Originally published on LinkedIn June 25, 2020.
By Eric Dorré and Marik Brockman
Innovating through a crisis is critical. It’s well known that innovation is required to stay relevant amidst ongoing technology disruption and through up-and-down economic cycles. But it’s even more critical in response to exogenous political or public health crises that can upend entire industries and ripple through the whole economy in a matter of weeks, not months or quarters. Here we are, and the opportunity is now!
Traditional waves of technology disruption and economic recessions are cyclical and more ambient. They take longer to unfold than sudden financial and political shocks, where the innovation response must be swift. If you miss the window, at worst, you may not survive. At the least, you will have missed the opportunity to thrive within a new ecosystem of customers and partners.
The COVID-19 pandemic has provided numerous examples of Immediate Innovators who will survive and thrive, even if on a small scale. These Immediate Innovators are more than likely infinite, iterative innovators who are intrinsically in touch with customer needs and already constantly evolve, even during good times. We also see examples of Stallers who wait-and-see, and Wash-outs who perish for lack of resources or, sadly, leadership. As a business leader, how are you creatively adapting?
Questions you should be asking yourself, everyday (not just in crisis):
Are you an infinite, iterative innovator making change, or does change happen to you?
Are your suppliers and customers innovating with you as partners or just along for the ride?
What forms of innovation should you be promoting in your industry’s ecosystem?
What pain points create waste in your value chain and how can you partner with like-minded customers and suppliers to eliminate them?
The Innovators
Even within the mature and relatively constrained restaurant and retail industries we find fantastic examples of immediate innovators. Copenhagen Denmark’s Noma, the #1 ranked restaurant in the world, provides a timely example. Usually they take reservations a year in advance, selling out each day in minutes, and feature organic produce from their own garden, locally raised meats, and rare, regionally-foraged herbs and accents.
Shutting down for a brief spell during COVID-19, they re-emerged, serving artisan burgers outside on picnic tables and featuring a wine bar. With a brand known to be exclusive and inaccessible thanks to worldwide demand and limited table-space, a Noma experience is now accessible to most Copenhageners, without a reservation!
Owner and master chef Rene Redzepi need not explain running a burger bar alongside his multicourse tour-de-force. Useful innovation needs no explanation. In the meantime, Noma remains in people’s minds, Denmark's "hygge" mystique is reinforced, and he’s having fun while keeping staff in place for the eventual re-opening that will take weeks of preparation to ensure their world-class quality.
Portland, Oregon provides a now world-renowned, if not somewhat risqué, example of innovation in the face of immediate economic turmoil thanks to a pair of gentlemen’s clubs who were forced to shut down after bars were deemed non-essential during a global pandemic. While an unorthodox case study, the pace and scope of change the business executed has gained coverage by Huffington Post UK, New York Post, and Rolling Stone Magazine.
To keep employees working, from cooks, to bartenders, to dancers, the Lucky Devil Lounge began delivering meals with a scantily clad team, calling it Boober Eats. But ride-hailing juggernaut Uber sent a cease-and-desist notice for trademark infringement on behalf of Uber Eats, so the owner had to innovate again. The result was impressive.
Proving there was still support for the business, their Devil’s Point location built a drive-through bar / restaurant where dancers work acrobatics on legitimate gymnastic equipment including rings and a high-bar. Business is booming and appeals to a wider audience because there is no drinking on premise during the lockdown and dancers keep their clothes on. From the #1 restaurant in the world to local bars, this proves anyone can use a crisis to innovate.
The Stallers
Most restaurants who never closed for COVID-19 were already offering take-out or delivery: pizza shops, ethnic eateries, and fast food chains. Restaurants who were always dine-in only, especially with white tablecloths, figured they would just wait out the lockdown for a few weeks. As orders and closures were extended, a plethora of restaurants who never imagined promoting pick-up and delivery had to try. Options are limited: (1) offer take out only; (2) build your own delivery operation; or (3) sign-up with a delivery startup company backed by venture capital.
Agreeing to the constraints imposed by branded power houses like UberEats, DoorDash, GrubHub, Caviar, and Postmates exposes restaurateurs to partnering with questionably sustainable business models. Delivery rules include offering the same prices charged to in-house diners while the restaurant also pays 30% commissions to the app service. Customers then pay a laundry list of fees that increase the cost of their meal 25-91%, according to the NY times (see below).
Source: New York Times
Results for independent proprietors will range from relative success, to mere survival on ultra-tight margins, to closing permanently. Outcomes will be skewed toward the latter two outcomes with neither the small businesses nor the delivery apps thriving. While apps are convenient for users, customers are increasingly aware of the economic damage to their wallets and their favorite local spot. This is an ecosystem of failed interdependencies.
Government officials have intervened in several major US cities, capping commissions paid to apps at various levels. It’s clear the apps will consolidate as that process unfolds. This will eliminate redundant costs and reduce marketing expenses used to attract customers to any one of many apps for the same hamburger.
In the end, the apps will need to find a price level that works for their business models, delivery partners, restaurant partners, and customers. There is a long way to go, but transparency in “who” is paying “what” is helping to elicit that equilibrium point. In the meantime, several businesses may shut, and multi-location businesses may consolidate as the many “shotgun” marriages of convenience reach their inevitable conclusions.
Invoking the “Mercy Rule”: Wash-Outs and Yard Sales
Only 60 days into the lockdown, numerous retailers announced plans to close most or all of their doors while declaring bankruptcy. These include formidable brands Pier 1 Imports, California Pizza Kitchen, Neiman Marcus, J. Crew, and JCPenney. The list will grow with anemic re-openings.
Nobody should stick around for the end of this one…
All these names bear similarities: at one point, they were on their A-game, but fundamentally failed to translate strengths into future growth with continuous innovation.
These were avoidable, but a long time ago.
No one plans for revenues to go from “doing fine” to zero in one day, for 2-3 months straight, with little clarity about when conditions will improve. Very few businesses can withstand such shocks, no matter their business plan. It’s not prudent nor possible to carry enough cash to remain liquid through such a crisis, which accounts for why governments around the world have thrown about massive forms of aid. Nevertheless, some business never stood a chance going into the crisis.
What is perhaps most striking is how many businesses filed Chapter 11 within the first month of the crisis. Clearly these businesses were already on their way out. Why? Because they never adequately adapted nor innovated during the “regular” business cycle--which, by the way, was 127 months of continuous economic growth, the longest stretch in history--and they proved they were out of their league. Their creditors and management teams have finally invoked the “slaughter rule” (more kindly called the “mercy rule”). Whatever transformation plans were in progress, they lacked discipline and creativity to achieve.
Some of these zombies were victims of financially engineered buyouts. To prolong the inevitable, Sears (while not quite dead again), sold off its core brands and with it its differentiation. Since then, they've made no investment in technology, innovation, partnerships, nor growth. Sears and its peers are closer to an end-of-life vigil than an energetic rejuvenation of core capabilities to become relevant in the game. The souls of their hollowed-out bodies are long departed, and all that remains are embedded ties to legacy models and cost structures leaving them suffocating with high debt, empty stores, flagging sub-brands, and unmotivated employees.
Everyone saw it coming, COVID-19 only accelerated it. Thirty years ago, Kmart alone (now merged with Sears) was a bigger retailer than Walmart. The difference between Sears/Kmart and Walmart: discipline, innovation, and tightly choreographed, technology-enabled business models with suppliers and partners.
VALUE IN THE SCRAP HEAP
Strikingly, Amazon is rumored to be in acquisition discussions with JCPenney, with the strongest assets being JCPenney’s real-estate. Anticipated re-purposing could include tech-enabled physical retail businesses (perhaps AmazonGo, Amazon 4-Star, or Amazon Bookstores), and the transforming of old retail stores into geographically advantageous warehouse and distribution nodes.
Note, this isn’t Amazon putting these companies out of business; it’s Amazon recognizing where value lies in these neglected and relatively hopeless businesses. As the solvency ship had long ago sailed, senior management should’ve sought buyers for whom key assets are more aligned with sustainable strategies.
At their core, capabilities and hope had decayed for the Wash-Outs, and the ability to attract talent evaporated. None of this obsolescence was inevitable. It was the consequence of a failure to continuously innovate and management’s neglect, then burdensome debt.
Summary
Crises like these, both in business and life, forces us to contemplate mortality. They also remind us to expect shocks--it’s business as unusual. At least in business, we can learn lessons over time and live to fight another day. Business leaders worth that moniker will take the questions above to heart and do the hard work necessary to survive and thrive. Are you doing all you can to make it through this disruption? Will you be ready for the next one?