The Press, October 2010
What’s yellow and leaves a sour taste in your mouth? For you and I it might be a lemon, but for a bunch of bankers owed around $1.19 billion it is likely to be directories company the Yellow Pages Group (YPG).
The unfortunate situation, which saw the planned sale of YPG fall through last month, may owe something to that classic marketing mistake of misunderstanding your real competition.
It is something any business in any sector needs to be constantly focussed on to protect itself from innovative competitors.
Telecom’s directories business (including the Yellow and White pages and the respective websites) was seen as a cash cow prior to its sale in 2007, contributing around 10% of their annual revenue. It was sold to a private equity consortium feasting on cheap debt for what was regarded at the time as an exceptionally good price (for Telecom) of $2.2 billion.
It has been downhill ever since for YPG, with earnings declining, the original buyers reported to have written off their investment and the banks taking control, left with the billion dollar sized hole.
YPG are forecasting earnings of about $133 million in the year to June 2011, down from about $157 million in the June 2010 year. Interest on the debt alone is running at more than $150 million per annum. If they were a homeowner it would be a mortgagee sale; if they were a horse it would be the glue factory.
At present they can’t even sell their way out of trouble, with YPG taken off the market as they couldn’t find a buyer at a suitable price. Reports have put offers at being as little as a quarter of the original purchase price.
At the core of the problem is the declining profitability of their good old print directories, which tend to find more use as inelegant door stops or propping up computer monitors than actually providing people with information.
YPG’s online business is growing quickly though, with the company investing smartly in areas like mobile directory solutions (i.e. for your cell phone), and getting referrals from the Google search engine. The tough bit is that this only represents 10% of overall earnings.
The problem for YPG in the long term is the competitive landscape. There are broad services like Google of course, which is the first place many start when looking for goods and services typically advertised by Yellow Pages (although Yellow.co.nz gets some of that traffic).
Then there are niche players like Builders Crack, a directory website for trade suppliers like builder, plumbers and painters. Dineout, a website that lists and rates restaurants throughout the country, is another example.
Added to this are fancy new location-based services like Foursquare, for the more geeky. These are basically where your location is tracked and mapped on the basis of the GPS in your phone. Your mates can track where you are and what you are doing, and review your recommendations for services like restaurants or shops in that area. Sounds a bit ‘big brother’ for me, but it is gaining popularity in the US.
Individual companies are also getting a lot smarter at promoting themselves directly to consumers online through web or iPhone applications, with little need for a costly Yellow pages advertisement on or offline.
A fundamental difference between YPG’s products and these offerings is that they are primarily focussed on the end consumer, not the advertiser. They can afford to let people rank and provide opinions that help guide others, whereas YPG is focussed on enhancing their advertisers’ reputation.
With YPG the biggest advertisers can secure the best listings, whereas in a customer-driven system like Dineout or Menumania, the best ranked restaurant gets prominence.
Focussing on the wrong end-market means you are less aware of potential competition. Perhaps the original purchasers of YPG focussed too much on their traditional competition from other directory businesses, rather than the less obvious new wave of online opponents.
Maybe they suffered from marketing myopia, thinking they were in the directories market rather than the ‘helping consumers make purchase decision’ market.
How can you know where your real competition lies? A clue is that customer’s needs are enduring, while solutions to those needs (i.e. products and services) will always change over time. For example, hunger will always be a deep human need, but the ways of meeting that will change constantly over time.
For directories like Yellow Pages, people will always need to make decisions about buying goods and services, but they won’t buy printed directories for ever more. The way they can do that will always change over time as new solutions come along. And with technology the pace of that change has accelerated.
Companies that don’t understand this, or move too slowly to respond, will always struggle and suffer decline over time.
How can YPG respond? Can they survive? They still have a hugely powerful brand, and have invested in it with advertising campaigns like the Treehouse and Yellow chocolate bar. The ultimate question will be whether they are brave enough to focus on solving customer problems rather than remaining beholden to their advertisers.