November 20, 2006 – The following blog entry is a re-cycled entry from a magazine column that I write. I’m re-cycling this column because this article is a particular favorite of mine. However, don’t worry, you won’t see this blog degenerate into a blog of recycled ideas. 99% of my blog entries will be new. Besides, for the overwhelming majority of you, this article is probably still novel. So if it is, please read on.
What does McDonalds really sell? And what about Nike? I know what you’re thinking. You’re thinking what in the world does understanding McDonalds’ and Nike’s marketing strategy have to do with building wealth? As you’ll discover in this article, understanding this has everything to do with how successful you’ll be in building wealth.
So what does McDonalds sell?
If you guessed hamburgers, fries and milkshakes, guess again.
Your second guess is probably wrong too. Because I know with today’s obsession with “lifestyle” marketing, most people believe that McDonalds sells a feeling of comfort and a family-friendly atmosphere. Just look at their Happy Meals, the fact that the only fictional character more recognizable than Ronald McDonald is Santa Claus, their frequent Disney promotion tie-ins, and their “You Deserve a Break Today” jingle. But McDonalds doesn’t sell comfort either.
Pure and simple, McDonalds sells real estate. If the quality of the food were McDonald’s number one concern, then people wouldn’t become obese from eating their food and you wouldn’t be shocked to find out what’s inside your meat (Just read the book Fast Food Nation if you really want to know what’s in your Big Mac. If you’re too lazy to read the book, good news – there is a Hollywood version of the book coming soon to a theater near you). In 1968, McDonalds operated just 1,000 restaurants. Less than 40 years later, it operates over 30,000 restaurants world-wide and opens 2,000 new restaurants every year.
To repeat myself, McDonalds sells real estate. If you still don’t believe me, this declaration came from the horse’s mouth. Ray Krok’s (the owner of McDonalds) right-hand man and business partner, Harry Sonneborn, stated: “We are in the real estate business. The only reason we sell hamburgers is because they are the greatest producer of revenue from which our tenants can pay us rent.”
Of all the major fast food franchises, McDonalds is the only one that owns or holds the lease on their restaurants. That makes them one of the largest landlords in the world. And the cost to buy one of their franchises? About a cool USD $500,000.
Actually this price is cheap compared to the USD $1,500,000 franchise tag per restaurant for their major competitors. But their competitors don’t own or hold the leases on their restaurants. That’s the difference.
What about Nike?
So now that you know the deal about McDonalds, what about Nike? Given that Nike does not own a single sneaker factory or have a single person directly involved in manufacturing their sneakers on their payroll, it is most definitely not shoes. They outsource every single step of the manufacturing process so they can spend the greatest percent of their annual budget every year on marketing. Nike’s largest budget percentage is overwhelmingly allocated every year to their designs and marketing department. And what do these employees do?
They manufacture “ideas” and “dreams”.
Before Nike paid Michael Jordan more than enough money that he could ever possibly know what to do with, the sneakers every kid wanted on their feet when they went back to school were Adidas. Nikes were what kids wore when you couldn’t afford Adidas. Back then, Run DMC cut a track titled “My Adidas”, not “My Nikes”. Back then, Adidas had the respect of the all demographically-important hip-hop community, not Nike.
When Nike realized that the key to success was to sell not shoes, but the concept that wearing Nikes would make you a better athlete, make you “cooler”, would make you stronger, run longer, run faster, give you more endurance, even make you jump higher “just like Mike”, only then did they started selling more shoes than anyone else. In fact, before they hired Michael Jordan to promote their ideas, Nike was losing so much money that they almost went bankrupt. But few people remember those days. In fact, this strategy of selling ideas proved so successful that Nike even coined a term for it.
They call this process “bro-ing” (Source: No Logo, by Naomi Klein, p. 75). They would take their prototype shoes to the inner-city playgrounds of Philly, Chicago, and New York, approach young kids, and say “Hey bro, check out the shoes” to build a buzz around them (this stuff is just too good to ever make up). As ridiculous as this sounds, this is true (I only wonder if they sent brothers to go on the “bro-ing” expeditions to keep it authentic).
Nike shoe designer Aaron Cooper stated that when he went on a “bro-ing” expedition in Harlem in New York City, that kids would tell him that Nike was the most important thing in their lives. Number two was their girlfriend. Nike determined from that point on, they were going to “bro” people to death. Since that decision, Nike has long replaced Adidas as the “it” sneaker among the “in-crowd”. Simply put, Nike is a brilliant marketing company.
NOW FOR THE PAYOFF
What do the big global investment firms sell?
Now that you understand the history behind McDonald’s and Nike’s marketing strategies, this will help you understand the strategies employed by large investment firms. The big investment firms employ some very sharp minds as well. They understand that selling a customer a dream and not reality will gather more assets. That’s why they don’t attempt to sell you great returns even though this is undoubtedly one of the very top things that every investor wants.
How else can you explain why most investment firms always tell you never to expect more than 6% to 10% maximum returns a year from your stock portfolio? Do those returns sound dreamy to you? If this was their major marketing campaign, how many private wealth management clients do you think they would have?
Can you imagine a slogan: “Because we make you 8% a year”?
Somehow I don’t think such a slogan would drum up much business. So the global investment houses, just like McDonalds, have figured out a way to sell you something else instead. Because they are not interested in trying to earn more than 6% to 10% a year for you, and this concept could never be sold as a dream, they sell you trust, and in the case of a post 9-11 America, sometimes even shamelessly sell national pride. Just look at some of the slogans they have used.
Prudential. “Growing and Protecting Your Wealth”.
Merrill Lynch. “We’re bullish on America”.
The message has always been, “Trust us, because we know what we’re doing. Since we’re the authorities, if we can’t earn you more than 6% to 10% a year, then you certainly won’t be able to do any better on your own.” And in the case of Merrill Lynch’s slogan of “We’re Bullish on America”, if that’s true, I’d like to take a look at their CEO’s stock portfolio in mid-2006 and see exactly how much of his portfolio is allocated to the U.S. stock markets. If you so desire, you can trust them right down the path of mediocrity when it comes to performance.
A simple way to determine what is the core of a company’s mission is not to read their mission statement, but to observe what companies spend all their time and money doing.
McDonald’s spends all their time and money building new restaurants.
Conclusion: McDonald’s #1 goal is to sell as much real estate as possible through selling what enables their tenants to pay rent — fast food.
Nike spends the lion’s share of their budget on marketing.
Conclusion: Nike’s #1 goal is to brand itself as the “it” brand to own.
Global investment firms spend all their time and money training their financial consultants how to gather more assets.
Conclusion: Global investment firms’ #1 goal is to gather as many assets as they can, not to maximize the returns of your portfolio.
If you really are skeptical of this, just call up you financial consultant and ask him (or her) how he spends all of his time every day. Ask him (or her) to describe an average day to you and calculate how much of every day is actually spent in activities that will maximize the return of your portfolio versus how much of every day is spent in activities that will maximize the amount of additional assets gathered for the firm. And therein lies your answer.
Another slogan many investment firms use are catch phrases that revolve around risk management such as “unparalleled risk management” and so on. Tomorrow, I’ll tell you how these phrases are used in misleading capacities as well.
On tap for tomorrow: Is Risk Really as Scary and Bad as Investment Firms Lead You to Believe?
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J.S. Kim is the Founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to return high double-digit and triple-digit returns.
