Possibly big price discrimination decision

Time will tell how big this is, but a food distributor in Pennsylvania won a Robinson-Patman suit against a supplier for discriminatory pricing and against Sodexho for inducing discriminatory pricing.

Feesers filed its complaint against Michael Foods and Sodexho on March 17, 2004, alleging price discrimination in violation of the Robinson-Patman Act. A three-week bench trial took place in early 2008 before Judge Sylvia Rambo in the federal district court in Harrisburg, which resulted in the April 27, 2009 decision.

At trial, Michael Foods and Sodexho argued that Feesers and Sodexho were not in "actual competition" for purposes of the Robinson-Patman Act because Sodexho provides food management services to its customers, whereas Feesers is a food distributor. The court found, however, that both Feesers and Sodexho procure and distribute food for the same institutional customers and, thus, are in actual competition for the same food dollar.

Although the injunctions issued by the district court are binding only as to Michael Foods and Sodexho, it is now clear that price discrimination by food suppliers against distributors such as Feesers and in favor of large-volume food management companies and GPOs such as Sodexho will not be tolerated by the courts.

This law blog quotes attorneys for the two sides, who disagree (no surprise) as to the importance of the decision:

Kessler [Feeser's attorney] told us Wednesday that the decision could have a major impact on the food distribution industry. In recent years, he explained, food management companies like Sodexo--which provide procurement and management services for cafeterias at schools, hospitals, and prisons--have used their large client base as leverage to extract better pricing deals from suppliers. That's hurt distributors like Feesers. "Sodexho [said to its clients], 'We don't compete with distributors so you can give huge discounts,' " Kessler told us.

Peggy Zwisler of Latham & Watkins, who represented Michael Foods at trial, disputed Kessler's view of Judge Rambo's opinon. She told us it's "very fact specific" and does not have broad implications. She also said that Michael Foods has "strong grounds for appeal" and it intends to do so.

The decision is here.

I am not an attorney, so take my opinions with several grains of salt, but it seems to me that the most significant point in the decision is that no proof of competitive harm is required, that harm can be assumed from the size of the price differential. My understanding is that this interpretation, if upheld, would make such suits easier to win in the future.

“Competitive injury” is established prima facie by proof of “a substantial price discrimination between competing purchasers over time.” In order to establish a prima facie violation of section 2(a), Feesers does not need to prove that Michael Foods’ price discrimination actually harmed competition, i.e., that the discriminatory pricing caused Feesers to lose customers to Sodexho. Rather, Feesers need only prove that (a) it competed with Sodexho to sell food and (b) there was price discrimination over time by Michael Foods. This evidence gives rise to a rebuttable inference of “competitive injury” under § 2(a). The inference, if it is found to exist, would then have to be rebutted by defendants’ proof that the price differential was not the reason that Feesers lost sales or profits.

Radio Shack brings us some good news

Radio Shack is not exactly the coolest name in retail, and a couple years ago I couldn't resist posting this bit of satire from The Onion, purporting to quote the chain's CEO:

"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 Day may be having the last laugh:

Net income rose to $43.1 million, or 34 cents a share, from $38.8 million, or 30 cents a share, a year earlier. Revenue grew 5.6% to $1 billion.

Analysts had, on average, been expecting Ft. Worth-based RadioShack to earn 20 cents a share on revenue of $944.8 million, according to consensus estimates derived in a FactSet Research survey.

The numbers may be inflated by sales of digital converters, but anybody who's showing good increases right now is doing something right.

Pontiac: R.I.P.

Old brands can be like old friends, I guess. When they die, we're saddened, we feel a void in out lives.

That's a bit of hyperbole, of course, but I will miss Pontiac, as I miss other brands that are gone, and as I will miss some others that appear to have one foot in the grave. I never owned a Pontiac, but it's a brand that I grew up with. It has always been there, and now it won't be.

Newspaper circulation falls -- even more

Just when you think things couldn't possibly get worse for the newspaper industry ... things get worse.

The latest circulation figures just came in, and they are ugly. Of the top twenty-five daily papers, only the Wall Street Journal had an increase (less than 1%). Many of the others had double digit decreases -- the New York Post was down more than 20%, and New York Daily News, Houston Chronicle, SF Chronicle, Boston Globe, Philadelphia Inquirer, Cleveland Plain Dealer, Newark Star-Ledger, St. Petrsburg Times, Portland Oregonian, and Atlanta Journal-Constitution were each down between ten and twenty percent. Overall:

... for 395 newspapers reporting this spring, daily circulation fell 7% to 34,439,713 copies, compared with the same March period in 2008. On Sunday, for 557 newspapers, circulation was down 5.3% to 42,082,707.

Well, at least things can't get any worse than this. Right?

FTC's RPM workshops scheduled for May

The Federal Trade Commission will hold workshops on resale price maintenance May 20-21:

The first panel will be moderated by Pauline Ippolito, Acting Director of the FTC’s Bureau of Economics, and will examine empirical evidence on the effects of RPM. Specifically, it will review existing empirical studies of RPM, or studies of other vertical restraints that might inform the thinking on RPM. The panel also will explore potential future research in light of possible testable hypotheses underlying the competitive effects of RPM.

The second panel, to be moderated by Laurel Price, Attorney Advisor to FTC Commissioner Pamela Jones Harbour, will examine the legal and business history of the use of RPM in the United States. It will explore how RPM has been treated in this country historically, as well as the legal and business management doctrines related to RPM.

The third panel, also to be moderated by Price, will examine “rule of reason analyses” after the Supreme Court’s landmark Leegin decision, and will assess guidance provided by the Leegin Court regarding the analysis of RPM.

The sessions will be of value to manufacturers who wish to establish minimum pricing rules for their resellers, although it's quite possible the rules might change again very soon.

Recessions get a bad rap

Advertising Age had an article last week about the big increases being seen in private label, “Don't Blame Private-Label Gains on the Recession”.

Not only have private label brands been gaining share for the past decade, experts say these gains are the single-biggest problem facing branded packaged goods players. House brands, once a staple of lower-income households, now enjoy roughly equal penetration among demographic segments. Improvements in quality and packaging have helped removed the stigma attached to buying a no-name product.

The recession has accelerated the growth of private label, but it is a long term trend that was happening before the recession and will (presumably) continue, though at perhaps a reduced rate, when the recession is over. The increasing concentration of retail, and the increasing power of the surviving retailers, virtually ensures it.

That’s an interesting thing about recessions – they speed up trends that already exist, especially speeding up the effects of secular decline. Besides private label, we see similar effects from the recession in media and retail. (I did a similar post on this point almost exactly a year ago).

Some of the biggest (or at least most publicized) hits in this recession have been felt by the big media, especially newspapers. But media watchers have been warning about the effects of media fragmentation for the past few years (I did a presentation on its effects on trade promo at a TPMA meeting three or four years ago – and I wasn’t first), and newspapers have been in decline even longer. The recession has merely exacerbated existing problems.

In retail, department stores are hurting, and several chains (including Linens ‘n Things and Circuit City) have liquidated. But the consolidation of channels has been killing off the also-rans in each channel for years now, and department stores’ market share has been dropping for decades. Again, the recession has just sped up processes that were already in action.

It’s convenient to blame recessions for business problems. But often the recession merely exposed the problem, it didn’t create it.

Some brand marketers may want to believe that the recovery will solve their problems with private label, and media people and retailers may have similar dreams, but the recovery will solve nothing if the underlying problems are not addressed.

Google interview, part two

A few weeks ago, I was interviewed by Brett Goffin of Google. The video from that interview is now available on the Google Retail Blog, in two parts. The first part, dealing with general trade promo issues and background matter, is here. Part two, dealing more specifically with trade promotion online, is here.

I’ll wait a few moments, while you click the links and watch the interviews … Okay, now that you’re back, I’ll expand a bit on what I said there.

I’m astonished, frankly, that online promotion has not yet attained a much higher percentage of trade spending. Our survey several weeks back indicated that it is under 5% for most programs. While our surveys are not scientific, the results comport with my observations. Given that online promotion offers both immediate sales opportunities at e-commerce sites (equivalent to in-store promotion), as well as brand-building opportunities (equivalent to print or broadcast advertising), and also customer education opportunities (equivalent to collateral material) – often serving these functions simultaneously – it seems retailers and their suppliers should be doing far more online promotion this many years into the internet age.

So why hasn’t it happened? There probably are multiple explanations, but it seems that the most likely reason is the usual one – money. Retailers make money off circulars and they make money off endcaps. They’re not going to get excited about online promotions until they can make equivalent amounts of money there.

When the internet first emerged, most of us looked upon it, in terms of trade promotion, as being analogous to broadcast or print, and therefore we tended to think of payment for it as being cost-based, as payment for those media (other than circulars) was traditionally arranged. But if we change the analogy to in-store promotion, then it is easier to think of payment as value-based.

The internet, of course, is both advertising medium and store (and more), and therefore both analogies are apt. But more to the point, there is no reason why retailers cannot charge what they see fit for online trade promotions, just as they do for an endcap in their store.

(A caveat: There are Robinson-Patman considerations concerning any trade promo payment that is not strictly cost-based – but value-based payments for internet promotions should be no more nor less questionable legally than value-based payments for in-store promotions. A second caveat: I am not a lawyer).

So what is needed for online trade promotion to advance beyond the level it is at today? Retailers need to see the opportunity to use it as a profit center, and then to present the value proposition to their suppliers; and/or, suppliers need to approach their channel partners with proposals to use online trade promotion that offer incentives comparable to in-store promotion; and/or, online media need to broker the deal.

The means exist to create online promotions that tie together search, banners, and “virtual endcaps”; promotions that build the brand, that sell, and that provide information to facilitate in-store sales. Retailers and their suppliers need to cut their ties to old models and move forward.

American Greetings gets out of retail, into distribution

American Greetings has pulled off what amounts to a trade with a privately-held card company, Schurman Fine Papers. AG sold their retail outlets to Schurman, which operates card stores under the names Papyrus and Carlton Cards, and simultaneously bought Schurman's distribution business, and a 15% share in Schurman.

American Greetings is selling its retail store operations to Schurman, which operates Papyrus card and gift retail stores. Schurman will operate stores under the American Greetings, Carlton Cards and Papyrus brands. Schurman paid American Greetings approximately $6 million for its retail business.

The card companies also announced that American Greetings purchased the wholesale division of Schurman, which supplies Papyrus brand greeting cards to specialty, grocery and other retailers. Following the close of the deal, American Greetings will become responsible for service to those accounts where Papyrus brand products are sold.

American Greetings paid approximately $18 million dollars as consideration for the wholesale division of Schurman.

American Greeting is a pretty well-known name -- I'm surprised to see that their retail business is worth only $6mil. But then, I also don't remember having seen any of their stores recently (if ever) -- which may be a clue as to why they are exiting the business. This would seem to be one of those "concentrate on your core business" moves.

Update 4/22: The Cleveland Plain Dealer reports that American Greetings closed sixty of its stores in February, leaving about 355. And this quote from AG's boss indicates that they looked at getting distribution rights to Papyrus as the focal point of the deal (and maybe the reason for the relatively low price for the stores):

“The addition of the Papyrus brand to the American Greetings family provides the opportunity to serve a consumer with distinct tastes—a consumer who appreciates the Papyrus approach to design and quality,” says American Greetings CEO Zev Weiss.

S&P downgrades Macy's and JCP to junk

Standard & Poor's has lowered the ratings on pretty much the whole retail sector, it appears, with Macy's and J.C. Penney taking the biggest hits.

"The rating actions reflect Standard & Poor's deepening concern about the impact of the U.S. recession on the increasingly troubled department store sector," Standard & Poor's credit analyst Diane Shand writes in her reports, "which has felt the full brunt of the declining U.S. economy and weakening consumer confidence in 2008. We believe lower consumer spending and declining mall traffic will affect the sales and profits of the department store operators this year," Shand writes, "and that recovery will be slow."

I'm not a market analyst (as a glance at my portfolio would quickly prove), but I certainly agree that "recovery will be slow" for the department store sector, since their problems pre-date the recession and will continue after the recession is over.

When retailers suffer, so do mall owners

General Growth Properties (ironic name), the second-biggest owner of shopping malls, declared bankruptcy this week, a victim of the ripple effects from the battering of their retail tenants. The company had $25 billion in debt, much of it coming due next year, and had bought out Rouse Company for $12.6 billion in 2004.

As more stores have closed, mall vacancies are at their highest point in almost a decade, according to Reis, a research company, which said the vacancy rate at the end of 2008 was 7.1 percent, compared with 5.8 percent at the end of 2007.

That has left many of the roughly 1,500 malls in the United States groping for a solution — any solution — to their woes. Some have converted retail space into office space. Others have drastically lowered rents for prized tenants, agreeing to cut deals to keep revenue flowing. Some have simply gone dark.

Shares in General Growth, which closed on Wednesday at $1.05, have fallen 97 percent over the past 12 months.

Down 97% -- sounds like some of my investments.

Mexican retailer enters US market

A Mexican 'cheap chic' retailer with 64 stores in its home country, has opened its first store in the US. Shasa says the Houston store is just the first of 100 planned by 2012. Some might consider this an inopportune moment to be opening new stores:

Trendy vendor and possible competitor Wet Seal reported that its net revenue fell to $593 million last year from $611 million in 2007. Clothing retailers like Ann Taylor, Eddie Bauer and Gap have shuttered stores across the nation of late. And retailers like Meryvn’s and Steve & Barry’s declared bankruptcy last year.

But the store owners are undetered:

“It’s the best time to enter. From here, it’s all up,” Armando Dollero said as he toured the 6,300-square-foot store on opening day.

The recession is also forcing customers to exchange expensive name brands for cheaper retailers, Carlo Dollero said.

“We’re getting a market we didn’t have before,” he said, adding that sales in Mexico shot up 42 percent last year compared to 2007.

Good luck to them. I love that attitude.

Designers want to control their brands

We've posted before about the havoc wrought by department stores, especially Saks, in taking panicky markdowns last fall, which many designers feel caused serious damage to their brand names.

Now some of the designers, according to this Wall Street Journal article, are seeking to regain control over their brands, and specifically over the pricing of their products. One tactics is to demand to be left out of "storewide" sales:

These days, many fashion brands are effecting their own pushback, demanding to be left out of department stores' sales. "All our brands are taking great care to ensure that what happened in November will not happen again," says Paola Milani, a spokeswoman for Gucci Group, which owns Bottega Veneta, Yves Saint Laurent, Gucci and other brands. "The idea is to maintain pricing coherence in the regions in which our products are sold regardless of channel of distribution." [ ... ]

Saks, which was a leader in last fall's discounting, declined to comment. But this week, notices for Saks's 25% off "Friends and Family" sale exclude, in the teensy fine print, more than 40 top luxury brands, including Gucci, Cartier, Chanel, Loro Piana, Oscar de la Renta, Zegna and Christian Louboutin.

One wonders if that will be legal if the Leegin decision is repealed, as Senator Kohl is demanding.

Other tactics include opening new stores, in order to reduce dependence on the department store channel:

Her company depends on department stores for 70% of its revenue, which was $273 million in 2008. But she would like to whittle that share down to 50%.

To that end, Eileen Fisher will open six new stores of its own this year in the U.S. -- slightly accelerated from an average of five new stores per year -- and is launching a costly new technology platform for Internet sales that will offer greater flexibility, allowing online customers to pick up items in stores, for instance.

Probably not a bad idea anyway, considering the current state of department stores. Another variation is opening leased departments within the d-stores.

And now ... private label cars?

Saturn car dealers, faced with imminent closure, are looking for an opportunity to buy the Saturn brand name from General Motors. They plan to buy cars from foreign carmakers, tweaking the design, and sell them as Saturns -- effectively creating the world's first private-label automobiles.

Telesto Ventures said it would not build vehicles and would only keep a skeletal design crew on hand to adapt models from other automakers to a Saturn look. It also said it would focus future models on fuel-efficient and electric vehicles from other automakers.

While such a business model doesn't exist today, Telesto's backers say the global overcapacity among automakers and the growing number of start-up firms in China and elsewhere would give the reformulated Saturn several possible sources of new vehicles.

Finding automakers to work with "is not a tremendous concern," said John Pappanastos, a group spokesman. "It would allow manufacturers not in the United States to launch without incurring the largest expense they would otherwise face, setting up a distribution network."

I wish them well, and I find it fascinating to watch the concept of private label spread into areas where one could never have imagined.

Google interview

Brett Goffin of Google interviewed me recently concerning trade promo, both in general and in regard to its utilization on-line. Part 1 of the interview is up now, with the second part to be posted next week. It's posted here. In this first part, we're discussing general principles, and we get more into on-line in Part 2.

I appreciate Google making this available, and I think it was a good interview (they edited out much of my mumbling and rambling).

Y&R allies with Mars

Ad agency Young & Rubicam has created an alliance with in-store specialist Mars Advertising.

Young & Rubicam, looking to snag more revenue in one of the few ad sectors still growing despite the recession, is forming an alliance with Mars Advertising, a specialist in pitching products to consumers while they're busy shopping.

Traditional ad agencies, finding their business shrinking as a result of the decline of traditional media, are following the money into in-store marketing. Y&R is just the latest of several firms to enter the field.

Y&R faces stiff competition in the in-store sector, where some of its rivals were faster to bulk up. Publicis Groupe's Saatchi & Saatchi, for example, purchased in-store marketing firm Thompson Murray in 2004. Now named Saatchi X, the firm has 15 offices around the world and works for marketers such as Procter & Gamble, Wal-Mart Stores and PepsiCo's Frito-Lay.

It's good to see the ad agencies catch on (if belatedly) to what we've all known for a decade or more. It remains to be seen if they understand the dynamics of trade promo. It's a little different from competing for Golden Lions at Cannes.

Record companies try adding value

Record companies are looking for ways to make more than 99 cents per song. One new effort is to bundle a group of added attractions around a new release. Epic, a Sony label, is offering a $17 “season pass” for fans of their group, The Fray.

"The pass delivers songs, video footage and photos, but spaces out the offering over several weeks in the hope of holding consumers' attention and justifying the premium price."

The music industry is flailing about, looking for new revenue streams. It may be that producing value-added bundles of this sort might be one way out of their dilemma. Interestingly, their problem has been caused by the collapse of bundled deals -- albums -- that they have been offering for generations. Downloads have de-bundled albums, and consumers are choosing to buy the one or two songs per album that they care about and ignore the useless filler songs that the record companies had been forcing their customers to pay for.

These new bundles will work only if enough consumers see the extra material as being of real value.

How to fight Walmart

Dartmouth's Tuck School of Business studied Walmart openings in new markets -- how local retailers reacted and Walmart's effect on their sales.

The effect was huge -- a 40% drop in sales for neighboring mass merchants and a 17% drop for grocers.

How did most retailers react to Walmart?:

• Cut prices
• Reduced number of brands carried
• Cut back on promotions

All three are bad moves, according to the study. Kusum Ailawadi, who led the study said that retailers who cut price were merely giving up income, since they could never hope to match Walmart's pricing. And instead of cutting brands, they would have been better off to diversify their offerings, especially on higher-end brands where they would not be competing with Walmart.

In regard to promotions, they should increase, not decrease their promotions. "If a store is offering weekly specials, it's harder to make exact price comparisons," she says.

Where are they now?: Polaroid

Ever lose track of an old friend and wonder what they're doing now? Polaroid was a client a number of years ago when I was with CoAMS, and it's kind of sad to see how far they've fallen.

Polaroid Corp., the twice-bankrupt pioneer of instant photography whose brand name may be its most valuable asset, must try again to auction off its assets after failing to win a judge’s approval for a $56.3 million sale.

Fifty-six million. Wow.

Of course, even ten or fifteen years ago, it was obvious the company was in trouble -- their product had been rendered obsolete by digital photography. They were milking film sales desperately. A company that had been a technology leader had not come up with anything new in a long time. They should be a good case study on how not to react to disruptive new technologies.

Acer gains ground by cutting costs and prices

Acer may be poised to become king of the PC hill:

... Acer could pass second-place Dell in number of computers shipped this year—and close in on HP. Acer "has a strong chance of overtaking HP," wrote analyst Gokul Hariharan of JPMorgan Chase in a report earlier this month.

This is based on unit volume, not sales, and many of the units are low-priced netbooks. But it's impressive nonetheless. They have moved up by cutting costs to be the bone (their overhead costs are barely half of Dell's and HP's), and doing the same with their prices.

Acer's new ultrathin laptop will have a starting price of $650, compared with $1,800 for a similar HP Voodoo Envy and $2,000 for a Dell Adamo. "They're changing customers' perception of what you should pay for a computer," says Richard Shim, an analyst with the research firm IDC.

So Acer is taking the low end of the market, but also attacking their rivals on the high end.

VF turning more to own stores

There is much to be said for zigging when everybody else zags, and that appears to be what VF Corp. is doing.

Many U.S. apparel makers are ditching acquisitions and store expansion plans to conserve cash amid the consumer-spending downturn. But VF Corp. is taking a reverse tack to survive the turmoil.

The largest apparel maker in the world by revenue, VF is continuing to add new retail stores and plans to snap up new brands, said Chief Executive Eric Wiseman.

The Greensboro, N.C., company plans to open at least 70 new boutiques world-wide this year, Mr. Wiseman said in an interview. It is committed to a five-year plan that began in 2007 to reduce its reliance on flagging department stores.

Last year, it opened 89 new stores and drew 16% of revenue from its own outlets. It aims to boost direct sales to 22% of revenue by 2012, Mr. Wiseman said. The stores also showcase its brands, which include Nautica, The North Face, Lee Jeans and Vans.

In a recession, it's possible to grab market share as competitors retrench. Companies that do so often come out the recession stronger than ever.

Its expansion plans are a contrast to those of rivals such as J. Crew Group Inc., which has said it is revisiting all store openings. Jones Apparel Group Inc., which owns brands such as Anne Klein, Nine West and Jones New York, said it was "substantially" paring back its store expansion plans. And Liz Claiborne Inc. is postponing store openings until the economy improves.

Of course, expanding in a tight credit market requires having manageable debts, and the article notes that "VF has no long-term debt coming due until the fall of 2010."

The company also appears to be looking toward the recovery in terms of its brand acquisitions, which include luxury products:

Although the luxury sector has been one of the hardest hit in all of retail, Mr. Wiseman said that he is looking to buy more contemporary apparel brands. Earlier this month, VF spent $208 million to acquire the shares it didn't already own and debt of Mo Industries Holdings Inc., which owns Ella Moss and Splendid, makers of $100 t-shirts sold at Barneys New York.

"We know the challenges of the upscale department stores," said Mr. Wiseman. Nevertheless, he defends his strategy, arguing that, for now, VF can capture consumers at lower- and mid-tier retailers, but "when they shift back up to luxury we can catch them there as well."

These may or may not be good moves. Time will tell. But what I like is that VF seems to be a company that is looking beyond the recession and adopting a strategy to maximize the recovery.