Indexed Annuities, Starbucks approach middle age
Consider the recent history of two products. In the American marketplace, both held a pedestrian yet respectable position: solid, reliable, sometimes boring but rarely unpredictable, associated with mature consumers who had little time for restless speculation. For those desiring a more interesting experience, there were other roads to travel, routes that could lead to more stirring results, albeit with a little risk. Our protagonists in this analogy, though, our two square and conventional product cousins, couldn’t be bothered with such folly.
I’m writing, of course, about fixed annuities and coffee. Bear with me.
Two run-of-the-mill products were torn apart and recreated, and emerged more interesting and complicated than before, and inarguably more marketable. Now, the coffee drinker was immersed the world of the Italian coffee house without leaving their block. How could that person, experiencing that heady rush of bohemian prestige every morning, ever return to the line at their local doughnut shop? By 2004, “Americans drank a record amount of coffee at home, in the office and at trendy cafes, lifting green coffee roastings to a 30-year high, industry research found last week. ‘The specialty coffee industry created a number of different entry level points for consumers that leads to that coffee drinking habit. Ninety percent of the credit goes to the specialty industry.’”1
Similarly, indexed annuities surged from modest beginnings to more than 55 billion in 2004.2 Certainly market conditions played a part in their rise during the early part of the decade, but salability and choice didn’t hurt. The safer investor could now play in the market and keep their chips from going to the house, provided they were willing to sit at the table long enough. The EIA brought new possibilities to traditional insurance savings products, and submerged the safe investor into the fast-track world of the stock and bond markets, all while wearing a life vest. Investing in fixed annuities became, dare we suggest, cool?
The Life Cycle and lessons learned
But products, like people and organizations, have a predictable life cycle. What we have referenced so far is the birth (or rebirth) and subsequent love affair with the childhood, or growth stage, of each product’s life cycle. It is new, different, and interesting, and especially in our coffee example, often makes us feel better about ourselves. We experience a period of discovery where we overlook its flaws, its price tag, or its consequences, because…well…aside from the benefits of the product, it’s so fresh and seemingly unique. We have seen this phenomenon with the new fixed annuity (formerly known as the EIA) and the new cup of coffee, the gourmet latte.
Since their rise to relative prominence in the middle part of the decade, both products grew from their relatively trouble-free, whimsical childhood into their adolescent stage. And it is there, typically, where the trouble and subsequent supervision begins. Excessive experimentation leads to confusion and bloated, hubris-driven ventures as products and companies approach middle age. Consider this from Greg Beato of Reason magazine:
In 2008, Starbucks closed 661 under-performing locations. In 2009 it shuttered an additional 300 stores and laid off 6,700 employees. In an attempt to position itself against newer, hipper rivals, the company started talking up its “heritage.” It resurrected a less polished version of its logo for use in certain branding situations. Presumably, its coffee is still brewed from coffee beans, but everything else in its new stores seems to have made a radical career switch. The bar at a London Starbucks is upholstered with scraps from an Italian shoe factory. The countertop at the Paris Starbucks is made out of recycled cell phones.3
Starbuck’s seems to have emerged from its adolescent period with a wary eye towards middle age; it’s still experimenting, still scrambling to meet the inevitable flood of competitive pressure, retraining, re-tooling.
Here’s where the parallel lines begin to draw nearer in our most unlikely analogy. First, it’s interesting to note that customers were initially drawn to the European-style prestige that has been so fundamental to the Starbuck’s model, but they have also made their preferences clear; Starbuck’s, whether willingly or grudgingly, has wisely listened, despite its continued flirtations with high-minded exclusivity. Chances are, you won’t be able to order a blended toffee Frappucino on your next tour of Italy’s countryside; but authenticity be damned, if it’s Frappucinos the customer wants, Starbuck’s delivers in several flavors. Second, the original idea is still good enough! A decent cup of rich coffee and a great aesthetic experience worked then, and it works now. After that, the best ideas a product manufacturer can implement as it approaches middle age come from the customers themselves.
And it’s a lesson that some indexed annuity carriers have learned well after a particular rough adolescent development period. Following its rapid growth through childhood, the product, its manufacturers, distributors and salespeople- its supply and delivery chain, or “the chain”- had played the part of the cocky teenager well- occasionally flaunting and thumbing its nose at authority figures (the regulators), sometimes taking more than its fair share (sales practices) and pushing its parents’ limits on curfews (surrender periods), resulting in sometimes unfair punishments and restrictions (05-50, 151a) that have been aimed at the troublesome few to the detriment of the well-behaved many. Misinformation fueled by competing industry forces flooded consumers, further exacerbating the problem. Many of us along the way weren’t sure if the chain would survive strong and intact.
As indexed annuities approach middle age, the chain has in many respects responded admirably, albeit slowly, a result that could be attributed to several factors inherent in such a scrutinized and regulated industry. Like our coffee-producing friends, the manufacturing link in the chain has listened to its customers (distributors and agents) by developing consumer-friendly products that match their needs and wants. With an eye towards the regulators and the possibility of new restrictions and overseers, every link in the chain has adjusted accordingly, resulting in more robust training and suitability programs. Finally, each link in the chain also seems to understand one simple truth: the product, broken down into its essential components so appealing to consumers in the first place, is good enough. The lessons of the life cycle have endured.
Footnotes:
[1] Food and Drink Weekly, Feb. 16, 2004.
[2] Jack Marrion, www.indexannuity.org, March 2010.
[3] Greg Beato, Starbuck’s Midlife Crisis, Reason, February 9, 2010