hurt -- They report it, and do a better job of policing that than any industry watchgroup.

And stats? my goodness. There is no comparison. You can tape everything and create your own stats, which I'm sure every "smart money" gambler does. There are public play-by-plays of every game. There are websites that analyze every which way from sunday every action and inaction of every player in the game.

There also is no such thing as insider information either. Player and team reps can't talk to known gamblers, but do they really need to?

Reporters are there after every practice to interview the players and coaches. They ask the same questions that every gambler wants to know, if only so they know who to pick for their fantasy teams. They also get to see and report on who is there and who isn't and who is limping and who isn't.

Baseball lends itself so well to statistical analysis that there's even a name for it: Sabermetrics

So let's see: a market with a limited set of well-defined outcomes, with a wealth of excellent data available, and yet most participants go purely on emotion, fully expecting to lose money. Sounds like there are probably a lot of inefficiencies that can be exploited there. Mark Cuban didn't become a mult-billionaire being stupid.

Creating a hedge fund with the explicit purpose of gambling on sports is certainly unorthodox, but it wouldn't surprise me if it works out well. A team of full-time, experienced analysts should be able to find some good opportunities.

Related Reading
Sabernomics - Sabermetrics and Economics blog
Will bots destroy online poker? - Me at The Raw Prawn
Hedge fund created to target alleged Coke abuses - Michael at Mahalanobis

Fabian at Fabian's Hammer (one of the best blogs about China you'll ever find) has expanded his scope to include coverage of Maoist movements around the world. From Nepal and India, to Mexico and Peru, revolutionary Maoism is still very much alive.

Keeping abreast of developments relating to Maoist movements is crucial for understanding the internal politics of a number of nations. Western companies operating in these countries should also pay attention, as their facilities are popular targets for Maoist insurrectionists.

Fabian kicks off this coverage with a very interesting post about the "Revolutionary Communist Party, USA". A lot of good info about their history and actions.

By the way, if you ever need to know anything about terrorism and terrorist groups in South Asia, Maoist or otherwise, the South Asia Terrorism Portal is by far my favorite resource. Their email newsletters are top-notch as well.

We had scarcely gone 200 yards into the Guatemalan forest, 20 of us weaving single file along the faint path behind our machete-wielding guide, when Diego Faustino Chavez warned us about a certain kind of bejuco, or vine. "If you step over it," he said to anthropologist Allen Christenson, "you can disappear. Or you think you've been gone for a few seconds, but it's really been three days."

That's the opener of an article in the November 2004 issue of National Geographic, entitled "Descent into the Maya Underworld".

The goal of our pilgrimage was a remote cave called Paq'alibal. For the Tz'utujil, Paq'alibal is arguably the most sacred place in the universe, for it is the cave in which dwell the nuwals, deified ancestors who bless the world with rain and fertility. So dangerous was it to approach the cave unprepared, that Maya believe, that in Santiago several shamans had been performing ceremonies since August to ensure that the nuwals would welcome us. Christenson had been doing fieldwork in Santiago since 1988 and had learned about Paq'alibal early on; but it had taken 15 years for him to earn the trust of the Santiago shamans that now made our trek possible.

It's an interesting account, which provides a window into the religious practices of the modern-day decendents of the ancient Mayas, 7 million of whom live in Mexico, Belize, Guatemala, and Honduras. Also lots of discussion about the importance of caves as an entrance into the world of the gods, and about some of the interesting cave finds of recent years.

About a different cave the author had entered, and the remains of a sacrifice thousands of years ago:

800 yards and almost 2 hours in, we reached the spacious chamber at the heart of the cave. 200 ceramic pots lay scattered about, most of them whole or nearly whole, some arranged in natural niches as if placed in museum display cases. The shock came, however, as we gazed upon our first skeleton -- one of 14 Awe has found in the cave. "This is a human sacrifice," he said. During the next several hours we hovered over one victim after another, including one pile of tiny bones, all that was left of an infant. The most startling skeleton was that of the 20-year-old woman. She lay sprawled in the position of her death, legs and arms akimbo, as some priest had either slit her throat, cut her heart out, or disembowled her. The skull, staring upward at eternity, seemed frozen in a silent scream.

National Geographic only has an excerpt online, so you'll have to find the print edition to read the whole thing. Find it in a library -- that's the only interesting article in the issue (though they do have an updated version of the World at Night map, with different colors for things like fishing lights, fires, etc).

There are a number of additional multimedia features online, however, like a flash presentation of the "sights and sounds of the Maya Underworld", and the full audio recording from 1959 of the ceremony to purify Balankanche, after E. Wyllys Andrews IV's archeological team angered the rain god by entering the cave.