A Tale of Three Companies
Over the next decade, some companies and individuals will prosper greatly. Some will fail. And others will simply adapt and find long-term growth. To make an analogy, companies in the customer support industry are going to fall into one of three categories: they are going to be the Netflix’s, the Blockbuster’s, and the Dillard’s of the next decade.
Let me explain:
Do you remember in the early 2000s when Blockbuster was dominant and Netflix was lending DVDs through the mail? Around that time, Netflix co-founder Reed Hastings met with Blockbuster executives and proposed a partnership where Netflix would manage Blockbuster's online rental business.
Legend holds that Blockbuster declined the offer out of a concern that streaming would reduce its revenue from late fees. After all, if customers can simply stream video content, then they would have no opportunity to forget returning their DVD or VHS rental before the due date. While each customer only pays a few dollars in late fees for each infraction, they sure add up. In the year 2000, a whopping 16% of Blockbuster’s total revenue came from late fees, totaling nearly $800 million in additional revenue.
So, instead of transitioning into the digital age, Blockbuster continued expanding with more store locations, reaching a peak of 9,100 stores in the year 2004. But as Netflix grew, Blockbuster’s value plummeted. In 2010, Blockbuster finally made a desperate attempt to start its own streaming service. But it was too little too late. By the time Blockbuster declared bankruptcy, its market value had fallen to only $12 million, at a point when Netflix’s market value had risen to $8 billion. [Sidenote: Netflix’s market value is currently over $130 billion.]
How did this happen? At the time Netflix arrived, Blockbuster was on top of the video rental world. Blockbuster had abundant resources, a very talented leadership team, and direct access to the very customers Netflix was trying to win over. How did Blockbuster stumble so greatly?
My theory is that it was not due simply to failing to adapt to technological change. Rather, the failure to adapt was a symptom of a much greater, much more deadly problem. Blockbuster lost the entrepreneur’s drive to do whatever it takes to satisfy a customer. Sometime between the opening of the first Blockbuster store in 1985 and the year 2000, Blockbuster lost its entrepreneurial spirit.
The Entrepreneurial Spirit:
When I say entrepreneurial spirit, I am referring to the feeling that an individual has when they first start a business. It is a mix between a passion to solve a problem and the necessity to pay bills. It is a feeling of both joy and fear. A deep sense of purpose accompanied with the realization that if you fail to satisfy customers, you could lose everything. Your home, your reputation, your dreams . . . all gone. It is a feeling that every entrepreneur feels when starting a business from nothing. And it fuels an intense focus on serving customers extremely well.
But it appears that many companies lose this entrepreneurial spirit over time as they grow and become more stable. It appears that satisfying investor demands on short-term financial performance becomes more important than pleasing customers. This is foolishness, of course, because loyal customers are the core asset of a business. And once customer loyalty is lost, the business is destined to fail over the long term. But, none-the-less, investor pressures regarding quarterly performance often prevails.
That certainly happened with Blockbuster. This is made clear by Blockbuster’s reliance on late fees to generate significant revenue. When that source of revenue was threatened by the prospect of making video rentals more convenient, Blockbuster chose to keep the late-fee revenue flowing in at the expense of the customer. The priority of serving customers well was replaced with the priority of short-term financial performance.
The Example of Dillards
Now, let’s turn a corner and compare Blockbuster to the retail company Dillard’s. You know, the clothing store you see in shopping malls. This company was founded by William T. Dillard, a third-generation merchant.[1] He gained his first experience in retail at the age of 12 when he went to work at his father’s general store. The year was 1926. Calvin Coolidge was president. Life was at a slower pace then, and radio was a primary means of entertainment. It was in this environment that William Dillard learned to serve customers well.
Then, in 1938, at the age of 24, William took a leap of faith. He borrowed $8,000 from his father and opened his first department store in Nashville, Arkansas.[2] Not Nashville, Tennessee. We are talking about a small town called Nashville, Arkansas that today has a population of only 4,425. At this point in his life, the lessons William learned from his dad on management and customer service formed the bedrock for how he would now provide for himself.
William found success. He later said his philosophy was to focus on giving the customers value and to advertise.[3] We was also known to say that “business without integrity is not good business—and in the long run will not be successful.”[4]
After 10 years of operating, William took another leap of faith. He sold his Nashville, Arkansas location in 1948 and used the proceeds to purchase a 40% interest in Wooten’s department store in Texarkana.[5] One year later, Mr. Dillard and some associates purchased the remaining 60%.[6] And the tremendous success of the Texarkana store enabled a string of acquisitions across the south.[7]
In 1964, Mr. Dillard opened a location inside a shopping mall for the first time.[8] He quickly realized that malls provided a bright future for expansion. So as malls sprang up across America in the 1960’s and 70’s, Dillard’s department stores became a reliable anchor for many of them.
By the time of Mr. Dillard’s death in 2002, the chain had 350 stores in 29 states, with around $8.5 billion in sales.[9] But his obituary in the New York Times points to some criticism that William Dillard received for running his publicly traded company as if it were privately held.[10] In particular, Dillard family members ran the business. The founder’s oldest son replaced Mr. Dillard as chief executive when he retired in 1998. Another son stepped in as president. And two daughters and a third son had titles of vice president or higher. On top of that, the family maintained majority ownership of the class of stock with voting control.[11] They also had a reputation for refusing to hold earnings calls and avoiding questions from Wall Street investors about their financial performance.[12]
But, these factors criticized in the New York Times obituary are actually what has led to Dillard’s continued success. The Dillard’s family has managed to keep the entrepreneurial spirit alive within the company. While industry peers sometimes mocked the family by calling them “the Dullard’s,”[13] the family has maintained focus on providing an excellent customer experience. And when competitors outpaced their growth in the 1990’s, the Dillard’s family brushed off investor criticism. They stayed true to their principles.
Then came the 2000s, the rise of online shopping, and a great recession. Several retail companies that expanded quickly in the 90’s failed to adapt. Sears, which was once the largest retailer in the United States, declared bankruptcy in 2018. J.C. Penny, struggled for more than a decade before it was forced into bankruptcy during the COVID-19 pandemic. And Macy’s has closed more than 125 stores and laid off thousands of employees.[14]
But do you know which retail brand is not suffering? Dillard’s. It’s share price has soared more than 1,500% between April 2020 and March 2023, outperforming Tesla, Apple, and Amazon during this period.
So how did they do it? Well, the Dillard’s family is quite secretive. They do not provide interviews and they still don’t host quarterly conference calls to discuss earnings with investors. But there are clues to their success in a recent Wall Street Journal article. Instead of going all-in to chase online shoppers, Dillard’s created the best possible in-person experience. And customers who crave that experience are raving about it. The Wall Street Journal describes Dillard’s customers as “truly loyal to the brand” and “nearly fanatical in their enthusiasm.”[15]Dillard’s Employees are trained to act like personal shoppers and to know their customers by name. The CEO and President (who are the sons of the founder) visit stores weekly and are in tune with what customers actually want to buy. In essence, Dillard’s has adapted to technological change, not by becoming the world’s biggest online retailer. But rather by becoming the best store for customers who still want an in-person experience. They are able to do this because the entrepreneurial passion for serving customers was successfully passed on by the founder.
Are you the next Netflix, Blockbuster, or Dillard’s?
Comparing Blockbuster and Dillard’s is interesting because they are both companies that went through tremendous change brought by technological innovation. One was able to adapt, while the other was not. I believe Blockbuster was either unwilling or unable to adapt because lost touch with its customers. So when its customers spending habits changed, Blockbuster was unable to change with it. Meanwhile, Dillard’s has always been intensely focused on serving customers. So when online shopping began to take off, Dillard’s was able to stay in tune with the type of customer that would stay most loyal.
All of this is important for us to consider today as artificial intelligence is going to change our clients’ and customers’ purchasing decisions. So this raises the following question:
What will your company look like 10 years from now: Netflix, Blockbuster, or Dillard’s?
[1] https://www.nytimes.com/2002/02/09/business/william-t-dillard-founder-of-a-retail-chain-dies-at-87.html
[2]https://www.forbes.com/sites/laurendebter/2021/12/10/dillards-department-store-top-stock-2021/?sh=403ed48f6361
[3] https://www.nytimes.com/2002/02/09/business/william-t-dillard-founder-of-a-retail-chain-dies-at-87.html
[4] https://encyclopediaofarkansas.net/entries/william-thomas-dillard-4529/
[5] https://encyclopediaofarkansas.net/entries/william-thomas-dillard-4529/
[6] https://encyclopediaofarkansas.net/entries/william-thomas-dillard-4529/
[7] https://encyclopediaofarkansas.net/entries/william-thomas-dillard-4529/
[8] https://www.nytimes.com/2002/02/09/business/william-t-dillard-founder-of-a-retail-chain-dies-at-87.html
[9] https://www.nytimes.com/2002/02/09/business/william-t-dillard-founder-of-a-retail-chain-dies-at-87.html
[10] https://www.nytimes.com/2002/02/09/business/william-t-dillard-founder-of-a-retail-chain-dies-at-87.html
[11] https://www.nytimes.com/2002/02/09/business/william-t-dillard-founder-of-a-retail-chain-dies-at-87.html
[12] https://www.forbes.com/sites/laurendebter/2021/12/10/dillards-department-store-top-stock-2021/?sh=403ed48f6361
[13] https://www.forbes.com/sites/laurendebter/2021/12/10/dillards-department-store-top-stock-2021/?sh=403ed48f6361
[14] https://www.businessinsider.com/macys-history-includes-rise-and-fall-photos-2020-2#macys-was-founded-in-new-york-city-by-rowland-hussey-macy-in-1851-1
[15] https://www.wsj.com/articles/this-department-store-stock-has-trounced-apple-amazon-and-tesla-ba6e7881?mod=Searchresults_pos1&page=1