Old Giant or Young Upstart, the Ultimate Question Is the Same: How Do You Grow?

For any business, there is only one ultimate question: growth and more growth, profit and more profit.

"The world has gone to ruin."

But the world may not be changing as violently as we imagine.

Reading Bloomberg Businessweek's recent list of 50 companies to watch in 2017, you still get the sense that, turbulent as the times are, the business world is going about its work in good order.

This is a year-ahead project Bloomberg started last year, drawing on the views of 250 analysts at Bloomberg Intelligence. Through it we can glimpse what Wall Street is fretting over — which is, in truth, what it frets over every day: Can these companies seize new markets? What can you do when consumers stop liking you? How do you win over new consumers you have no relationship with at all?

Behind these questions lie Wall Street's expectations for each company's future. Good or bad, those expectations end up moving stock prices and shareholder returns.

So Wall Street is always a little cold-blooded. But Wall Street loves change above all.

"Worth watching" really means something is changing, or that a change already underway may be about to have consequences. We found that the companies on this list are either watching their traditional core business get disrupted and looking for a way to pivot; or expanding overseas in search of more room to grow; or working to get closer to young consumers so the times don't leave them behind; or huddling together to ease the pressure of competition.

In short, whether old giants or industry upstarts, they all face the same problem: finding future growth.

This QDaily article will not — and indeed cannot — analyze all 50 companies exhaustively. What we find valuable are the common questions underneath: the same challenges that many companies likely face. Looking at the problems these companies ran into over the past year, and how they tried to solve them, may be instructive.

The Old Giants Still Hold the Loudest Voice in How We Live

Nearly all 50 companies on this list are large, long-public traditional firms — Walmart, Nestlé, Procter & Gamble, Sony, the tobacco company Philip Morris, and the like. On one side, the internet is breaking down traditional channels; on the other, young consumers want different things from products and services, leaving these companies baffled.

Afraid of losing touch with new consumers, old giants prove their relevance by daring to put forward new concepts.

Nestlé, now 150 years old, watched people's enthusiasm for packaged food gradually cool, and chose to expand and acquire in skincare and nutritional health products while cutting its dependence on packaged food. One of its best sellers today is Lean Cuisine, a line of low-fat, low-calorie frozen diet meals; its second-largest source of operating profit is also its own nutrition and health products line.

The world's largest food company also appointed a CEO from outside for the first time — something that had not happened since the 1920s. Ulf Mark Schneider took office in January 2017; he had previously been CEO of Fresenius, Germany's largest healthcare group.

Procter & Gamble, on a "slimming" drive for the past two years, has also rolled out plenty of new concepts in its push to innovate — laundry pods, liquid sanitary pads, smart electric toothbrushes, and so on. In short, things that sound like they have a gimmick and a markup, meant to grab the attention of consumers who care about quality of life.

These companies may not be the first to invent a concept, but big companies have the power to push an idea until everyone knows it — and to threaten the small companies that started it.

Take organic food: Whole Foods led the way for years, but once Walmart, Costco, and others began selling cheaper organic food, Whole Foods saw same-store sales fall for four straight quarters this year. Another example is cage-free chicken and eggs. Over the past year a great many big companies eagerly piled in — among those we covered alone were Walmart, Tesco, McDonald's, Subway, Costco, Nestlé, General Mills. Just about every one of the world's largest food companies has had its say. Then there is the cigarette market: the e-cigarette was born in a small Shenzhen factory, but it took tobacco giants like Philip Morris to spread it worldwide and cast it as the future of the cigarette business.

The fight over this loudest voice is really a fight over future markets and consumers. Big companies can market a new concept, but the odds of success are not high, because the users and devotees of any new concept are, nine times out of ten, not the old customers. That makes it a double challenge: overcoming entrenched perceptions and educating the market.

Courting Young Consumers, Because They Are Future Revenue and Market Share

Worried about future revenue and markets, companies often adopt strategies aimed at the future and at the youth market — in product, marketing, design, and distribution.

Walmart's biggest enemy is not Amazon; it is that new consumer behavior has beaten it. Fortunately, it is already working hard to build out a digital business. In August this year the company spent $3.3 billion to buy the e-commerce startup Jet.com, and put founder Marc Lore in charge of Walmart's future e-commerce. The membership model and flexible, customizable pricing Lore pioneered at Jet.com had made it one of the few companies ever to threaten Amazon.

The membership model is now something Amazon is pushing hard, too. According to Consumer Intelligence Research Partners, Amazon Prime's paid annual memberships passed 60 million as of June this year — meaning 50% of Amazon users have already bought the $99 annual membership.

Walmart also held on to growth in its third-quarter results, much of it thanks to just six weeks of contribution from Jet.com. At the same time, Walmart told shareholders plainly that, to keep building out e-commerce, profit may not grow for at least the next three years — after all, building and transforming a business costs money.

Amazon, meanwhile, having posted a record $857 million in profit in its third fiscal quarter, is set to plow that cloud-computing income straight back into even more cash-hungry priorities: warehouse construction, fresh food, artificial intelligence, and music and video services. Indeed, over the past year Amazon hired 85,800 new employees, most of them assigned to fulfillment centers and the team building the company's voice assistant.

Among the other companies on the list, the old liquor maker Diageo wants to ride the wave of "cocktail culture" to draw in young elites; Adidas is eyeing the trend-chasing young on social networks, marketing through off-court stars Kanye West and the Kardashians; Comcast will start offering wireless service in 2017, using Verizon's network and 15 million public Wi-Fi hotspots; and the apparel retailer Ralph Lauren poached Stefan Larsson, who spent 15 years at H&M, as its new CEO — whose first move was to shorten supply-chain turnaround times, just like the fast-fashion brands young people love.

Pivoting in Search of a New Growth Engine

When a core business hits a wall it can barely break through, turning to a new business may bring a company back from the dead — or sink it deeper into the mud.

GoPro, on the list, may be the best illustration of this. The company that created the action-camera market saw its stock more than double in the three months after its 2014 IPO. But starting last August, with no money to be made, the stock fell off a cliff.

The numbers show no sign of a turnaround. Per its third-quarter 2016 results, revenue dropped 40% year on year; it sold only 1.02 million action cameras, down 36.1%. Operating loss was $88.6 million, a 300% wider loss year on year.

It tried several ways to save itself. First it launched cheaper models, then it tried to make video content and build an action-sports video community. None of it worked. The Karma drone, released in September, was the first new product of its pivot — the hope being to draw on its action-camera expertise to make a smart drone equally suited to travel and extreme sports. But it hit a power-failure problem the moment it went on sale; all 2,500 units shipped were recalled, and there is still no word on when a new version will arrive.

The drone market overall has grown more competitive, too. Venture investment in drone companies in the third quarter this year fell from $134 million a year earlier to $55 million.

Pivoting is hard for any company. Sony counts as a success story; it made the list thanks to the PlayStation VR, released in October. 2016 was dubbed the so-called "first year of VR," with 30 companies including Meta and Google launching more than 40 VR products.

Sony's strategy this year cannot strictly be called a "pivot" (it has long been a heavyweight in gaming), but smartly pulling out of the smartphone market (Sony's phone business was its biggest loss-maker in 2015; this year it cut mid-range smartphone sales, and the high-end models that remained boosted operating profit) and using its best-selling PS4 console to promote VR gear clearly let it revive a games business whose growth had been slowing.

By the numbers, the attempt looks fairly successful — PlayStation VR ranks first in VR product market share (30%). Its biggest advantage is the tens of millions of PS4 consoles already out there, which deliver a VR experience to consumers without any modification.

Still, if VR cannot shake the perception that it is "only good for games," every company in the field may have to face the awkward fact that demand is simply too small. Going by total sales, VR gear is still far from mainstream.

And with the PC market shrinking, many companies tied to that industry are looking to pivot. Seagate Technology, focused on hard drives, was nominated this time precisely for its pivot toward cloud storage services.

Expanding Overseas to Quickly Win New Markets and Users — If You Can Get In

In July this year, Netflix tasted Wall Street's mercilessness for the first time. In the second quarter it added only 1.7 million subscribers — below Wall Street's expectation of 2.5 million — and its stock then fell as much as 16% at one point. After years of charging ahead, Netflix had to start defending its ability to keep growing.

The only good news may come from international markets. In January this year, Netflix loudly announced it would enter 130 new countries and territories worldwide. The move did help. In the third quarter of 2016, nearly 90% of new subscribers came from international markets. But the growth those markets can deliver is hard to predict — after all, the most important one, China, has kept Netflix firmly shut out.

Back in North America, a steady stream of new rivals is piling on the pressure. Amazon, with 60 million subscribers, is ramping up its content spending; nearly $4 billion in original-programming investment this year shows how seriously it takes the streaming membership business.

Real estate is looking overseas, too. Plenty of Chinese property firms are building positions abroad. Even after Brexit, Chinese companies' enthusiasm for London, a financial center, has not cooled — investment was up a third on last year, the most striking case being Greenland Group, which bought the northwest corner of Canary Wharf to build the Spire London, set to be Europe's tallest residential tower. And Swire Properties, on Bloomberg's list, will this year gradually hand its large mixed-use project in Miami, Brickell City Centre, over to tenants. That go-big strategy, analysts say, should help Swire open up overseas markets.

Steinhoff, the South African furniture retailer known as "the African IKEA," now spans 20 countries; it made the list this year for entering the British and US markets, having acquired Mattress Firm, the largest specialty mattress retailer in the United States, and the British discount supermarket Poundland.

Ford, also on the list, is the opposite case. Wall Street's complaint about it is that it is "too dependent on the US home market." Its rival General Motors is the contrast: China has already become GM's largest market in the world.

Old Things, New Tricks — and a Possible Comeback

The clearest case is Adidas, also on the list. Not everyone can tell you exactly what Nike's Air Jordan "True Blue" means, but even consumers outside sneaker culture could hardly dodge the NMD and the trend Adidas set off this year.

This company, still Germany's worst-performing stock two years ago, pulled off a beautiful turnaround in the final three quarters under departing CEO Herbert Hainer: combined revenue for the first nine months of 2016 grew 20%, with North America up 31%, retaking second place in the sportswear market from Under Armour.

Since the Stan Smith came back, a run of hit products has rescued the company's results. One important shift in all this is how Adidas uses celebrities — Kanye West's partnership with Adidas has gone well past the ordinary celebrity-endorsement model: the singer is not only a spokesman but a designer, the opening shot in a sales war, the start button for a trend. He is both Adidas's most important marketing asset and a sales channel in his own right. We covered this in detail in our big-company digital strategy series this year.

Patents Are Core Competitiveness — Pharma, for Instance

A new drug takes 10 to 14 years on average from plan to market, and costs billions of dollars; it gets 20 years of patent protection, and once that patent expires it may break the monopoly for consumers, but for the drugmaker it is a nightmare.

Eli Lilly, on the list, is known for the variety of its drug portfolio. Its US market share is not large, but it has stuck with investing in new-drug R&D, across more therapeutic types than most peers. CEO John Lechleiter once said he aimed to bring 20 new drugs to market between 2014 and 2023, an average of two a year, and the company is now reaping a rich harvest from them. Total revenue in the first half of 2016 grew 7% over the same period last year.

What drew attention to Lilly, though, was its work on drugs for Alzheimer's disease. The US government spends more than $200 million a year treating the disease, but because Alzheimer's is so complex and variable, it remains a problem medicine has yet to crack. Lilly, Biogen, Merck, TauRX, and others are all developing their own drugs; over the past 27 years, Lilly alone has invested $3 billion in researching drugs for cognitive decline. Yet Solanezumab, on which it had pinned high hopes, failed in a large clinical trial this year. It is still thought to have a chance of success.

The other pharmaceutical companies on the list each have one or two proprietary drugs against hard-to-treat diseases — Alkermes' addiction-dependence treatment Vivitrol has already boosted its results, and its antipsychotic drug is expected to become a new growth engine; Ariad's relaunched blood-cancer drug has kept it growing steadily, and a new lung-cancer drug has been submitted to the FDA; Kite Pharma, founded only in 2009, is one of the few new companies on the list, and is competing with Juno and Novartis to win FDA approval for a novel autoimmune drug that can treat blood cancer.

When You Have Nothing Else, You Can Still Cut Costs — by Laying People Off, for Example

Volkswagen has been trying to recover from last year's diesel scandal. That scandal cost it the title of world's best-selling carmaker in 2015, which went to Toyota. This year, after signing a settlement worth about $15 billion over the summer, it announced in late November that it would cut 30,000 jobs worldwide. It plans to slim down and reform, shedding its tangled structure and redundant labor contracts, and to lift its operating margin to 4% before 2020.

Ralph Lauren, mired in high inventory, constant discounting, and heavy dependence on department-store channels, laid off 750 people last year and another 1,200 this year — about 8% of its entire workforce — while also closing 50 stores worldwide. These are new CEO Stefan Larsson's biggest moves since he took over last year, and he has framed the whole restructuring as "simplifying the company's structure and saving on spending." Reportedly the move will save the company $1.8 to $2.2 billion a year.

Another industry slashing costs furiously is traditional print media. The Wall Street Journal, The Daily Mail, The Guardian, and The New York Times are all cutting costs through layoffs this year. The first and biggest reason is that the flight of advertisers has sent print revenue plunging, while the digital ad market is still not mature enough to make up the lost ground. And as they move their business online, the pain of layoffs is hard to avoid.

Layoffs and pivots often go hand in hand — something US banks know well. In an age of mobile banking and online transfers, the big banks have decided they can trim the number of physical branches. Bank of America, Citibank, and JPMorgan Chase have together closed 389 branches since the third quarter of last year, hoping to push customers toward self-service electronic channels, mobile banking, online banking, and ATMs. Fewer branches mean more workers out of a job; Bank of America alone announced 8,000 layoffs from its consumer banking branches. And across the Pacific, China's four largest banks cut more than 25,000 jobs in the first half of the year.

What Excites Wall Street Is Still Buy, Buy, Buy

Dow and DuPont, the two largest and oldest companies in US chemicals, both turned in unsatisfying results over the past two fiscal years and both drew criticism from activist investors.

But the reason they made the list this time is Wall Street's anticipation of their merger. If the two companies can complete their $130 billion combination in 2017, the result will be a chemicals super-giant, and if they can optimize and integrate as planned, they could also wring out $3 billion in cost savings. Wall Street probably gets excited just thinking about it.

The other mega-merger that excited Wall Street this year is US telecom giant AT&T's $85.4 billion acquisition of Time Warner, owner of HBO and CNN. The merged company can both make content and push it out through millions of mobile and broadband subscribers and satellite TV boxes.

Media consolidation was fairly conspicuous this year: earlier, Lionsgate bought the pay-TV channel Starz for $4.4 billion in a single deal; Comcast took over NBCUniversal and Verizon; and just last week, 21st Century Fox bought Sky.

All of this is seen as media companies looking for new ways to deliver content to consumers in the face of rising online channels like Netflix, Amazon Prime, and YouTube. With ad revenue trending down, more scale gives them more bargaining chips against advertisers.

It is not just media, in fact: in any industry, scale still means strength. A merger between rivals eases competitive pressure while also building the combined company's strength against other competitors.

Take the July merger of Royal Ahold and Belgium's Louis Delhaize Group into the Ahold Delhaize group, to fight the discount wave led by Walmart and Aldi and sweeping through supermarkets. Unwilling to bow to discounting yet still wanting to keep growth going, joining forces for complementary strengths is probably a decent strategy — Ahold, which owns bol.com, the Netherlands' largest e-commerce platform, can help Delhaize grow its online arm, while Delhaize's core US business, Food Lion, can complement Ahold's Giant Food chain. Their US operations, reportedly, overlap by less than 5%.

So there you have it: "the more things change, the more they stay the same." For any business, there is only one ultimate question: growth and more growth, profit and more profit.

QDaily will run a series of 2016 year-end review articles over the next month or so. Stay tuned.

Infographics: Feng Xiuxia

Cover image from Pexels, The Last of Us, and Wikimedia Commons