Wednesday, January 31, 2007

Reminder: TPMA meeting coming soon

Still time to sign up. The meeting will be in St. Petersburg, Florida (with near-zero temps expectedfor the next week here in Chicago, I'm looking forward to it, I'll guarantee that!) on Feb 11-13.

I'll be speaking on Tuesday morning on "Turning Sarbanes-Oxley into a Competitive
Advantage" -- basically, I'll be expanding on the Lemonade Law post from a few days ago (it's two or three posts down from here).

The conference brochure is here, and you go here to sign up.

Wal-Mart -- lotsa changes

There have been a steady parade of changes at Wal-Mart lately -- starting it seems with the agency-search debacle a couple months back, but more likely in response to flattening comp-store results, the changes of direction in terms of the chain's positioning, and bad news from overseas (the closures in Korea and Germany, poor results in UK).

In short, things have not been happy in the House that Sam Built.

My own opinion (admittedly an outsider with no specialized knowledge of what's going on) is that Wal-Mart has lost focus -- their foreign ventures and attempts to move upscale seem to have distracted them from their core competencies and left them looking like they're floundering.

I've listed most of the bad news above. The good news would be that they are taking action. Whether the actions are the right ones or whether it's just more floundering only time will tell.

Here's a BusinessWeek article saying that the move of the chief marketing officer, John Fleming, to head up merchandising is an attempt to "ease the deep tensions between the two divisions that have hurt the retailer's turnaround efforts."

Underlying the problems in marketing, though, was a divide with Wal-Mart's powerful merchandising division, the unit responsible for buying and displaying goods within stores, company insiders say. Before Fleming became marketing head, the marketing department played second fiddle to merchandising and was jokingly referred to as the place Wal-Mart employees went to retire. It didn't even have a consumer research arm.

Fleming went to work expanding the department, adding consumer research and marketing strategy staffs, and creating a branding unit to define how Wal-Mart should position itself with consumers. Fleming called the department "a startup in the world's biggest turnaround."

Fleming's aimed to have the ascendant marketing department use its consumer research to help guide the merchant's product choices. But Wal-Mart's merchandising division wasn't accustomed to taking direction from marketing and the two departments didn't work together effectively, people familiar with the situation say. The merchants were slow to follow marketing's lead on product direction. For example, marketing had pushed denim for fall, but the theme wasn't apparent in stores.

And Advertising Age reports on additional moves, including the head of the US stores division to international and his replacement by the head of Sam's Club.
In all, the latest round of recent or pending management moves involves 10 to 15 people, according to one person close to the company.
It will be interesting to see if the recent round of problems is just a bump in the road, fixable by moving some people around, or if Wal-Mart has topped out and will now settle into slow decline.

Do they just have a cold, or have they contracted the dreaded, terminal Sears Disease?

Monday, January 29, 2007

Sarbox – the Lemonade Law

Unlike some folks in business, I’ve never felt particularly strongly against the Sarbanes-Oxley Act – at least in regards to trade promotion management.

As a citizen and taxpayer, I always get nervous when the government creates another layer of bureaucracy (the PCAOB). And I’ve been hearing a lot lately about how much financial business is moving to London and other places, away from New York and the US, to get away from Sarbox.

These are legitimate concerns, I think. But as for trade promo, what does Sarbox require? As I understand the requirements, they could be summarized in simplest form as:
  • Full audit trail from plan to settlement
    • Have a system that accurately tracks what promotion was planned, what actually happened, and what you paid for it
    • All changes and deviations must be documented
    • Program rules must be documented and appropriately enforced
  • Full auditable proof of cost and performance
    • There must be documentation of what you paid for
  • All funds must be fully and accurately reconciled
So what’s the problem here? None of this is anything that we shouldn’t have been doing all along. It has been a shock to our systems to actually have some rules after so many years of anything goes, but now that we’ve adjusted, the time has come to look at the ways to take what we’ve learned from Sarbox and, whether we like the law or not, make the most of it.

As the saying goes: If life hands you a lemon, make lemonade. I can think of three varieties of Sarbox lemonade that can probably be made by most companies, and there are no doubt others that are specific to your company, based on the findings of your internal audits and the process re-engineering done to achieve compliance.

Sarbox Lemonade Recipe #1: Deductions and Post-Audits

If you are doing what Sarbox requires in regard to trade promotion, you should have virtually no unidentifiable authorized deductions for trade promotion.

Hard to believe, but true. Let’s look at a (very simple) schematic of a properly-functioning trade promotion process under Sarbox:

If you are actually doing this – if you and your trade partners are agreeing to a plan up-front, and the execution of the promotion matches the plan, and it’s all documented – how could there ever be a trade promotion deduction you don’t recognize?

Okay, I know this is the real world, and stuff happens – there will be exceptions. But they should truly be exceptions, meaning that there should be few. The exceptions themselves can be made into a positive, because they can become your measuring stick – the number of exceptions tells you the degree to which you are noncompliant with Sarbox.

For the same reasons noted above, there should be virtually no post-audits.

Sarbox Lemonade Recipe #2: Outsourcing

What is your company set up to be? A manufacturer/marketer of (fill in the blank) or a paperwork processor? There’s no good reason anymore for keeping the administrative aspects of your trade promotion program in-house.

You’ve outsourced payroll, HR, and a good many other paperwork functions, but you kept trade promotion inside, in large part because it was too unruly and uncontrollable. You wanted it where you could keep an eye on it.

That’s not necessary today – not now that you have Sarbox-compliant processes in place. You still will have the upfront planning done internally, of course, but all the back-end paperwork processing – all the collection and checking of documentation, and the issuance of payments or matching of deductions – can be done outside, by companies set up to do that sort of stuff.

Sarbox Lemonade Recipe #3: Documentation/Analytics

Now that Sarbox has enabled you to get your trade spending under control, and to track what you are spending the money on, you now have the opportunity to measure its effectiveness. The documentation of performance gives you the information you need to fully understand exactly what sort of promotion your retailers are doing for you – matching this up with their sales reports will tell you what sort of promotion works, and will give you the opportunity, in the next planning cycle, to do more of what works and less of what doesn’t.

You may or may not like Sarbanes-Oxley. It may or may not be a good law. But, properly used, it can be turned to your competitive advantage.

Wednesday, January 17, 2007

Quick notes

The NRF is forecasting slower retail growth for 2007. "... NRF is predicting industry sales gains of 3.8% in the first quarter, 4.6% in the second, 5.2% in the third, and 5.7% in the holiday quarter."

Home Depot investors are suing to stop Nardelli's platinum and diamond-encrusted parachute. And it may bring on government action: "
U.S. Rep. Barney Frank, chairman of the House Financial Services Committee, said the severance deal was 'further confirmation of the need to deal with a pattern of CEO pay that appears to be out of control.'"

The Telegraph reports that India's long-anticipated retail opening could be finally here. "The Indian government could lift restrictions on foreign investment in its retail sector as soon as next month, paving the way for British store groups such as Tesco and DSG International to open massive chains in the country."

The world's biggest malls

A slide show from Forbes. Eight of the ten are in Asia.

Ho-hum, sales down (again), profits up (again) at Sears

The question everybody asks is how long they can keep doing it.

Analysts raised their collective eyebrows Wednesday after Sears Holdings reported it is keeping a healthy cash kitty and has sold property, believed to be parking lots and other out lots such as gas stations, at some Kmart stores.

Sears also reported that holiday sales in November and December dropped 5.6 percent at Sears stores and fell 1.2 percent at Kmart stores from a year ago, but its fourth-quarter and full-year profits are expected to top Wall Street's forecasts.

The news sent shares up 3.5 percent.

That "healthy cash kitty" is what keeps speculation going about purchases (Gap and other possibilities).

Meanwhile, the chief marketing officer for Sears stores is out.
The chief marketing officer for Sears Roebuck & Co. unit has left the company, Bloomberg News reported today.

Joan Chow departed Hoffman Estates, Illinois-based Sears last week, spokesman Chris Brathwaite said today in a telephone interview. He declined to comment further. Sears is owned by Sears Holdings Corp., the largest U.S. department-store company and also parent to Kmart Corp.

Brathwaite said Maureen McGuire, the chief marketing officer for both the Sears and Kmart Corp. divisions, will fill the position while the company searches for a permanent replacement ...

Sunday, January 14, 2007

India: Tesco + Tata?

Rumors out of India are that Tesco and Tata are in talks to create a joint venture that could compete with the Wal-Mart/Bharti combo:

Tesco has begun talks with Indian giant Tata Group to form a retail joint venture to break into the country’s retail market. Tesco has been desperate to find a local partner in India after losing out to Wal-Mart to tie-up with Bharti Enterprises. Tata had previously said it was not in talks about a move into food retailing.

And speaking of Bharti/Wal-Mart, they will be announcing their plans in February:

Bharti’s Chairman Sunil Mittal said, "Complete details, including financial details, about the retail business will be announced next month jointly by Bharti and Wal-Mart".

Mittal added that the company was planning a cluster of outlets, preferably starting in north India and Bangalore.

Gap: Changes and rumors

Gap hasn't been doing well (to put it mildly), which almost always leads to two results: executive departures and rumors about sell-offs.

Kyle Andrew, vp-marketing, is gone, to pursue other opportunities, as the saying goes.

The day before Andrew left, the president of Gap Adult and one of the top designers for Old Navy also decided that other opportunities were worth pursuing. The same article mentions that:
"Rumors that Gap has hired Goldman Sachs Group to "explore strategic alternatives" fueled an increase in its stock value by as much as 11.4% on Monday.
Meanwhile, the Chicago Sun-Times is reporting that Sears Holding Company may buy Gap (the whole thing or pieces of it). We've been hearing lots of rumors about what Sears might be buying, though, and we're not going to hold our breath on this. Eventually, they'll do something (they have lots of cash), but who knows what?

Wednesday, January 10, 2007

John Kittle joins MEI

John Kittle, formerly Director of Trade Promotion and Category Development for Meow Mix, has joined MEI as VP-Industry Relations. Kittle had responsibility at Meow Mix for implementing the MEI solution. Prior to Meow Mix, Kittle was Director of Customer Sales Force Development at IRI, and had spent twenty-one years at Nabisco in various sales and marketing positions.
"John was a natural fit for this position given his industry experience and excellent reputation," stated Fred Schroeder, CEO, MEI.

Sunday, January 07, 2007

TPMA, February 11 – 13

The next Trade Promotion Management Association conference, The Financial Impact of Trade Promotion Management, will be held in St. Petersburg, Florida, February 11 – 13.

Make your reservations now at the TPMA website.

Mixed messages

It was a good Christmas.
Shoppers' Second Wind Keeps Retail Positive: The last week in December brought positive results for U.S. retailers as consumers redeemed gift cards and took advantage of post-Christmas deals, according to data released by the International Council of Shopping Centers on Wednesday. Weekly U.S. chain store sales increased by 0.3% for the week ending Dec. 30. Year-over-year sales grew 2.8%.

Some believe this momentum could parlay into a rich first quarter.

Christmas stunk.
Ho No No: Christmas Was Kind Of A Downer, After All: After all that fussing about the weather (too warm), the discounts on plasma TVs (too deep) and the shoppers (too few), major retailers made it official yesterday: Christmas 2006 is going into the books as kind of a dud.
We link, you decide.

Margin pressure on food manufacturers

The Wal-Mart effect is being felt by food manufacturers:

Aggressive price cutting by Wal-Mart Stores, the world's biggest retailer, is likely to put pressure on the profit margins of food manufacturers this year.

"Looking ahead to 2007, our work suggests gross margin performance should gradually deteriorate during the year ..."
With commodity prices rising, one would expect that manufacturers would pass their cost increases along -- but not if Wal-Mart won't allow it.

Is trade promo about to go into decline?

I read an interesting column in MediaPost by Joe Mandese a few days ago. It was one of those end-of-the-year-trend-prediction things, and among its points, it argued that trade promotion is in a period of decline:

Marketers bent so far backward in their promotional support that for a while it looked like advertising might take a subordinate role in the marketing mix.

Thankfully, that period ended in the 1990s as brand marketers came to their senses and began reinvesting in what actually drives consumers to their products: brands. The reign of trade promotion officially ended in the late 1990s …

Since this is a media trade publication, and the ad and media industries have long been beside themselves with frustration over the growth of trade promo budgets, I think there’s an element of wishful thinking to this analysis (as demonstrated by the use of the word “thankfully”).

But I don’t entirely dismiss the idea, although I don’t know of any evidence to support the idea that trade promo growth ended in the nineties, which would imply there has been some significant decline since. Based on both numbers from surveys and anecdotal data, the most I could say is that, after the incredible growth rates of that decade, in recent years the increases in trade promo budgets have slowed.

There are a couple reasons for this slowing: One is that the increasing scrutiny of the FASB/Sarbox initiatives has uncovered abuses and made everyone more cautious; the other reason – the main one – is that trade promo budgets have probably gone about as far as they can in some categories and channels, especially food/CPG.

With trade promo budgets already near (in some cases, over) 20% of sales, there simply is no more money to be spent. Already some analysts are downgrading food industry stocks because of concerns about margin erosion.

The question of how big trade promo budgets will be, though, is less important than the larger one of what our overall future will be. The future of trade promotion will be driven, as I see it, in large part by four big trends. The message these trends send today about the role of trade promo, and therefore of its share of the marketing budget, is mixed, but we’ll have to wait and see how they play out before the final answer is known.

Wal-Mart. No discussion of anything involving sales channels can be complete without weighing the effect of Wal-Mart. And today the question everyone is asking is, “What the #$%& is going on in Bentonville?” The very public scandals with Tom Coughlin and their strange ad agency review tell us clearly that this is no longer the company that Sam built. Throw in the embarrassing retreats from Germany and Korea and the continuing beatings they’re taking in UK and Japan; add on the loss of focus evident in the recent “we’re going upscale/no we’re not, we’re going back to basics” fiasco; mix in the whispers you hear from every side in the vendor community that Wal-Mart is simply not as sharp as they once were in every aspect – pricing, logistics, merchandising, execution; and, finally, top it all off with recent sales figures.

Clearly, the wild ride to the top is over. Just as trade promo budgets reached a point where they could go no higher, Wal-Mart has grown so large that further expansion (at least at the previous rates) is probably impossible. The question when growth slows and then stops, is whether decline is inevitable. Perhaps this recent spate of bad news is just a temporary thing, but to those of us who are getting on in years, Wal-Mart looks eerily like Sears in the sixties and seventies, when the former King of Retailing began its abdication with a series of missteps, loss of focus, and changes of direction.

It’s impossible to say what the effect of a floundering Wal-Mart will be on trade promotion; it is only clear that anything that happens at Wal-Mart will have a huge effect on everything involving retail.

Internet. Thus far, trade promotion has played a relatively small role in the growth of Internet retailing, but it would be very surprising if this were to continue. The application of many trade promotion tactics (slotting fees, shelf position, end caps, etc.) used in brick and mortar retailing have clear analogies in the virtual world.

Beyond in-store promotion, though, the analogies are less clear. It seems likely that, while trade promo’s role in Internet retailing will increase from what it is today, it will probably be less important than it is in the “real world”. Therefore, as the market share of Internet retailing grows, the role of trade promotion overall will decline.

Media fragmentation/in-store. One of the biggest drivers in the rise of trade promotion has been the growing awareness of the importance of in-store promotion. It’s your last chance (and your best chance) to get your message across (the moment of truth, as P&G calls it).

This is going to continue growing. Not only because in-store promotion is effective, but also because of the continuing (and accelerating) decline of traditional media.

I’ve written about the fragmentation of media before (see here), and nothing has happened to change my mind on the subject. It’s happening in every category of traditional media – TV, radio, magazines – but the effect on trade promotion is clearest in the precipitous decline of retail’s traditional #1 medium – newspapers. The news about the news biz gets worse with every passing day as the drops in newspaper circulation lead to layoffs in the newsroom and sell-offs of major papers (anybody want to buy the LA Times? If so, Tribune Company would love to hear from you).

The need for local promotion to replace newspaper advertising will create still more demand for in-store vehicles, and we’re seeing a resulting rush to create new vehicles; it seems at times that every square inch of retail space is an ad.

Once again, we will find that there is an upper limit – customers will rebel against the constant assault and will vote with their feet (and their pocketbooks) against retailers who overdo it. There will be a shakeout as the less-effective vehicles are abandoned. But overall, there will be a continuing growth in in-store spending, and therefore an increase in trade promotion budgets.

Analytics. The most important development in trade promotion in coming years will be the increasing use of analytics. Ever since the introduction of the first scanner, we’ve been aware that it is possible to tie sales-out to the promotions that drove them. But it has taken a long time (and increases in computing power and declines in the cost of disk storage) to assemble the massive databases of transactions and to develop lift tables from them.

The heavy lifting has been done now, and the numbers will keep getting more complete and the forecasts resulting from them will keep getting sharper through trial-and-error. The ubiquity of scanners in every channel, not just grocery, will mean the expansion of analytics from CPG/food into every category.

The result on trade promotion budgets? Mixed. There will be less resistance to big trade promotion budgets as the results of the spending are clarified (I can’t tell you how many times I’ve heard a CFO say something like, “I wouldn’t mind spending $150 million on trade promo if I just knew what we were getting for it.”)

The money will move around a lot, though. Some companies will decrease their trade promo spending and perhaps put the money back into national advertising, as Mr. Mandese suggests, as they learn that trade spending doesn’t work for them; others will increase the trade spend. Some channels will see less trade money coming in, others will get more. Some specific retailers who have been wasting (or pocketing) the money will get cut off. Promotional vehicles will change.

There will be very mixed results, by channel, by product category, by manufacturer, by retailer. The only constant will be change.

The net effect of these four big trends?

· One (media fragmentation/in-store) driving trade promo spending up.

· One (the Internet) driving it down.

· One (analytics) with mixed effects.

· One (the decline of Wal-Mart) unknown.

Add them all together, and the total is … unknown. And that should make life interesting.

The Home Depot severance package

Off-topic a bit for a TPM blog, but I can’t resist commenting on the $200+ million severance package Home Depot just gave Bob Nardelli, the CEO who spent the past six years driving down the stock price, for which he was handsomely remunerated.

Nardelli and Home Depot have agreed to terms of a separation agreement that would provide for payment of the amounts he is entitled to receive under his pre-existing employment contract entered into in 2000. Under this agreement, Nardelli will receive consideration currently valued at about $210 million.

The package includes a cash severance payment of $20 million, the acceleration of unvested deferred stock awards currently valued at approximately $77 million and unvested options with an intrinsic value of approximately $7 million. It also includes payments of earned bonuses and long-term incentive awards of approximately $9 million, account balances under the Company's 401(k) plan and other benefit programs currently valued at approximately $2 million, previously earned and vested deferred shares with an approximate value of $44 million, the present value of retirement benefits currently valued at approximately $32 million and $18 million for other entitlements under his contract which will be paid over a four-year period and will be forfeited if he does not honor his contractual obligations.

I’ve never really agreed too much with the critics of “excessive” compensation for top executives (nor excessive compensation for movie stars or athletes). I figure if people achieve their goals in terms of creating income/profits/share price increases, they should be compensated accordingly.

Nardelli’s case (and it’s not unique, except in its size) is reminiscent, though, of a baseball owner (it may have been George Steinbrenner) who was asked if he resented the high price of baseball talent. He replied that it wasn’t the price of talent he objected to, it was the high price of mediocrity.

CEOs who produce should be paid plenty. Those who don’t should be booted out the door. Giving a failure $210 million to go away is wrong.

Thursday, January 04, 2007

Tesco's US opening nears

The opening of the new Tesco stores in the US is getting closer, as the company has now applied for fourteen liquor licenses in the Phoenix area:
U.K. grocery powerhouse Tesco PLC has applied for 14 liquor licenses across the Valley so far this month, indicating its imminent arrival in the Phoenix metro area, reported The Business Journal of Phoenix.

As has been widely reported, the secretive retailer plans to expand into the United States early next year, including 50 stores in the Valley.
Several sites have also been chosen in Orange County, California, with the sites reported to be around 14,000 square feet.

As might be expected, competitors are nervous:
Rob Johnson, a spokesman with Chandler-based Bashas’ Supermarkets, described Tesco’s challenge to local competitors in one word: “formidable.”

Johnson described Tesco’s likely challenge to local companies like Safeway, Fry’s and Bashas’ as a knock-down, dragout fight for customers.

“There’s no way around it,” he added. “(It’s) really a crowded market. There’s either going to be a long drawn out staredown (or) something will have to give. And usually at the end of the staredown, somebody does give.”

Big news: Excessive price cuts hurt profitability

These are a couple relatively old items that have been sitting around because I was feeling lazy over the holidays.

It appears that the huge price cuts Best Buy and Circuit City took for Black Friday had a negative impact on their bottom lines. Imagine that!

Circuit City took the worst hit, because they are the weaker of the pair:
Circuit City Stores ... lost money during the three months ended Nov. 30. Investors already knew that the consumer electronics retailer from Richmond, Va. has been battling cut-throat competition, but they had expected at least a little profit.

Consumer electronics retailers are frantically trying to beat each other to customers by slashing their prices on things like flat panel TVs, effectively crimping the entire industry's ability to make money....
But Best Buy was hurt, too:
The company’s gross profit rate for the third quarter was 23.5 percent of revenue, down from 24.4 percent last year, and operating income for its U.S. operations fell 6 percent to $186 million for the three-month period, which included the first three days of the Thanksgiving holiday.
Best Buy justified their moves with the market share defense:
However, CEO Brad Anderson defended the aggressive price moves, stating they helped Best Buy win market share, brand loyalty and new customers as the chain headed into the final and most earnings-rich quarter of its fiscal year.
Which has some validity, of course. Particularly if Best Buy is playing a game of chicken with Circuit City -- having deeper pockets and being overall stronger, they can afford to play the price-cut game harder and longer. But there are two problems with the game, as I see it. One is that there's another company that can play it better (and we all know who it is), and the other is that consumers' expectations are changed by such events. Now that we've seen that laptops can be sold for $250 and hi-def TVs for $600, we're not likely to flock into stores to pay triple those prices.

Wednesday, January 03, 2007

Channel-stuffing at Snapple?

An attorney for sixty distributors suing Snapple (a division of Cadbury) says that an internal study reveals that the company has engaged in channel-stuffing.
A study ... Snapple Beverage Corp. has presented in court "apparently establishes" that the company used questionable distribution practices to meet a sales quota, a lawyer for 60 distributors suing the company said in a recent letter to the judge.

The letter by Howard B. Cohen to U.S. District Court Magistrate Judge Mark D. Fox says the study seems to show Snapple "engaged in a pattern and practice of channel stuffing. ..." The letter says the study - which is not part of the court file in White Plains - also seems to show that the company sold product at greatly reduced prices to certain distributors - but not to those who brought the lawsuit.
We all know that a great deal of channel-stuffing occurs in every product category, but the increasing frequency of legal action involving the practice is beginning to make it extremely dangerous (in addition to short-sighted and stupid, which it has always been).

Tesco is half of new space in UK

While we in the US are watching Tesco's moves as they prepare to open soon here, in its homeland, they are apparently trying to ignite a price war, according to The Guardian:
Britain's biggest supermarket chain, Tesco, is further turning the screws on its rivals by triggering a price war.

It is permanently cutting prices on 600 key items by a total of £80m. The move will be viewed by critics as another example of how the increasingly dominant retailer is flexing its muscles against smaller competitors.
The other point covered in the article is of equal interest -- that half of all new retail space in the UK in the past year was opened by Tesco. This would indicate the likelihood of substantial growth in their current 21.6% market share. Meanwhile, the Competition Commission's report on concentration in the retail sector is expected soon (it has already been delayed).
Britain's Office of Fair Trading highlighted four areas of potential concern when it decided to refer the sector to the Competition Commission in March this year: planning, price flexing, supermarkets' relationships with suppliers, and their entry into the convenience sector.
More about the latest rumors on Tesco's US operations in a later post.