The Rise And Fall Of The Purple Cow: A Story Of 4 Purple Companies

by: Richard Richter

Seth Godin's 2002 marketing blockbuster The Purple Cow really changed the way people think about marketing. His thesis is that advertising has become ineffective, and that in order to attract attention these days, a company has to really stand out and do something unorthodox, what he calls "purple cow" as opposed to "brown cow". The book mentions several companies that took off with a purple cow idea. Some of them are still successful and maintaining their purple cow marketing campaign by continually innovating. Others have fallen from grace. In this article I'd like to contrast four companies, two purple cow successes and two that are again struggling, and top it off with what I see as a possible new purple cow company in the making.

JetBlue (JBLU) and Logitech (LOGI), fallen from purple grace

We all remember when JetBlue hit the scene. It was the little things that made people happy and made JetBlue a purple cow. The fact that the staff would do most of the cleaning of the plane before landing instead of between flights and encourage the passengers to help in an effort to keep the next flight from being delayed and thereby lowering costs for everyone. It was a team effort. The inside of the planes themselves was very aesthetically pleasing. The seats were actually comfortable. But what I especially remember was the complementary bag of Terra Blues potato chips I always got in flight. Not a cheap bag of peanuts, but a real gourmet brand of interesting and tasty potato chips! Something as seemingly inconsequential as a bag of gourmet blue chips really stood out for passengers and made them feel appreciated beyond the hackneyed "We appreciate your business and hope you fly with us again," line at the end of a flight that you know is being recited by a zombie flight attendant with too many peanuts in its pockets. Passengers quickly flocked to the purple cow that was JetBlue.

JetBlue's net income before breakout in 2003 was $49M. At its peak, during its breakout year, earnings were $103M. But JBLU's last peak in 2007 at over $16 a share was the short opportunity of a lifetime. Despite revenues being up 82% in a two year period to over $2B from '04 to -06, JetBlue's losses just kept growing. Anyone who saw this and shorted the company reaped handsomely. Its problem was debt, as interest expense was killing its profits. It had taken on too much debt in an attempt to expand too fast.

The problem with JetBlue is not that it can't attract customers and grow its revenues. The problem is with the airline industry itself. At $4.5B in FY 2011, JetBlue's revenues are 366% higher than what they were when the company was at its peak profitability. It is now back net positive, but its debt load is still a hefty $2.9B, which is almost twice its market cap. JetBlue is still a beloved airline by its passengers, but it will be a long time before the company can claw out of debt and really grow again.

The story with Logitech is a little bit different. When LOGI broke out between 2005 and 2007, its revenues and earnings were growing by leaps and bounds - 40% in two years, and income by an even larger 54%. What made this possible, Godin notes in his book, was the purple cow nature of its products. Nothing technologically revolutionary, but the design, style, and ergonomics of its mice and other computer accessories really stood out against competitors.

Unfortunately, the cost of doing business has skyrocketed, and with huge competitors like Apple (AAPL) conquering the cool design space, Logitech has not stood out for quite a while. Its 2012 revenues were only 12% higher than what they were in their peak year of 2007, and net income has dropped 68% since then. The only reason to invest in LOGI now is bottom-picking speculation, and it paid its first 79 cent dividend last quarter, which is pretty decent considering its size.

Starbucks (SBUX) and Krispy Kreme (KKD); two purple cows that continue to shine purple

Two purple cow companies mentioned in Godin's book have continued to grow, though one had some trouble in the interim. Krispy Kreme made purple cow headlines with Godin with its original and standout way of opening new chains. Every time Krispy Kreme would open a new branch, it would open at some godforsaken hour like 3 in the morning in order to attract attention, and hand out a bunch of free donuts to anyone crazy and fanatic enough to show up.

This accomplished two things. First, the media would get a nice story of a Krispy Kreme Grand Opening at 3am, and the hour would filter out the average donut admirer from the true donut Krispy Kreme enthusiast. The enthusiasts would then take their free donuts and tell their friends.

This business strategy catapulted the company into dramatic gains. In its growth stage from 2000 to 2002, its income ballooned from $6M to over $26M. Its collapse came in 2004 when debt ballooned to $50M. By 2005, however, it was clear the company had expanded too fast. With record high revenues of over $700M, impairment charges had destroyed its profit margins, and it was operating at a loss and taking on more debt.

But people still ate its donuts every time a new branch opened at 3am. It has since paid down its debt a little each quarter and revenues are starting to grow again. Better catch this one on the way back up. This time the company knows to take it slow.

As for Starbucks, I won't go into the nitty gritty numbers of its story, but I will make one simple bullish case. Starbucks was purple cow because it changed the entire experience of what coffee is. Before Starbucks, it was a cheap drink you had privately or with an omelet at a breakfast place. It wasn't an experience. It was just caffeine. Starbucks made it into a whole shebang and cultural phenomenon by making it more expensive and adding a whole lot of bells and whistles. The reason I think Starbucks still has plenty of room to grow is that management has clearly showed purple cow acumen in its recent acquisition of Teavana. Teavana is a purple cow for tea if ever there was one. Step into that place and you feel like royalty, with tea flavors expensive as can be from all around the world and aromas that you wouldn't smell anywhere else. It stands out a mile away. As a believer in the purple cow, just as Starbucks changed coffee, Teavana will change tea. With a 1.5% annual dividend and its strong performance even in times of recession, SBUX is a safe one to hold for years out.

Could soup be the new purple cow?

Soup is pretty blah. Campbell (CPB) is a staple steady stock, but it doesn't move much, nor do its revenues or earnings. There's nothing purple cow about Campbell. At best, it's a place to park money to defend oneself from inflation. The company I had in mind that could change the way America sees soup is the Original Soupman (SOUP.OB). In a way, Soupman has already changed the way America thinks about soup, as Soupman is what was behind the Seinfeld Soup Nazi character. It's a pity the company didn't go public back then. It would have had an easier time playing off being a cultural icon.

The soup is definitely purple cow, as Soupman's original shop does indeed have long two-hour cues outside in Manhattan on cold winter days as Seinfeld depicted. Everyone remembers the famous crab bisque even though most Americans have never had it.

The question is, can Soupman take its amazing purple cow soup product and really turn it into a national phenomenon? It hasn't succeeded yet and there are a lot of challenges the company must face and overcome if it is to do so. Take a look at its quarterly report and decide for yourself if this microcap is worth a shot at the purple cow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.