Monday, November 12, 2007

Fresh & Easy yes, bangers & mash no

Well, Tesco's Fresh & Easy is finally open, and I really wish I had a chance to see what they look like. I need to line up a client visit to southern California soon. The first six stores opened there last week, to positive reviews, according to the LA Times:
... Times staffers ... gave the markets high marks for:

* interior design, because of wide aisles, clearly written signs, bright lighting and an uncluttered feel.

"I like the nice atmosphere," said shopper Sakinna Hamdan, appraising the Arcadia market. "It doesn't overwhelm you like other stores."

* product selection, including Spanish meats, such as jamon serrano and sliced chorizo, and cheeses from around the world.

"This is the first time I've had decent ricotta outside Bellwether Farms from up north or Italy," Kleiman said.

* prepared foods, including single-serving offerings of Greek salad, chicken fajitas and macaroni and cheese.

* convenience -- for instance, nearly all the produce is packaged in plastic bags or net sacks. (But that was a negative for Barasch. "If I want one tomato, I want to be able to buy one tomato," she said.)

* neat presentation of fresh-looking fruits and vegetables. "The apples and pears are beautiful," said Upland store shopper Lauren Ramos, whose husband works for Trader Joe's.

* unexpectedly low prices on items, including a 6-ounce tube of Total Advance Clean Colgate toothpaste selling for $2.47.
So far, so good, though a wise comment was appended:
Kleiman cautioned against making firm decisions right now, when floors aren't scuffed and none of the shopping carts is out of alignment yet.

"It's hard to separate the newness from the niceness," she said.
If anyone has been there, I'd like to hear your opinions. Will it revolutionize American grocery retailing?

Disappointing note in the article: "A British retailer it may be, but Tesco didn't make a big deal out of that. There were no bangers or mash at the Fresh & Easy stores The Times visited." What?!? I love bangers and mash!

A video report from BBC is here.

Continuing bad news for media

A bit of deja vu -- I think I've written that headline before. Several times, in fact. Spooky, huh?

Newspapers: The latest circulation reports are out, and they're as bad as ever. All daily papers down 2.5, Sundays down 3.5%. Twenty-one of the top twenty-five down. New York Times down 4.5% daily, 7.6% Sunday, Washington Post down ... But why go on? You've heard it all before.

Radio: The radio biz had been expecting a bad September, but it was much worse than expected:
Radio ad revenues fell an alarming 7% in September compared to the same month in 2006--a far steeper decline than the 1% dip forecast by industry analysts. The weak performance is especially ominous as September 2006 provided an easy comparison benchmark for the industry to beat. [...]

The 7% drop is sending analysts scrambling to readjust their current forecasts for the third and fourth quarters of 2007. In a note to investors, Jim Boyle, a senior analyst with CL King and Associates, predicted a 3% drop in radio revenues during the third quarter. He also warned that fourth-quarter comparisons "are substantially harder" than the third quarter's.
Magazines: Just to provide a bit of company for the misery, Newsweek dropped its circulation base by 500,000 -- a 16% cut.

All traditional media: A study published in Adweek says that traditional media will lose 30% of their revenues over the next five years.
About 30 percent of the advertising revenue now resting in the coffers of traditional media companies will shift to online ad exchanges like Yahoo! and Google in the next five years, according to a new report from IBM Global Business Services.

More than half of the 80 industry executives IBM polled for its survey anticipate a shift of this magnitude, which would involve billions of dollars, said Saul Berman, a co-author of the report, "The End of Advertising as We Know It."
What happens to a business that loses 30% of its revenue? I think we all know.

Love that report title.

Sunday, November 11, 2007

SEC closes OfficeMax investigation

The day after I posted the item below, concerning possible vendor allowance problems at Office Depot, the two-year-old SEC investigation of OfficeMax finally ended, with no action against the company, which had cooperated with the Commission and fired six people who were involved in the alleged falsification of documentation.

The Naperville, Ill.-based company had launched an internal review in December 2004 after receiving claims from a vendor alleging that OfficeMax employees requested inappropriate promotional payments and falsified supporting documentation.

The internal investigation was conducted under the direction of the company's audit committee and was completed in March 2005. Six employees were fired in connection with the probe.

In June 2005, the SEC started its investigation, with which the company cooperated. OfficeMax said Thursday in an SEC filing that it was notified last month that the agency had completed the investigation.

Wednesday, November 07, 2007

Office Depot: more vendor allowance problems

Office Depot announced last week that it was delaying its Q3 report because of an internal investigation of possible problems in accounting for vendor allowances.
Office Depot Inc. on Monday delayed its third-quarter earnings report due to its audit committee's independent review of vendor program funds, a development that one analyst said raised questions about the nation's second-largest office supplies retailer's financial statements.

Its shares fell more than 14 percent.

The review primarily relates to the timing of the recognition of certain funds, the Delray Beach-based company said. Office Depot had been scheduled to release its third-quarter results Tuesday; a new date wasn't released.

Numerous other retailers have had similar problems in the recent past, including competitor Office Max. In fact, it's amusing to note that such problems are so common that the AP article I linked quotes an analyst as minimizing the impact on the basis of "what the heck, they all do it" (or something like that:

Lehman Brothers analyst Brad Thomas stressed that it was too early to tell how this affects Office Depot, but he said delays related to the timing of reporting vendor funds happen rather often in the retail industry. Suppliers enter into agreements with retailers for rebates and advertising allowances, which companies must account for.

"This often has been a one-time issue rather than something that impacts growth rate and cash flow," Thomas said.

The legal vultures took note quickly, and several shareholder lawsuits have already been filed.

Monday, November 05, 2007

Kohl introduces bill to overturn Leegin

Senator Herb Kohl of Wisconsin (yes, that Kohl) introduced a bill to overturn the Supreme Court's recent Leegin decision. We reported on Leegin here -- the decision changed retail price maintenance regulation from "per se" to "rule of reason":
The ruling, in the case of Leegin v. PSKS, overrides the Court’s 1911 Dr. Miles decision, which had established a per se standard in vertical price maintenance cases, and replaces it with a rule-of-reason standard. Translated from the legalese, this means that under the Dr. Miles standard, any manufacturer-imposed price plan was a violation of the Sherman Act, but now such a plan is a violation only if it can be proven to have anti-competitive effects.
The case has generated more interest than the norm for antitrust decisions (admittedly, not a very high standard). My own guess is that it will not have a very wide effect, since it probably will only allow MSRP to be applied by manufacturers with no market power (had you ever heard of Leegin before this case?)

Nonetheless, Kohl wants to overturn the decision. From his press release:
"In the last few decades, millions of consumers have benefited from an explosion of retail competition from new large discounters in virtually every product, from clothing to electronics to groceries, in both 'big box' stores and on the Internet. Our legislation will correct the Supreme Court's abrupt change to antitrust law, and will ensure that today's vibrant competitive retail marketplace and the savings gained by American consumers from discounting will not be jeopardized by the abolition of the ban on vertical price fixing," Kohl said.
I'm guessing this won't get far until 2009 at the earliest, and that it won't make much difference either way.

Tuesday, October 30, 2007

Is trade promo failure a CPG thing?

We frequently hear numbers on the failure of trade promotions indicating that 70% or more of promotional events are unsuccessful for the manufacturer (though not necessarily the retailer), even with "success" being rather limply defined as producing enough lift to pay for the cost of the promotion. I've also heard it said that the average promotion returns 65c for every dollar spent.

Ouch. If I really believed that I worked in a business whose function was to subtract value, I'd look for another trade. The following is an example of results I've often seen, based on supplier and retailer promo profitability:

What I find interesting is that these horrific numbers always come from the CPG side of the trade promo world. Over in durables and business-to-business, the story is very different.

This particular graph comes from the hardware/d-i-y world and represents sales growth results for retailers based on the level of their usage of a particular manufacturer's co-op/mdf program. In an earlier life, I did this same study for probably a hundred manufacturers, in a variety of durables and B2B categories, and the results were similarly positive in all but two or three cases.

I can think of four possible explanations for these apparently contradictory results:

1) Trade promotion doesn't work: The CPG numbers are true, the durables/B2B numbers false -- a reflection of the more sophisticated analytics available in CPG.

2) Trade promotion works: The durables/B2B numbers are true, the CPG numbers somewhat false, because in CPG many promotions that are planned and paid for don't actually happen. Therefore the negative numbers in CPG are often the result not of unsuccessful promotions, but of promotions that never happened.

3) Trade promotion works if it's done right: Both sets of numbers are true, and are reflective of the fact that durables and B2B trade promo programs have more in the way of rules and structure behind them, which leads to a more disciplined usage of trade promo funds. This is somewhat related to #2, since in durables/B2B, part of the rules/structure I mentioned is that documentation of events is generally required.

4) Maybe it works and maybe it doesn't: Both sets of numbers are false -- which means we don't have a clue what's going on.

I have no way of proving any of these contentions, but my belief is that #3 is closest -- that trade promotion, when used in a targeted manner to promote to the end-buyer, and with the discipline of documentation behind it, generally drives increased sell-through.

The question for CPG manufacturers is how to re-introduce discipline in their programs. For durables/B2B manufacturers, who seem to be moving quickly toward the CPG model, the question is how to avoid following CPG over the cliff. I don't pretend to know for sure, but I suspect the answers lie in better analytics and better use of the resulting findings.

Intel mandates 35% on web

Intel has put a new rule into its Intel Inside program -- 35% of spending must be online.

It seems common-sense that a technology company would put its marketing money where its customers are, though whether 35% is the appropriate percentage is of course open to debate. Some of Intel's major partners, who are technology companies themselves, apparently think it's too high, since they have not been putting that much into online advertising. The linked article cites HP at 23.6%, Dell 18.9%, and Toshiba 19.1%.

Putting a minimum or maximum on co-op/mdf spending is not unusual in the durables and B2B arenas, so what Intel is doing is new only in terms of the medium involved.

It is, of course, yet another piece of bad news for the traditional media.

Nintendo's on a roll

The good news continues to pour in at Nintendo: Ad Age selected them as Marketer of the Year -- one of those rare occurrences where I don't disagree with that mag.
Video-game sales were starting to flatten in North America. In a dash of in-home market research, Nintendo executives saw their own families divided into gamers and nongamers. Instead of a problem, they saw an opportunity.

So while other video-game makers were busy trying to incorporate gamers' intense demands into their next-generation hardware, Nintendo set out to create products that could change the dynamics of gaming and expand the audience well beyond what it had been before.
More importantly, the company's profitability and stock price are soaring:

The stock rose 5.3 percent to 71,300 yen on Monday, bringing its market capitalization to 10.1 trillion yen -- a fivefold increase in the past two years.

Nintendo's market capitalization is almost double that of Sony, whose total revenue is more than eight times as big as Nintendo's.

From a channel marketing standpoint, what all this means is that Nintendo is able to watch smugly as their competitors are forced to cut price:

Profits at Nintendo have surged on the runaway success of the Wii and the portable Nintendo DS machine in North America, Europe and Japan, forcing Sony and Microsoft to slash console prices in a desperate catch-up bid ahead of the holiday season.

Iwata said the company was struggling to meet demand of the Wii and a price cut was out of the question.

Monday, October 29, 2007

Next TPMA -- April in San Francisco

TPMA had another good meeting here in Chicago. Good attendance (near 200, representing more than fifty manufacturers and a heartening turnout of retailers) and some great presentations.

As always, though, the most valuable (and enjoyable) part of a meeting like this is talking with all the smart, experienced people -- here's a pic from the networking event at the Lincoln Park Zoo's ape house, sponsored by SAP:


The next meeting will be April 20-22 in San Francisco. The focus topic is directed to sales, marketing, and merchandising folks: "If you spend it will they come?" The description is here. I plan on being there and I hope to see you.

Nike taking a shot on goal

Forgive the labored headline, please. Nike's goal is to be the major power in soccer by World Cup 2010, so they've bought British supplier Umbro to give them an assist.
The acquisition is a major step for the U.S. apparel and shoe maker, which has said it wants to become soccer's top brand by the next World Cup in 2010.

Nike's soccer brand has performed well and grown in recent years, but Umbro's ties to the United Kingdom, where Nike has struggled, should boost the company's profile and performance.
Umbro will apparently continue to operate as a separate brand, largely because of its high brand awareness in the soccer world -- "... Umbro supplies uniforms to the national teams of England, Ireland, Sweden and Norway, six English Premier League teams and more than 100 other professional teams globally."

Penn Traffic execs facing criminal charges

Because of TPMtoday's hiatus, we failed to report this item when it happened a few weeks ago. As we reported several times last year, Penn Traffic, a 100+ store chain in the northeast, had been playing games with trade promo allowances.

I'll give you a moment to recover from the shock.

Now two of the company's former top executives -- Leslie Knox, the Chief Marketing Officer, and Linda Jones, a VP -- have been indicted.
Jones, 48, of Reynoldsville, Pa, and Knox, 61, of Titusville, Fla., were charged with conspiracy to commit securities and mail fraud and causing false filings to be made by Penn Traffic. If convicted, each faces a sentence of up to 20 years and fines totaling $5 million.

According to the complaint, Penn Traffic prematurely recognized promotional allowances from the second quarter of 2001 through at least the fourth quarter of 2003.

Knox and Jones directed and took part in the scheme in an effort to meet internal budget plans, the complaint said. As a result, the company pulled forward about $10 million in operating income that was included in Penn Traffic's public filings.

All about Wal-Mart

Well, not all about. That would take a blog (or two or three) all by itself. Let's just settle for a bit about their domestic and international growth plans:

When last we met to discuss these issues, I was noting how Wal-Mart seems to be tripping all over itself to change its direction repeatedly (the Sears Syndrome) in the US, while having mixed (at best) success overseas. Nothing new to report on the change of direction question (which means, perhaps, that they've solved the problem), but international operations don't seem to be much improved.

After years of poor performance at its Seiyu operation, which it owned 51%, Wal-Mart is going to try going it alone in Japan. There had been speculation that they might pull out of Japan, as they recently had from Korea and Germany, but this means that they are, almost literally, doubling down.
But Seiyu has struggled amid intense competition from smaller retail chains, as well as from major local companies that are introducing large Wal-Mart-style stores and price-cutting.

The Japanese retailer said in fresh earnings results announced Monday that it expects to book its sixth straight year of losses this year, with a 10.40 billion yen ($90.90 million) loss amid poor sales and ballooning restructuring costs.

And they plan to enter Russia next:

Wal-Mart is looking abroad for stronger growth in the 13 countries where it has stores and hopes to add Russia to a list that already includes China, Britain and Japan, according to the company's chief executive.

Wal-Mart Stores' business has been growing faster internationally than in the United States, accounting for 22 percent of last year's total sales of $345 billion, the chief executive, Lee Scott, said at an annual meeting of investors and financial analysts Wednesday. He said international stores would be "a bigger part of our business."

But the most interesting point in that article is how much they are cutting back on US growth (more on this point here): They had been opening 280 store per year; this year it has been 195; next year 170; then 140. Such cutbacks are inevitable, given the cannabalization effect of new stores, but that means there's that much more pressure to perform internationally -- something they haven't been able to do consistently outside North America.

Manufacturers who have ridden Wal-Mart's coattails in recent years also have tough questions to ask themselves: What will they do for domestic growth as Wal-Mart slows down?, and, will they be Wal-Mart's suppliers of choice overseas, or will they run into local competitors?

Sunday, October 28, 2007

And in further channel-blurring news ...

Dell appears to be well on the way to being a full-time player in the retail market, now announcing a deal with Staples:
Dell and the world's biggest office products supplier announced Monday that Staples would offer Dell desktop and notebook computers, monitors, printers, ink and toner starting Nov. 11. Dell products also will be available through Staples' Web site.
Dell built itself into the world's #1 computer brand on a direct-to-consumer model, but after losing the top spot to HP, they've moved into the retail space. Prior to the Staples deal, they recently moved into Wal-Mart. Outside the US, "Dell also has struck partnerships recently with Bic Camera Inc. in Japan, Carphone Warehouse PLC in Britain, and Gome stores in China."

Macy's and Hilfiger make a deal

Macy's is going to be the exclusive distributor for Tommy Hilfiger apparel.
Beginning in the fall of 2008, Mr. Hilfiger will restrict sales of his men’s and women’s sportswear lines — from hoodie sweaters to puffer coats — to Macy’s roughly 800 stores. The combined lines are estimated to have annual sales of at least $200 million.
It's becoming very hard to come up with a clear definition of "private label".

Newspaper biz is healthy in the (very) long term

Those who have read this blog for a while will know that I'm pretty negative about the newspaper industry. In part because of external factors -- there's little anybody could do about many of the problems the industry faces; and even more because of the incredible blindness and arrogance of those in the industry -- there are things that could be done to mitigate the damage of those external factors, but ...

Fortune's Richard Siklos recently published a column arguing that things aren't quite as bad as the seem, noting correctly that newspapers still account for about a quarter of all advertising revenue in the US.
So much depends on how you view the numbers. A report by PriceWaterhouse Coopers estimates that revenue for the newspaper industry will be down 1.4% for 2007 to $59.2 billion, the second straight down year. The report sees advertising for the industry at essentially flat through 2011, after taking into account papers' rising online revenues. Put another way, according to this analysis nearly one out of every four dollars spent on advertising in this country is spent today on newspapers. And much of the upheaval is due to the fact that it is moving to one in five dollars in a hurry, largely thanks to online upstarts. There are plenty of businesses that wish they had these problems.
Meanwhile, an analyst for Deutsche Bank was announcing what amounts to good news these days -- that growth will return for newspapers ... in 2012. But even that tempered optimism had to be tempered further, by noting that the good ol' days will never return:
Wall Street analyst Paul Ginocchio predicted that big metro newspapers would bounce back—but not until 2012. But the Deutsche Bank Securities analyst warned that when earnings turn positive again, they would be in margins far below the levels newspapers got used to in the 1990s.
For the newspaper business today, every silver lining has a cloud.

And then, of course, there are ongoing rumors about a potential buy-out of the New York Times, and one look at their stock price over the last couple of years shows why:

But even the gloomiest viewers of the newspaper biz (a category in which I could probably be placed) think newspapers are going to disappear. As Siklos notes, "[I]t's instructive that no legacy medium has been obliterated by a new technology: consumers simply adjust and adapt. In the era of DVDs and downloads, we still go the movies and listen to the radio."

The blog of the undead

It's the appropriate time of year for such things, so now is as good a time as ever to bring TPMtoday back to life.

While it was on sabbatical, I've put aside my private consulting practice and gone to work for Oracle Consulting. I'm pleased with the move, enjoy working with a host of highly-skilled people, and look forward to having the huge range of Oracle resources to bring to clients.

If reading the previous paragraph makes you think that TPMtoday will turn into a lengthy ad for Oracle, please don't worry. I'll make every effort to keep my postings unbiased. In addition, this remains my blog, unaffiliated with Oracle.

Thursday, July 12, 2007

The CD biz is even worse than you thought

Analysts have revised estimates on how quickly the bottom is dropping out of the compact disc market.
In a report, industry analysts Richard Greenfield and Mark Smaldon of Pali Research in New York said they now expect U.S. unit sales of CDs to slide 20% in 2008, a bigger decline than the 15% drop they had previously predicted. Moreover, decline would come on the heels of an expected 18% drop in U.S. CD sales in 2007.
If my math is right (and it is) that would mean that 2008 sales will be less than two-thirds of sales in 2006. You can't last long in that kind of market.

The big question, of course, is how long before retailers pull the plug:
A key factor affecting CD sales: how quickly those big-box retailers such as Best Buy shrink the amount of floor space they devote to music to levels more comparable to Wal-Mart. Combined with the growing utility of digital music, it could easily lead to even more rapid decline in CDs in 2008-2010 ....
I've seen no evidence thus far that the music industry has figured out any way to address the new market realities, other than suing everybody in sight.

Wednesday, July 11, 2007

Is Macy's the next private equity play?

There's been some speculation lately that Macy's will be the next retailer to be scooped up by private equity purchasers.
Wall Street sources cited as likely bidders Kohlberg Kravis Roberts, the buyout firm famous for its takeover of RJR Nabisco in the 1980s; and Goldman Sachs Group, Macy's longtime investment banker.

Macy's would be a ripe takeover candidate because its rich cash flows and attractive real estate could be used to pay off debt that leveraged buyouts pile up.

There has even been speculation that Eddie Lampert (of Sears/Kmart fame) might make a play for another big retail name. Although he seems to have his hands full with the continuing bad news from his current possessions.

Some analysts see the whole scenario as unlikely:

"We view a Macy's LBO as possible but not probable," Deborah Weinswig, a New York-based analyst [for Citigroup], wrote in a report Tuesday.

"While there are a few reasons why an LBO might make sense for Macy's, especially given the slow progress of the May turnaround, we believe Macy's past LBO experience makes a transaction unlikely."

Dump that newspaper stock

If you haven't already, that is. Goldman Sachs has issued a statement warning that the next few years could be very ugly for the newspaper biz:
"The magnitude of the recent declines is extraordinary for a non-recession period and provides concrete evidence, in our view, that the share shift from print to online in the publishing industry is accelerating."

Some companies are more at risk than others. Goldman cut its rating on McClatchy from "neutral" to "sell" and reinstated a rating on The New York Times Co. to "sell."
The news got worse for NYT Company a few days later when Standard & Poors lowered their bond rating to BBB, which is perilously close to junk.
S&P said it ``expects revenue declines to continue over the next couple of years'' and that New York Times ratings may be lowered again ``if trends related to print advertising remain in line with what was reported in the past few months.''
Going back to the Goldman Sachs article, there is some good news in it. After noting that things are going to be really, really grim for the next five years as the industry transitions from print to on-line ("the transition period from print to online will be 'painful' and 'extended'"), they are relatively bullish in the long-term:
"Ultimately, we believe newspaper publishers will re-emerge as very healthy and dominant players in the local media marketplace."
So now all the newspapers have to do is figure out how to stay alive for five years.

What’s so great about PRISM?

There has been a lot of talk in the trade press over the past year about Nielsen’s PRISM system – an effort to measure in-store promotion. I don’t get it.

First, in case you’re not familiar with it, here’s a quick description from Nielsen of their “ground-breaking effort to measure the size and composition of the audiences for in-store marketing media”:

“This new phase of research will demonstrate in a larger and more diverse store sample that we can link consumer traffic to specific in-store media and marketing conditions and create an entirely new and powerful opportunity-to-see measure for advertisers, retailers, media companies and media & promotion agencies,” said George Wishart, Global Managing Director, Nielsen In-Store. “Knowing the reach-and-frequency of an end-aisle display will be much more valuable than just knowing the display was there.”

Well, yes, it is more valuable than that, but the more important question is whether this new data is more valuable than the data that already exists – sell-through. In-store promotion has always been the form of marketing most closely tied to the scanner. I don’t see that this new form of research adds much of value to what we already have.

I can see how this new measurement provides to Nielsen’s agency clients numbers in a form that agencies understand – reach and frequency – and therefore allows comparability across platforms. But still, it seems like all the shouting boils down to, “Hey, we’ve got a great new set of numbers. Of course, they aren’t as good as the numbers we’ve already got, but they’re new.”

Trade promo = $450 billion

One of the questions I’m often asked is how much trade spending there is totally. I’m usually wise enough to respond that I honestly don’t know, though this answer is generally deemed unsatisfactory.

One reason I’m asked, I suspect, is because I was foolish enough for a number of years in the nineties and early zeroes to put into writing an annual estimate of trade spending (this was when I was writing/editing newsletters for former employers TradeOne and CoAMS).

When I started out doing this I was reasonably confident that what I was doing was at least close, given the parameters I was working with. Among other limitations, I tried to limit the estimates to only promotional spending intended to create sell-through – eliminating pricing actions and slotting, for example. As time went on, though, I began to see this distinction as artificial, and also to become concerned about the large percentage of spending thus being eliminated.

I give this background only to warn you that I’m going to try again, and that there is a good chance I’m still way off.

The methodology I’m using is to take the US Census Bureau’s retail sales figures by channel for 2006 and apply to each channel percentages of typical mark-up and trade promo spend in order to get to manufacturer spend in each channel. I then applied the US figure to other countries based on the relative size of their economies, with factors thrown in to account for regional differences (e.g., average trade promo spend in Europe averages about 85% of US levels, according to a study by Hand Promotion Management a few years ago). Some of the less-advanced economies I adjusted based on the percentage of retail trade that moves through modern outlets versus the share sold by traditional mom & pop stores, who presumably receive little if any funding.

So, taking this mix of some actual research and real math, combined with a bunch of tosses at the dartboard, what’s the result?

Worldwide trade promotion spending in 2006 was $456,210,968,840.29.

Well, okay …. Let’s just say that it’s somewhere in the general vicinity of $400-500 billion. Or so.

The Case of the Disappearing Coupons

The number of coupons redeemed annually in the US has declined dramatically -- from seven billion in 1992 to only 2.6 billion last year.

The reasons are multiple -- changing demographics and changing media usage leading the way:
Latinos, especially immigrants, are less likely to use them because coupons are not known in Central or South America, Tilley said.

And younger shoppers, already less likely to read newspapers in print form (if at all) are also less likely to go through inserts in the Sunday paper with scissors to clip coupons, he said.

The article details some of the ways manufacturers and retailers are responding -- mostly by handing out coupons in the store. I don't know how typical I am of shoppers, but I never use those coupons I'm handed at the check-out counter for my next visit (I sometimes intend to, but I always forget).

Interesting factoid in the article -- something I never knew:
The first coupon was created by drugstore owner Asa Candler, who in 1894 had just purchased the formula for a new beverage called Coca-Cola. He gave out tickets good for a free drink at his soda fountains.

A year later, Post Cereal issued a coupon good for 1 cent off of a box of Grape-Nuts. And the rest was discount history.

Slightly OT: Soccer is scoring big

Obviously there are some marketing connections that I can create, but the fact is that I'm a soccer fan, and it's great to point out that there are some very clear signs in the past several weeks that, even pre-Beckham, soccer is starting to make some very big inroads in the sports (and therefore media and marketing) scene.

At the end of June, the final match of the Gold Cup tournament (USA-Mexico) on Univision drew an audience 40% larger than hockey's Stanley Cup final had drawn a few weeks previous on NBC.
The United States' 2-1 come-from-behind victory over Mexico on Sunday received a 2.5 fast national rating on Univision, the network said Tuesday. That translates to 2.83 million households, nearly double the 1.48 million homes that watched the 2005 Gold Cup final between the United States and Panama.


Anaheim's series-ending 6-2 victory over Ottawa in the Stanley Cup on June 6 received a 1.8 rating on NBC, which comes to 2,005,000 households.
This despite the fact that the match was also shown (in English) on the Fox Soccer Channel, where there were probably almost as many viewers (I wasn't one of them, since I was at the game).

Clearly, soccer has displaced hockey for the #4 spot among American team sports (assisted by what seems a death wish on the part of the NHL).

To show it was no fluke, a week later the USA-Argentina match in the Copa America drew an audience big enough to make Telefutura #1 in New York in key demographics:
Think of it as Telefutura's David Beckham moment. Last Thursday night, Telefutura's New York stations, WFUT Channel 68 and WFTY Channel 67, were No. 1 in prime time in the key male demos -- 18-34, 18-49 and 25-54 -- a first since the network's debut in January 2002.
It wasn't even close -- Telefutura beat the network stations by wide margins (alas, it wasn't close on the field either -- Argentina pounded us). And, again, the match was available in English on pay cable.

And this is, as noted, pre-Beckham. He'll presumably help spike things a bit more -- he's already attracting attention with Adidas's clever Futbol vs. Football spots where he co-stars with Reggie Bush of the New Orleans Saints.
In an unscripted series of spots to appear online and on broadcast TV, the athletes compare notes on their two sports. In "NFL Goalie," Bush attempts to tackle a new position—much to the amusement of the soccer icon. Beckham gives him some tips, such as, "The goalkeeper can actually move around." Kick after kick, Bush fails to stop Beckham from scoring. He cracks, "If I get at least one, I think I'll be successful."
Actually, the best line comes when Bush is trying to teach Beckham to throw a pass. After several tries Bush asks, "Are you sure you're right-handed?"

To finish with an actual marketing spin -- if your company isn't on the soccer bandwagon yet, you'd better jump on quick.

TPMA meeting in Chicago -- October

The next TPMA meeting will be in Chicago on October 7-10. Mark your calendar now.

This is the main TPMA annual conference, and should be a good one. The conference theme is An Integrated Channel Management Approach to Excellence. I'll have more info on it as things develop, but for now check out this for early information.

Friday, June 29, 2007


The Supreme Court handed down a ruling Thursday overturning a precedent that had stood for almost a hundred years, and has opened up the possibility that manufacturers could have more freedom in crafting price maintenance programs.

The ruling, in the case of Leegin v. PSKS, overrides the Court’s 1911 Dr. Miles decision, which had established a per se standard in vertical price maintenance cases, and replaces it with a rule-of-reason standard. Translated from the legalese, this means that under the Dr. Miles standard, any manufacturer-imposed price plan was a violation of the Sherman Act, but now such a plan is a violation only if it can be proven to have anti-competitive effects.

I won’t go into too much detail on the case, both because I’m not qualified to do so, and because the legal fine points are not necessary for a marketer-level understanding of the implications. Those implications will become clearer as time passes, but we’ll try to get an early start on it here.

To summarize the case very briefly, Leegin sold its Brighton line of fashion accessories through boutique outlets, which were required to price the products at a certain level. PSKS was one of their customers, but was cut off after they reduced prices below the specified levels. PSKS sued Leegin for damages and won at the lower court level. Leegin tried to introduce expert testimony that their suggested price program was not anticompetitive, but they were not allowed to do so, because the courts held that such testimony was irrelevant, given the per se rule established in the Dr. Miles case.

The new ruling allows the case to be retried including Leegin’s expert testimony. If they can show that their program did not damage competition, they can win the case.

In their decision, the Court listed some of the ways in which a price-maintenance program can be pro-competitive. It seems likely, therefore, that if you can show that your program is crafted in such a way as to achieve these goals, you may be on solid ground.

The Court argues that reducing intrabrand competition (the competition among retailers selling the same product) can enhance interbrand competition (competition among manufacturers).
The promotion of interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.” … A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.
They go on to argue that price maintenance programs promote higher levels of service to consumers by eliminating free-riding.
Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. … If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer.
They also believe that other services might be provided by retailers who are confident of their margins:
Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.
In addition, the Court believes that price maintenance can facilitate entry of new brands, thus increasing competition.
“[N]ew manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer.” … New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect.
In a final section, the decision lists some of the things that would indicate an anticompetitive effect:
For example, the number of manufacturers that make use of the practice in a given industry can provide important instruction. When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers. … Resale price maintenance should be subject to more careful scrutiny, by contrast, if many competing manufacturers adopt the practice.

The source of the restraint may also be an important consideration. If there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer. … If, by contrast, a manufacturer adopted the policy independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct. … A manufacturer also has an incentive to protest inefficient retailer-induced price restraints because they can harm its competitive position.

As a final matter, that a dominant manufacturer or retailer can abuse resale price maintenance for anticompetitive purposes may not be a serious concern unless the relevant entity has market power. If a retailer lacks market power, manufacturers likely can sell their goods through rival retailers. … And if a manufacturer lacks market power, there is less likelihood it can use the practice to keep competitors away from distribution outlets.
Although this case dealt with price maintenance rather that minimum advertised price (MAP) programs, it would seem that the Court has indicated a more-lenient attitude toward manufacturer involvement in pricing generally, and that MAP programs might be allowed more latitude as well. This would allow manufacturers to put more teeth into co-op/MDF policies forbidding payment for advertising below specified prices.

These policies can of course be enacted only by those manufacturers who have the appropriate brands and the channels (independent resellers and smaller chains) to implement and enforce pricing rules.

If your company has products and channels for which price-maintenance programs are appropriate, you should bring this decision to the attention of your counsel. Here’s where to direct them:
  • A short write-up on the background of the case is here.
  • The decision is here.

Wednesday, June 27, 2007

More bad news for the media

Another update -- the bad news continues for the "old media" companies:
  • The New York Times Company reported that ad revenues declined 8.5% in May, with national, retail, and classified all declining.
  • Bear, Stearns offers some thoughts on the possibility that NYT might be the next takeover target.
  • Ad Age asks the question, "Where's the money moving?" and answers themselves, "Out of media." Much of that movement, we know, is into trade promo.
  • Car dealers are saying "bye-bye" to the classifieds. Revenues for automotive classifieds dropped 12.8% in 2006, and another 20.1% in the first quarter of 2007. Ouch!
Can it get much worse?

Yeah, it probably can. And will.

Wal-Mart slows it down

I need to bring some things up to date, so the next few posts will be updates of ongoing issues – the first being the ongoing questions about what appears to be a floundering Wal-Mart.

The most interesting thing has been Wal-Mart’s recent announcement that they will seriously cut back on their rate of expansion.

At Wal-Mart’s annual shareholder meeting here this morning, executives surprised investors by announcing that they would reduce the number of new supercenters to be opened this year by 35 percent, or roughly 70 stores, to hold down the chain’s mounting expenses.

It was the second such cutback in the past year and suggested that Wal-Mart, whose staggering growth has produced hundreds of new stores a year, is at a turning point in its 40-year history.

The first thing to note about this is that, even with the reductions, Wal-Mart will still be growing at a rate faster than the total size of all but a few other chains in the world. Wal-Mart will open about 200 new stores this year, instead of the planned 265-270. At about $100 million per store, that’s growth of $20 billion (about equal to the total sales of J.C. Penney). In the next few years they plan about 170 stores per year.

But the change does reflect an awareness that the chain has matured and needs to emphasize growing profits over volume.

Opening fewer stores will also ease some of the criticism about “comp store” figures – part of the reason Wal-Mart has done poorly in this measure is that all those new store openings were cannibalizing sales at the existing outlets.

The change in Wal-Mart’s direction raises a difficult question for their suppliers, however – they are going to have to look elsewhere to get their own sales increases, rather than depending on riding Wal-Mart’s growth.

Private equity and TPM

Over the past year or so, I’ve noted with increasing wonder the number of acquisitions of major brands by private equity and hedge funds, including both major retailers and their suppliers. I won’t bother with a list here, but I imagine you’ve been noting the same thing.

The question I’ve had (not surprisingly, given my focus) is what effect this will have on trade promotion practices. Here is an article in Brandweek that addresses the issue from a related marketing point – is such a buy-out good or bad for brands?

Although the tone of the article seems to me somewhat biased against private equity, nonetheless it seemed to come down to the classic non-answer: “It depends.” In this case, it depends on the reason for the buy-out and the strategy of the buyers.

Unsatisfying as that answer always is, I suspect it probably applies equally well to trade promotion. As many buy-outs as are happening, it’s safe to assume that they are happening for a variety of reasons and will therefore have a variety of effects.

Where I think buy-outs will have an effect on trade promo practices is in taking some emphasis off short-term results. I know I’m not alone in criticizing business for short-term thinking – it is, in fact, a bit of a clich√© – but it has led to some of the worst abuses in trade promotion. Ahold is, of course, the poster child here, but we all are aware of many similar (though less egregious) cases from similar experience – a great many companies have used trade promotion funding to pad quarterly figures, to stuff the channel, and to hide problems in a variety of ways.

Being allowed to do more long-term thinking might also allow channel marketers to focus some funding on building up promising smaller accounts, rather than directing everything toward the largest accounts, who can often provide the greatest incremental lift in the shortest time. I've advocated such practices for years, in the belief that suppliers need to keep smaller channel players healthy as a defense against the effects of consolidation. My pleas have generally fallen on deaf ears, however.

All this, of course, presumes that private equity investors are willing to build a company up before making their profit on a resale, and that’s where the “it depends” comes in. Some will take that view, and some will just want to provide some quick fixes in a “buy and flip” operation – they’ll be no more interested in trade promo best practices than the antsiest Wall Street analyst.

Monday, June 25, 2007

Kellogg won't advertise sugary cereals to kids

I read a number of articles on Kellogg's new guidelines for advertising nutritionally-questionable products, which I think most people probably approve of.

I couldn't help, however, having two non-nutritionally-correct thoughts on the subject:

One is that this is just what the TV industry needs these days -- losing another billion or so in advertising. (Actually, I don't know how much Kellogg spends or how much the net effect will be in lost advertising -- I'm just guessing it will be significant).

The other is that I wonder whether some of the money will simply move to in-store and other trade promo funding.

Old news: Dell being sued for Intel payments

My apologies for posting about something that happened several months ago, but I just learned about this and since I haven't heard it discussed, I'm guessing some of my readers are equally in the dark.

Back in February, a group of Dell stockholders filed a lawsuit against Dell and Intel, alleging that volume rebates the company had received from Intel had not been disclosed, causing the stockholders to not understand fully the importance of such payments to the company's profits.
"Intel secretly paid very large end-of-quarter cash rebates to PC (manufacturers), like Dell, that purchased all or virtually all of their microprocessor/chip requirements from Intel," the amended lawsuit states. "These rebates, which were, in fact, kickbacks, were not traditional volume-based discounts and the monies paid were separate and apart from and in addition to certain publicly known, co-marketing funds which Intel made available to certain of its customers to assist in product advertising."
The amount of the payments, according to the suit, was about $1 billion annually.

Although this is specifically separate from co-op/MDF and other such payments, as noted in the last sentence quoted, I've often argued that retailers should be required to reveal the amount of trade promo funds they receive, since the funding is often well in excess of profits. The SEC has thus far ignored my suggestions, however.

This lawsuit has some relationship to the AMD-Intel lawsuit and investigations of Intel in Europe and Korea, which involve some of the same payments.

Intel strongly denies any wrongdoing: "We conducted a preliminary review of the complaint. At first glance, it appears that some of the allegations with respect to Intel appear to have been completely made up."

The Times They Are A-Changin'

Bob Dylan didn't have channel structures much in mind back in the sixties when he wrote that famous song, but the music reference is apropos: What has happened is that one group of channel interlopers has been passed by another in the music biz.

I've posted on the destruction of the music retail channel before -- the death of stores such as Wherehouse and most recently Tower, killed off by mass merchants. But now we're seeing another whole channel, or two, taking a big piece of music retailing.

According to NPD Group
, ITunes has moved past Amazon and Target to take third place in music retailing. The top five are:
  1. Wal-Mart - 15.8% market share
  2. Best Buy - 13.8%
  3. ITunes - 9.8%
  4. Amazon - 6.7%
  5. Target - 6.6&
Just for old-times sake, I think I'll listen to Subterranean Homesick Blues on my Ipod.

Wednesday, June 13, 2007

Can you define "market"?

If so, the government wants to hire you.

Two recent merger cases have raised the question of how markets are defined. Normally, this blog doesn't care much about the merger and acquisition part of antitrust law, and I'll admit that I know practically nothing about it. But these particular cases are of some interest to marketers.

The one that's getting the most attention this week is Whole Foods/Wild Oats. The purchase of Wild Oats by Whole Foods would combine #1 and #2 in the high-end organic food market -- if you consider that a market. If you do, then you would oppose such a merger, as the Federal Trade Commission has announced it does. Alternatively, you could describe the merger as the combination of two small supermarket chains, minnows compared to Kroger and Super Valu, and say that there's no reason for the FTC to oppose it.

The two chains have said they'll take the FTC to court:
"The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic, and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Market."
Personally, although I'll reiterate that I know nothing about the law, I think I side with the stores. There is no "natural food market", there's a niche within the grocery market that these two stores have successfully exploited. But now all the big chains are jumping in, and the only way for the niche players to survive will be to combine and grow. As an example, here's the Basha's chain in Arizona announcing their entry into the niche a couple weeks ago:

Bashas' will open its first Ike's Farmers' Market grocery store this weekend in Oro Valley, company officials announced Wednesday.

Ike's Farmers Market is a new concept for the privately held, Chandler-based chain that operates Bashas' Supermarkets, AJ's Fine Foods and the Food City grocery stores.

Ike's features organic breads, an extensive offering of bulk food items such as nuts, grains and coffees, organic wines and health-oriented products including supplements and natural body care items.

Ike Basha, by the way, was one of the founders of the chain.

This is just one of dozens of entries into the category by existing supermarkets, who are either opening new stores under new names, as Basha's is doing, or vastly expanding their natural food selections (e.g., Wal-Mart).

The other case is the merger of the XM and Sirius satellite radio companies. This one raises the question of whether satellite radio is a distinct market from broadcast radio. If it is, then the only two providers are merging; if it isn't, then the merger is no big deal, because the two represent a fairly small portion of the radio market.

The thing I enjoy about this one is watching the National Association of Broadcasters twist themselves into pretzels trying to make a logical argument against the merger. The NAB is the principal opponent and has been lobbying Capitol Hill assiduously. The problem is that the NAB's actions undercut their argument: If satellite radio is not competitive with the broadcasters, then why does the NAB care?

Monday, June 11, 2007

UK Competition Commission publishes working paper

The Competition Commission investigating practices in the UK supermarket channel has released a working paper that finds numerous areas of concern. According to a British law firm, Cameron McKenna, the commission identified forty-two practices that they categorized under eight headings:
  • Requiring payments or concessions in return for access to shelf space in relation to both new and existing products
  • Imposing conditions relating to suppliers’ trade with other retailers
  • Applying different standards to different suppliers’ offers
  • Imposing an unfair imbalance of risk
  • Imposing retrospective changes to payment or contractual terms
  • Restricting access of suppliers to the market
  • Imposing charges on or transferring costs to suppliers
  • Requiring suppliers of groceries to use third party suppliers nominated by a retailer

Many of these practices are familiar to those of us on this side of the pond. In addition, "The Commission also voiced concern about possible barriers to market entry for small suppliers and the consequent impact on innovation and product choice for consumers."

The article also suggests that the working paper "has prompted speculation that the Commission may impose tough guidelines on retailers."

It seems to me possible that action to halt the growing power of huge retailers might present an example to the FTC in the US. Combine that with the cool reception given by Congress to the Antitrust Modernization Commission's recommendation that Robinson-Patman be repealed, and perhaps there might be an environment developing in which steps might be taken to control retailer power.

Or maybe not. But it will be interesting to watch. Provisional findings are due from the Competition Commission in September -- so that's when we'll get the next clues on how the winds are blowing.

This reminds me that I said several weeks ago that I would put forth my recommendations for reforming rather than repealing R-P. I promise to do so -- someday soon.

Tuesday, May 22, 2007

Moving down by moving up

I've always been deeply suspicious of retailers who say they're going to fix things by moving up-market. I am particularly puzzled by retailers who are doing well in a lower market who then try to move up-market. Why?, I wonder.

I posted on this last fall in regard to Kohl's:
Why is it that stores have this craving to move "up-market"? I have always suspected that it's because the execs are embarrassed to be running a store where they and their friends wouldn't be caught dead shopping.

But then I'm a cynic.
So of course I was pleased to see some corroboration in this item from Forbes, Retailers Upscale Move Spurns Customers":

To attract wealthier customers Wal-Mart has added upscale clothing and home lines, alienating its base, says Grom. “I think Wal-Mart going upscale was a very big mistake,” he says. “Is it value? Is it upper end? I don’t think the customer really knows.”

Wal-Mart is pulling some of its designer merchandise from some stores:

Wal-Mart Stores Inc.'s designer line by Mark Eisen has been pulled from several hundred of the more than 3,000 U.S. stores that carried it, the Wall Street Journal said on its Web site.

Wal-Mart brought in Eisen, a former AnnTaylor Stores Corp. design executive, a year ago for its George line of women's clothing, the paper reported.

The move comes as Wal-Mart looks to clear out stocks of unsold clothing, the Journal said.

I'm beginning to wonder with Wal-Mart whether they are just in a bit of a slump, or if they have contracted the dreaded Sears Disease, the symptoms of which are repeated changes in strategy, the shuffling of top executives, and a long, slow decline into irrelevance.

Macy's State Street business really, really bad

Macy's has admitted that Chicagoans, who were deeply PO'd by the decision to drop the Marshall Field's name, are staying away in droves from the venerable State Street location.
At a press conference after its annual meeting here Friday, Federated's chief financial officer, Karen Hoguet, said former Field's stores are performing no worse or better than the roughly 400 regional department stores Federated acquired from St. Louis-based May Department Stores Co. in 2005 and converted to Macy's.

But there is an exception: the Chicago store on State Street.

The landmark store, long a tourist destination, is "doing badly," Hoguet said, without providing specific performance data.
Chairman and Chief Executive Terry Lundgren was quick to interject that operating a Midwest flagship in Chicago remains core to Macy's strategy.

"We're very committed to that store," said Lundgren, noting that rival Carson Pirie Scott a few blocks south closed its flagship store earlier this year. New owner Bon-Ton Stores decided the giant emporium was too costly to operate.
Overall, it looks like Macy's (the name change from Federated was finally made official yesterday) is not doing particularly well with the transition:
On Wednesday Lundgren characterized the former May stores' sales performance as "disappointing," as Federated missed its first-quarter sales target and earned less than Wall Street had expected.

Analysts estimate the sales drop at former May stores averaged 7 percent to 10 percent.
If the overall number is 7%-10% and State Street is worthy of particular mention, the sales drop there must be awful.

Monday, May 21, 2007

Conyers doesn't want to repeal R-P

While John Conyers, the chair of the House Judiciary Committee, was polite about the Antitrust Modernization Commission when they presented their findings to the committee recently, it doesn't appear that he was in the least impressed with their recommendation that the Robinson-Patman Act be repealed:
Other recommendations, such as repeal of the Robinson-Patman Act, I am skeptical of ...

In its recommendations, the AMC suggests repeal of Robinson-Patman, claiming that it is not performing its intended function and that it conflicts with the goals of modern antitrust law. I am not in full agreement with the AMC on this point. Admittedly, the Act has its flaws; it is structurally complex and hard to administer, and it is not often used as an enforcement tool. But these problems don’t mean we should repeal the law altogether. Instead of repealing the Act, I believe we should be finding ways to make it work.
This is in line with my prediction six or so weeks ago.

Macy's to newspaper biz: "Shape up!"

Well, okay, you caught me making up quotes again. The CMO at Macy's, Anne McDonald, didn't quite say that -- what she said was: "In order for your newspapers to be winning our advertising dollars, you need to be winning in the marketplace, and that's not currently the case." And:

With Macy's now a national brand following Federated's acquisition of May Department Stores, the chain is turning increasingly to media with a national reach such as fashion magazines, television and Web sites, she said.

Newspapers are still effective at delivering local messages, she said, but need to do more to engage Macy's shoppers — primarily women ages 18-54.

Department stores have always been a mainstay of the newspaper business, along with supermarkets and car dealers. Although I don't have any numbers in front of me, I would be willing to bet that those have been the three leading categories of local advertising.

But car dealers are going on-line -- the last few cars bought in the Houk household (my kids go through vehicles at a disturbing rate) were sourced through sites like and, and that's where the dealers and manufacturers are going as well. Supermarkets, as any vendor supplying trade promo funding can attest, are spending most of their money in-store these days. And the consolidation of the department store channel has pretty much butchered that cash cow.

McDonald did offer some suggestions. A couple:
  • "newspapers [should] collaborate more effectively across regions and with each other in selling advertising, which would allow national companies such as Macy's to reach a broader audience"
  • "publishers [should] collaborate with advertisers on research to better understand the rapidly evolving habits of their customers"
Most importantly, she suggested that the newspaper industry, like her business, just needs to wake up to the changes in the marketplace:
Macy's, she said, is seeking to establish itself as a more upscale, fashionable brand and drive foot traffic even when there aren't promotions, and is still trying to understand how customers are changing the ways they shop. "Like us, you must change the way you think," she said.
Frankly, I'm not convinced that Macy's has the answer to the problems of their channel (I'm not convinced that there is an answer). But I'll give them credit for being aware that they need to change. I've seen less evidence of that awareness among newspaper execs.

More at this site.

In related news: Macy's is moving ad spending, responding to poor sales:
Troubled by sluggish sales across all Macy's stores the last three months, parent Federated Department Stores said Wednesday that it will shift its advertising dollars to public promotions from direct mail and private customer-only events. "Our promotions will need to create more urgency for these customers to react," CFO Karen Hoguet said on an earnings call. "These marketing issues are particularly critical in home areas that tend to be driven most by promotional offerings. We are hoping that these changes will help accelerate the business starting in late May."

Former CFO at Network Associates convicted

Today, I feel like I'm the local crime reporter. In addition to the US Foodservice guy below, we also had the former CFO of Network Associates convicted last week, again for playing accounting games relating to trade promotion allowances -- in this case, channel-stuffing.
According to court documents, Goyal allegedly caused Network Associates to make payments to its distributors disguised as discounts, rebates and marketing fees to convince the distributors to engage in channel stuffing
After the fraud, which cost the company more than a billion in market capitalization, the company was renamed, and is now called McAfee.

Ahold marketing exec gets seven years

Mark Kaiser, the former top marketing guy at US Foodservice, was sentenced to seven years in jail for the trade promotion accounting games that the Ahold subsidiary played a few years ago. He might consider himself lucky, since the prosecutors wanted twenty years.

The judge said he had to sentence Kaiser to prison because the criminal conduct was serious. "It was deliberate," Griesa said. "He had a leadership role and he got other people into trouble."

Ahold was forced to restate more than $800 million in earnings because of the fraud at U.S. Foodservice, and its stock lost 60 percent of its value. Two weeks ago, Ahold agreed to sell U.S. Foodservice to two private-equity firms for $7.1 billion dollars in a deal expected to close later this year.

Kaiser also was fined $50,000. He will remain free while the case is appealed. He was convicted in November after a one-month trial on securities fraud, conspiracy and false-filing charges.

In related news, Ahold recently sold US Foodservice.

Sunday, May 13, 2007

That certainly didn't take long

Wednesday, I sent out a newsletter dealing with channel developments affecting the two-per-channel theory (posted here Thursday, immediately below this one).

Barely was it mailed and posted than there were further developments.

One of the channels I didn't use as an example, office supplies, nonetheless demonstrated that the same principles apply to it -- according to this report, #3 Office Max may be bought by Staples or Office Depot.
OfficeMax Inc., the third-biggest U.S. office-supplies retailer, may be a buyout target for rivals Staples Inc. or Office Depot Inc. in an industry "that only needs two large players," a Credit Suisse analyst said.

The office-supply sector may follow supermarkets and department stores in consolidating as revenue growth slows, Gary Balter, a Credit Suisse analyst, said today in a research note.
And Tweeters said it may follow up the closure of a third of its stores by going Chapter 11.

The Dallas Morning News has a good summary of the rapid consolidation of the electronics channel:
All over Dallas-Fort Worth, consumer electronics chains CompUSA and Tweeter are closing stores after losing turf battles to two powerhouses – Best Buy and Wal-Mart.

Soon their easy-to-identify but empty stores will join the unmistakable shells of former Ultimate Electronics locations around North Texas.

Consumer electronics retailers are reeling from the faster-than-expected price drop last Christmas for their hottest product. On Thanksgiving weekend, prices for flat-panel TVs dipped below $1,000.

"The flat-panel TV pricing collapse last Christmas set a chain of events in motion. The television is the pillar of business for consumer electronics chains," said Alan Wolf, retail editor of Twice Magazine.

It's a lengthy article with lots of good info on the channel (I didn't know that Wal-Mart is now #2 in electronics, though it isn't a surprise).

Update (Monday): USA Today reports that Wal-Mart is going to ramp up its efforts in the electronics channel (not satisfied with being #2?) and, no surprise, Circuit City will suffer as a result:

"This is not good news for other people and is great news for Wal-Mart," says John Champion, a retail analyst at consultant Kurt Salmon Associates. "Any time Wal-Mart moves the needle a little bit, it's a tidal wave for everyone else."

Circuit City, trying to recover from a missed bet on wide-screen TVs and other challenges, could be hit hard.

Thursday, May 10, 2007

Harry Potter and the Disappearing Channels

This is going to be, to some extent, a repetition of previous items I’ve written. But there have been some interesting developments that indicate that it is time for an updating and review of the Two-Per-Channel Theory.

I've often advanced this theory (as have others), which says that we are moving toward a retail landscape in which there will be only two significant outlets in each channel. I've used as examples:

  • Best Buy/Circuit City
  • Home Depot/Lowe's
  • Barnes & Noble/Borders
  • Target/Wal-Mart
  • Kroger/Super-Valu
  • etc.

There are a corollary and a variant to this theory. The Manufacturers’ Corollary holds that there will be only two suppliers in each product category. The logic behind this is that suppliers will have to be large enough to deal with the retail giants, and is supported by the tendency of the retailers to want to improve efficiency by winnowing their supplier base. Supporters of this corollary point to P&G’s acquisition of Gillette. They argue that P&G was already bigger than its competitors, so the acquisition was not intended primarily to strengthen their hand vis-√†-vis Unilever, but rather its purpose was to allow them to sit at the table with Wal-Mart as equals.

Which brings up the Wal-Mart Variant to the Two-Per-Channel Theory. It holds that the final two in each channel will be:

  • Best Buy/Wal-Mart
  • Home Depot/Wal-Mart
  • Barnes & Noble/Wal-Mart
  • Target/Wal-Mart
  • Kroger/Wal-Mart
  • etc.

Neither version, of course, takes into account channels that utterly disappear, as the music stores have, and as has seemed possible at times with toys.

I've expressed my concern frequently for anybody running third in their race, but it seems that perhaps running second may be little better, and that the Wal-Mart Variant might be the stronger version of the theory, based on recent rumblings from two prominent #2s.

Circuit City: This chain’s problems have received a lot of press lately. Even after the negative publicity on their big layoffs,
the bad news has continued:

… Circuit City Stores Inc., the nation's second-largest consumer electronics retailer, said it expected a pretax loss of as much as $90 million this quarter and revised its forecast for the first half of 2007.

The news sent the company's shares down more than 7% in after-hours trading.

Sales in April were "substantially below plan," the company said.

Problems in this channel go beyond Circuit City, as BusinessWeek's summary of both cause and effect make clear:

Last "Black Friday," for its annual post-Thanksgiving sales blitz, Wal-Mart Stores decided to slash the price of one of the hottest electronics items for the holidays—the 42-inch flat-panel TV—to $988. The world's largest retailer had staked similarly audacious positions before, in numerous product categories, as part of its quest to remain U.S. retailing's "low-price leader." In turn, Wal-Mart's move caused a freefall in prices of flat-panel televisions at hundreds of retailers—to the glee of many people who were then able to afford their first big-screen plasma or liquid-crystal-display model.

Now, it is becoming apparent that Wal-Mart's calculated decision to break the $1,000 barrier for flat-panel TVs triggered a disastrous financial meltdown among some consumer-electronics retailers over the past four months.

The fallout is evident: After closing 70 stores in February, Circuit City Stores on Mar. 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group, the high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. Dallas-based CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores is boarding up dozens of outlets, as well as selling 94 of its 211 stores.

It’s so bad that Radio Shack’s CEO said that he has no idea how the chain manages to stay in business: Well, okay, he didn’t really say that, but The Onion, as is true of the best satire, captured the mood of the consumer electronics channel in a few paragraphs:

"I'd like to capitalize on the store's strong points, but I honestly don't know what they are," Day said. "Every location is full of bizarre adapters, random chargers, and old boom boxes, and some sales guy is constantly hovering over you. It's like walking into your grandpa's basement. You always expect to see something cool, but it never delivers."

Added Day: "I may never know the answer. No matter how many times I punch the sales figures into this crappy Tandy desk calculator, it just doesn't add up."

But it isn’t just consumer electronics.

Borders: Both the big book chains are hurting, as we’ll discuss, but Borders is in serious pain:

Borders, which reported a loss in the quarter, announced a dramatic shakeup of its business -- it plans to cut its number of Waldenbooks stores in half, to about 300 by the end of next year, and is considering the possible sale of most of its international businesses.


Competition from discounters such as Wal-Mart Stores Inc., which can afford to slash prices on books, has squeezed profits at Barnes & Noble and Borders, which have responded with their own discounts.

In this channel we see the clearest parallels to the record biz, and the possibility is strong that bookstores may likewise just go away. Harry Potter tells us why (in case you were wondering when I was going to finally get around to justifying the title).

The book world has been eagerly anticipating the publication of the newest Harry Potter book, but indications are that booksellers will see no profit from it, as reported in the UK's Times:

HMV Group gave warning yesterday that Harry Potter would not fly to the rescue of the ailing retailer this summer as it revealed further sales declines at its Waterstone’s bookstore chain.

The seventh and final adventure of the young wizard, Harry Potter and the Deathly Hallows, comes out on July 21 and Simon Fox, the chief executive, said that Waterstone’s had already sold nearly as many by preorder as were sold in total of the sixth Harry Potter book.

He said that it was vitally important for Waterstone’s to offer the book at a competitive price but because it was selling it at £8.99 – half price – it would be “hard to make money”.

So why are they selling a product for which there is great demand at a no-profit price? Glad you asked:

Mr Fox’s comments reflect the fears of Kate Swann, the chief executive of WH Smith, and Philip Downer, the retail director of Borders, as the high street prepares for a Harry Potter price war with the supermarkets and online stores such as Amazon, which is already offering the book for £8.99. Asda and Tesco will deliver the Bloomsbury publication for 12p less, plus postage and packing.

The retailers admit that the preorder price may fall to a 55 per cent discount closer to the publication date.

The big boxes are skimming off the cream, the bestsellers, and leaving the remainder to the booksellers – which is almost exactly what killed off the record stores (digital music and piracy were the other ingredients, but those factors aren’t far off for book stores – we await only a good reader for e-books to fill the role of the iPod). It’s also not dissimilar to the effect on Circuit City, et al. of Wal-Mart’s flat panel move.

As I look at these examples, I move more to the idea that the Wal-Mart Variation may be more likely than the original Two-Per-Channel Theory. Or perhaps the final two, in every channel, will be Wal-Mart and Amazon. That would be interesting.

The effect on trade promotion? We know what has happened to trade spending in the last couple decades, as retail concentration has grown. Presumably, we would see a continuance – to the point where we would equal Australia, where two huge chains have dominated for a long time. There, trade spending has topped 30%.