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.
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 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.
However:
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.
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.
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 cars.com and autotrader.com, 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.
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."
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.
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.
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.
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-Ã -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, asBusinessWeek's summaryof 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, butThe 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."
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.
Why?:
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%.
I've often described TPMtoday as the world's first and only blog dealing with trade promotion marketing. I'm going to have to change the description, though -- Multi-Ad has launched a blog recently called The Co-op Connection, and when I visited it I found a link to another blog called Co-op Queen Buzz, which has been around for almost a year. I'll have to drop the "only".
Both look interesting, especially for those involved in media sales.
If anybody knows of other blogs relating to trade promotion, co-op/mdf, or other channel management subjects, please let me know, and I'll pass on the word.
The history of rebates is replete with programs that have been, to put it kindly, less than consumer-friendly.
Microsoft once offered a $300 rebate on a software upgrade but required customers to send in a UPC code from the box for the original software.
Cell phone maker Samsung paid $200,000 to settle a case in New York involving 4,100 residents of apartment buildings whose rebates were wrongly rejected. It turned out the rebate system only allowed one rebate per address but couldn't account for apartment numbers.
And consumer electronics retailer CompUSA was charged by the FTC for failing to promptly pay rebates.
The government alleged that CompUSA advertised rebates from one of its suppliers even after it knew the company was failing to pay rebates, Gold said.
"The Commission’s complaint against the InPhonic alleges that, in connection with its advertised rebate offers, among other things, the company failed to provide promised documents needed to obtain rebates, to send out checks in the time promised, and to disclose adequately certain material terms and conditions prior to purchase."
"The Commission’s complaint against Soyo, Inc., alleges that most of Soyo’s rebates were delivered late – in some cases, consumers had to wait a year or longer for their checks to arrive."
And this one details another problem -- a manufacturer has failed to give their processing firm funding for the rebate checks, with Office Depot ending up making the rebates good.
The whole rebate business has such a bad reputation no that I wonder why manufacturers continue to associate their brand with it. Well, okay, I do know -- it pumps up sales. Sales up, brand image down.
During this phase, Nielsen In-Store will extend P.R.I.S.M.'s coverage to all in-store marketing media, among them merchandising activity, retail TV and radio networks, shelf talkers, cart talkers, digital signage and other point-of-purchase displays. The research also will be expanded to a national sample of about 200 stores. Final specifications for linking information about consumer traffic and the presence of in-store media will be defined over the following six months, and the first robust reach-and-frequency measures are expected by the close of the year.
Meanwhile, Kimberley-Clark has started use of an idea that has been frequently discussed over the past couple years -- using RFID chips to track stores' deployment of POP materials.
Kimberly-Clark customized an RFID application that, after RFID tags are placed on the display cases, records when a promotional display is received at a store and checked into its backroom warehouse, and when the displays reach the designated sales floor.
Good results thus far: "Kimberly-Clark has increased compliance with its promotions to 75% from 55% of its participating stores, the company says."
As reliance on in-store marketing increases, as appears inevitable given media fragmentation, efforts such as these will become ever more important.
Once again (how many times?), Sears reported that same-store sales were down in the first quarter -- Sears down 2.4%, Kmart down 4.7%. But they remain profitable and heavy on cash.
Despite the softer sales, the company is projecting an increase in first quarter earnings thanks to $69 million in unrelated gains, including a favorable legal settlement, a dividend from Sears Mexico, and insurance payments for hurricane damage in 2005.
Sears Holdings will end the quarter with about $3 billion in cash and cash equivalents.
In other reports, they said they will be starting up new branding campaigns for both chains, and that the worst of the Kmart locations may be turned into Sears Grand stores. (Is anybody willing to bet that Kmart will still be around in, say, three years?). And also,
Sears Chairman Edward S. Lampert, a 44-year-old billionaire hedge-fund manager, said turning around Sears may take another three years. The process has been one of the most difficult things he has done, Lampert said.
They also mentioned an interest in using that three billion to buy something. Wonder if he's looked at Gottschalk's?
Rumor has it that Wal-Mart is considering buying the Gottschalk's chain of department stores. The purchase would be intended to strengthen Wal-Mart's presence in California. Gottschalk's has a total of 63 stores, most in California, but also in Nevada and the Pacific Northwest. Most are in secondary markets (e.g., Fresno) or on the outskirts of major markets (e.g., San Bernardino).
The report, citing Wall Street analysts, said the Gottschalks prospectus was sent out by UBS Investment Bank about six weeks ago and Wal-Mart was given a copy of the book.
The article said opening bids are expected by early June.
In December, Gottschalks said it hired UBS Investment Bank to help it explore available options, including a sale or merger of the company.
What I find most interesting is that there is no mention of a department store interested in buying a fair-sized department store chain.
Nothing new in the latest circulation report, which could be summarized as "situation bad, getting worse -- again."
A few papers scraped out tiny increases, but most took hits -- some bad and some terrible. And then there's the Dallas Morning News, circulation down 14.3%. It's not easy to lose that much business in just one year.
The drop at DMN at least diverted attention from the continuing horror story that is the Los Angeles Times. The Times lost another 4.2% on top of their other recent losses. It's interesting to note that a few years ago, the LA Times had almost caught the NY Times and looked set to become the country's biggest metro daily. Now, even though the NYT is also losing cirulation, the LAT is more than 300,000 behind. In fact, another year like this one, and the LAT will drop into third place, behind the New York Post.
The Post, despite all the sneers it gets from the elite, is doing something right. It's the only paper to show a significant increase -- up 7.6% -- and has passed its tabloid rival, the Daily News.
Once again, for trade marketers the question is -- what do you do when your principal advertising medium implodes?
As mentioned a few weeks ago, Mike Kantor at TPMA has been talking with various people about ways to get more involvement in the association from manufacturers in non-CPG categories -- durables, business-to-business, services, etc.
Since getting more involvement from durables people and having more subject matter at conferences specifically targeted to them (I'm not sure which is the chicken and which is the egg) are pet topics of mine, Mike has asked me to chair a committee to come up with a plan and to implement it.
We have some good people signed on to the committee, tentatively called the Durables Council (or Durables/B2B, or something like that -- we'll worry about the name later). We need more, of course, so be expecting a phone call asking you to volunteer, or better yet call me (708-758-0748) or Mike (646-442-3703).
We want input especially from manufacturers -- we want to know what you want from the association: what topics at meetings, what types of studies, research, information and services. We know we're dealing with busy people, so we won't demand a huge time investment -- a one-hour conference call once or twice a month, plus some thought in between. The only requirement is that you have opinions and are willing to express them.
Provocative title, isn't it? It's a cheap journalistic trick to lure in readers, but I'm not proud.
But there really is a point to it -- it hit me as I was reading this article in Forbes. It doesn't tell us anything most of us didn't know (or at least suspect). But it puts some hard numbers to the fact that, just like alcohol, a little bit of Wal-Mart is okay, even good for you, but you gotta know when to stop.
Forbes studied 300+ manufacturers, correlating their profit margins to the amount of their total business Wal-Mart represented, and comparing the margins to those of competitors. The bottom line? The more you sell to Wal-Mart, the lower your margins.
Wal-Mart <10%, margin = 39.1%
Wal-Mart = 10-20%, Gross margin = 36.2%
Wal-Mart >20%, Gross margin = 35.4%
The trend is most pronounced in the apparel & accessories category, where average gross margin drops from 48.7% for companies generating less than 10% of its sales through Wal-Mart, to 28.7% for those selling 20% or more. Food & beverage also shows a big disparity, where the same breakdown shows average gross margins dropping from 39% to 22%.
In all, only 25 of 333 companies managed to beat its sector gross margin average while generating at least 10% of their revenue through Wal-Mart. Only seven that sold over 20% there did it.
The question not addressed, of course, is whether the additional volume makes up for the decreased margins. But certainly those tightened margins (and the vulnerability of being so dependent on one customer) is scary to investors, as to managers:
"I wouldn't not own a company just for that reason, but if I could choose between two companies that were basically equivalent, I'd choose the one that sells less through Wal-Mart," Todd says.
Another excellent meeting for TPMA -- the organization continues to build momentum. There were, as at previous meetings, good presentations from a bunch of smart people.
Metrics dominated the agenda, as it is dominating much discussion in all areas of marketing these days. The first day started with a keynote address by Dale Hagemeyer of Gartner and a manufacturer panel discussion on metrics, and the second day concluded with a presentation of a survey on trade promo practices by Chris Wiesen of SAP.
But metrics wasn't everything. Nationwide Insurance (Dennis Disser and Greg Cheslock) looked at another perennial topic, collaboration, from a new perspective. We usually think of collaboration in terms of the giants -- how do we build a collaborative relationship with Wal-Mart and Best Buy? -- but Natiowide has a customer base of thousands of small, independent dealers (in their case, agents) and approaches collaboration through regional groups. This is a seldom-discussed topic and is worth exploring further.
Collaboration will be the principal topic at the TPMA annual conference here in Chicago this October. Set aside October 7-10. I'll post more info on the meeting as the agenda develops.
The latest TPMA conference,Achieving the Relative Gold Standard in Trade Promotion Optimization, will be held in San Antonio April 29-May 1. It is directed at sales and marketing personnel.
If you can get there, you should. Not only a good agenda, but the Riverwalk is a fun place. Info here.
I recently was reading an article in the LA Times about Seagate’s efforts to build brand identity as they enter the retail space. Inevitably, Intel Inside was brought up:
Seagate is trying to do what Intel Corp. did with its "Intel Inside" campaign — become a name that shoppers look for when they walk into Fry's Electronics or Best Buy stores. Today the semiconductor giant says its brand is valued at $38 billion, thanks in large part to the campaign it started in 1991.
The article goes on to quote an observer who says, "There's a lot of Intel envy."
Yes, there is. Also a lot of misunderstanding about the program and about what can be accomplished with ingredient marketing.
Intel’s website has a good history of the program, which explains a lot about why they deployed the program and what they were trying to accomplish.
A caveat about their website: It implies that the whole thing was dreamed up by Intel, which is not the way I remember it. The idea of applying ingredient marketing techniques to computer chips was presented to Intel by Medianet (now TradeOne), specifically by Rob Hand and Jay Koonce, more than a year previous to the roll-out, working from a proposal I had first made to Motorola several years previous and based on my department store experience working with fabric programs such as cotton. Rob, Jay and I reworked the Motorola proposal for Intel.
While Intel’s marketing people may not have come up with the original concept, they deserve full credit for recognizing a good idea when they saw it, and even more for building on it and enhancing it greatly.
I can’t count the number of times I’ve been asked in the past 10-15 years to design a program for somebody “just like Intel Inside”. The problem has been, generally, that their circumstances are very much different from Intel’s, most often in two important ways:
1)Money
Intel had about twenty tons of money that they threw behind the program (more about this below). Even at its outset it involved huge expenditures, and it’s probably well over a billion annually now.
I asked one of the computer components makers who told me they wanted a program “just like Intel Inside” how much they were budgeting for it. When they told me they had set aside three million dollars, I gently suggested that they consider alternative approaches.
Intel was trying to motivate companies like IBM, Compaq and H-P to do their bidding. It takes a lot of money to impress companies like that – don’t try it with a budget of three million.
Intel also backed their co-op advertising with a tremendous amount of national – especially TV. A confession: I’ve been guilty of trying to hype the importance of trade promo by pointing to Intel Inside as an example of using co-op advertising to build a brand name. While true to some extent, the effects of the national advertising were, obviously, vital as well. The big difference was that, in Intel’s case, the national advertising was in support of the co-op, rather than vice-versa.
2) Centrality of the product
When we applied the cotton example to chips, our thinking was that the chip was the defining element of the computer, just as cotton is the defining element of a garment. Styling and dyes may make a particular shirt more desirable than others, buttons may add to its utility, but without the fabric there is no shirt.
Similarly, NutraSweet has had success with ingredient marketing in conjunction with products such as Diet Coke because, while the cola would exist without it, it is NutraSweet that makes it a diet drink.
An ingredient marketing program can be a success with less-essential products, but I can’t think of any that have been anywhere near as successful. Window and appliance companies, for example, often subsidize ads by home builders who include their products, but these have minor impact, because the appliance is merely a feature – nobody is going to buy a house because of the dishwasher. The Intel Inside ads were arguing that the make of the chip should be the deciding factor in your purchase decision.
Further thoughts: Why it should have failed (and why it didn’t)
Following up on that last sentence, in our discussions at Medianet, one of our concerns was that the program might fail because the computer manufacturers might recognize that buying into it was contrary to their own interests.
Intel Inside had the effect of commoditizing the computer industry (or, at least, speeding up tremendously a commoditization process that perhaps was inevitable). The message of the ads was that all the computers were pretty much the same – it was the chip that mattered.
I suspect that the computer company marketers were blinded by the piles of money Intel was throwing at them. In any case, none of them hesitated to cut their own throats – a lesson of sorts on the effects of greed.
Recent hurricanes and other problems have drastically cut orange juice production in Florida, which has led to rising prices in grocery stores, which has led to declining sales. None of this should be a surprise, but this AP story seems to treat it as such.
Juice makers like Atlanta-based Coca-Cola Co., which makes Minute Maid orange juice, and PepsiCo Inc. of Purchase, N.Y., the maker of Tropicana orange juice, were forced to raise prices to offset the cost of oranges - a cost that has gone up at the same time crop yields have gone down.
Journalist meets supply-and-demand, is shocked. AP goes on to tell us that "A smaller number of crops typically translate into higher raw material costs for juice makers since the cost of oranges usually rises with a smaller harvest." No kidding.
Enough snark. Apparently yield have dropped from 220 million boxes of oranges per year prior to the 2004-05 hurricanes to an anticipated 132 million boxes this year. Prices are up 20-25% percent, with sales down about 10% or so -- which translates into a bit of a revenue gain:
But Florida Department of Citrus spokesman Andrew Meadows said even though consumption might be down, revenue from orange juice as a category has gone up in March.
According to the AC Nielsen figures, revenue is up 9 percent across all brands, mainly due to the higher prices companies are charging for their products.
One guesses that Coke and Pepsi will take this lesson to heart, and that prices will not drop all the way back when production revives. It appears that the price increases are being accomplished in large part through less promotion -- not surprising, given the supply constriction -- why promote if all it will do is create an out-of-stock?
Van Brugge said PepsiCo and Coca-Cola are raising prices by increasing the list price slightly and cutting back on promotions, like in-store discounts and coupons.
Tropicana spokesman Pete Brace said the company is "making the necessary adjustments to ensure supply and meet consumer demand."
As expected (we reported it here a month ago), the Antitrust Modernization Commission has recommended to Congress that the Robinson-Patman Act should be repealed.
The commission, which has been meeting and deliberating for three years, said lawmakers should put an end to the Robinson-Patman Act, which bars suppliers from engaging in anticompetitive price discrimination.
"The act has really outlived its usefulness and is better put to rest," said Jonathan Jacobson, an antitrust lawyer with the firm Wilson Sonsini Goodrich & Rosati and a member of the commission.
The Washington Post provides the arguments against R-P, which has never been popular with econmists.
When it came to the Robinson-Patman Act, however, the commission recommended repeal. Congress passed the act in 1936 with the idea of leveling the playing field between small businesses and chain discount stores.
Enforcement of the Robinson-Patman Act has been in decline since the 1990s as the statute has come under increasing criticism from economists, who say it works against the interest of consumers by discouraging legitimate discounting.
Critics say the act actually hurts small businesses because some suppliers choose to avoid selling to them altogether to avoid running afoul of the law. "It makes price competition more difficult and complicated," Jacobson said.
I very much question the last paragraph -- a "problem" I have literally never even heard of in more than three decades in this business. But, nonetheless, I agree that R-P is a far-from-perfect piece of legislation (I presented a short form of my proposed fixes in the previous post, and I think I will flesh out the argument a bit more in the next few days).
It seems to me, though, that given the importance of this issue to our trade, that this is something on which we should present a group position to Congress. Even if there are differing opinions within the TPM community (as there surely will be), we can present to Congress our collective wisdom and experience, complete with differing views.
I've suggested to Mike Kantor that this is an appropriate issue for TPMA to take a leadership role.
Note: The full report is here (warning: it's 540 pages -- if anybody bothers to read the whole thing, please let me know).
Every month is bad in the traditional media these days, but February was particularly awful for the newspaper folks:
Gannett's ad revenues were down 3.8% (USA Today down 10%)
New York Times Company down 6% (the Times itself down 7.5%)
Tribune Company down more than 5%
McClatchy down more than 5%
Media General down 5.8%
If these were one-time blips, explainable by bad weather or some outside event, it would be no big deal, but the problem is that the news just seems to get worse and worse.
Most of the numbers were worse than January’s and came after a difficult year in which many newspapers continued to pare costs by laying off employees, shrinking the physical size of their print publications and reducing benefits. Several newspapers also tried raising revenue by accepting advertising in prominent spaces that they had long reserved for news.
And still the numbers were bad. Collectively, the February sales were “the worst group performance to date,” Steven Barlow, an analyst at Prudential Equity Group, wrote to his clients.
And of course, it isn't just newspapers, though they're the worst:
“It’s fundamental, what’s going on with newspapers,” he said. “The younger groups, the most desired demographics, are just not reading them. They aren’t listening to traditional radio either, but I tell radio broadcasters that they’re lucky not to be in newspapers.”
Speaking of which, ZenithOptimedia says that Internet advertising will surpass radio on a world-wide basis by 2008 -- a revision of previous estimates which said it wouldn't happen until 2009. Internet advertising will increase 28.2% this year, compared with an overall increase of 3.7%.
And bringing up the Internet takes up back to newspapers, where we learn that in the UK, the Internet has passed up newspapers in ad spending:
Advertising spending online overtook national newspapers' share of the pie for the first time in 2006 as companies continued to chase a growing web audience.
According to data from the Internet Advertising Bureau out today, online spending smashed through the £2bn barrier in 2006 while television revenues fell and press barely budged.
Nielsen's Trade Dimensions predicts 94,000 new retail outlets in the next five years -- many of them restaurants of one type or another. Thirteen thousand new fast-food places! You know, I was saying to myself just the other day that there are nowhere near enough burger joints.
Cadbury is reportedly looking into buying Hershey. As we noted a couple weeks ago, they are splitting up the confectionary and beverage businesses. The boss says he wants "the biggest and best confectionery company in the world." Hershey would be a big step in that direction.
VF Corporation has sold off the part of the business that provided its initials. They sold the intimate apparel division (Vanity Fair, Vassarette, etc) to Fruit of the Loom.
There was an interesting case argued at the US Supreme Court last week -- Leegin Creative Leather Products v. PSKS Inc. -- which raises the question of whether manufacturer-dictated pricing constitutes a per se antitrust violation.
Leegin is a small manufacturer of quality leather goods, which had sought to create a niche by selling only through boutiques:
Leegin's marketing strategy for finding a niche in the highly competitive world of small leather goods was to sell its Brighton line through small boutiques that could offer personalized service.
Retailers were required to accept its no-discounting policy. Leegin did not dispute that this amounted to price fixing, but argued that consumers benefited from the extra care that the retailers' guaranteed margin enabled them to give to promoting and servicing the products.
Leegin cut off Kay's Kloset for cutting prices -- Kay's parent company sued and won in the lower courts. The issue before the Supremes is whether having mandatory pricing is always illegal ("the per se rule") or whether it may be legal if it makes sense under certain circumstances ("the rule of reason").
If the court does use this case ... to overturn the per se rule, resale price maintenance would not automatically be legal. Rather, any challenge to an agreement between a manufacturer and retailer to forbid discounting would be subject to the "rule of reason," a familiar concept in antitrust law under which courts evaluate the anti-competitive effects of a marketing restriction case by case.
The results of this case could have significant ramifications for marketers, and it will be interesting to see the outcome.
Three years after relaunching Life magazine as a newspaper supplement, its third incarnation, Time Inc. announced it would fold the title with the April 20 issue, citing the decline in the newspaper business and outlook for ad revenue in the newspaper supplement category.
This time, instead of its original death as a mass-market magazine that couldn't compete with TV, Life's death is a part of the ongoing decline in the newspaper business. Somewhat ironic.
Circulation was up, because they had added the LA Times, Chicago Tribune, NY Daily News, Washington Post, and several other papers. Ad pages were down 10% this year, however.
The slow-motion aution of the Tribune Company seems to be nearing completion after six months -- a process that has probably cost shareholders hundreds of millions.
Tribune Co., owner of the Los Angeles Times and Chicago Cubs, will probably accept real estate billionaire Sam Zell's $8 billion takeover offer by the end of the week, according to people familiar with the matter.
An agreement is likely by Tribune's self-imposed deadline of March 31, said the people, who declined to be named because no decision has been made. Zell's offer of $33 a share is 6.8 percent above yesterday's close.
Zell's offer was competing with the company's plan to reorganize, as well as less-attractive bids from the company's largest shareholder, the Chandler family, and California billionaires Ron Burkle and Eli Broad. The auction dragged on for six months amid waning interest from buyers and an 8.4 percent drop in the stock.
"Shareholders have to be frustrated that this has gone on while the share price has declined,'' said James Peters, an equity analyst at Standard & Poor's in New York. He rates the stock "hold'' and doesn't own it. "The price being discussed reflects that fact that the company is in a declining revenue environment.''
That "declining revenue environment" comment refers to the fact that Tribune reported this week that "newspaper advertising fell 5.1 percent in February to $233 million, led by a 13 percent drop in classifieds."
Zell will apparently not break up the company -- one of the other options being considered.
The Burkle and Broad bid includes $500 million in cash and would use an employee stock ownership plan to aid the recapitalization, the person said. It is believed that Zell was proposing to invest $300 million.
But with little else known about the offers, it was unclear whether Tribune's board, which met Thursday, would consider the latest bid or even extend its deadline.
The deadline was supposed to be 3/31, but that's past, with no word.
Updated update: Looks like Zell won. Anybody wanna buy the Cubs?
Women's Wear Daily says that Foot Locker, which has close to 4,000 stores is planning to pick up another 1,700 or so by buying Genesco.
Genesco has a bunch of shoe stores, including Journeys and Johnston & Murphy, but apparently the main interest for Foot Locker is the hat business.
Foot Locker has previously said it would open a chain of athletic hat stores called "Champs Sports Just Hats" to try to take market share from Genesco's Hat World chain. At the time, an analyst said the hat business had operating profit margins of 12 percent to 13 percent, higher than the average for specialty retail.
The Advertising Checking Bureau is celebrating this month the 90th anniversary of its founding. It was founded in 1917 as a service to provide newspaper tearsheets to advertising agencies as proof that their clients' ads ran; they created the co-op auditing business thirty years or so later.
"We are proud of our long standing heritage and the accomplishments of the company over the past 90 years, especially in an industry where consolidations are prevalent and corporate resilience remains unique. The cornerstone of our success rests on the provision of excellent customer service in a challenging and highly competitive business community." said Brian McShane, President ...
I worked there for several years, but don't hold that against them; they shook off that mistake and have prospered since. Among their more distinguished alumni are Rob Hand, who went on to start up a competitive service, Medianet (now TradeOne), and now is with Oracle; Steve Isaacs, who also founded a competitor, CCI; and Art Fiordaliso, now CEO of a third competitive firm, AAS.
Ninety years -- it's good to know there's something older than me.
As if things weren't ugly enough for metro dailies, more free daily papers appear to be on the way.
It’s already started in Europe. It's about to arrive in the U.S. It's what's fast becoming a global war between traditional paid newspapers and the hordes of free dailies sprouting up in cities worldwide.
It's an ugly fight, and it threatens to transform American newspaper publishing when it arrives.
Imagine a typical newspaper market in America, with one or two paid dailies and perhaps a subway freebie. Now imagine a handful of free papers joining the scramble to win readers and advertisers.
There already are free dailies in several big cities, including a whole chain of Examiners (SF, Baltimore, Washington, with more planned). Now an Icelandic media company is opening a Boston paper, with plans to expand, and not just in the biggest markets.
But they will surely come. "The prognosis is that there will be more free dailies in America-- whether through the Examiner (delivered to homes) model, or through the street/hawker/pick-up model (Quick - Dallas, Red Eye - Chicago, Express - Washington), or via hybrid distribution in smaller markets. The trend to free is inevitable."
What's less clear is who will survive and who not when the shakeout comes.
It's a market that is already fragmented, facing declining usage, and with signicant (and growing) competition for customers' time and attention. For retailers and manufacturers offering trade promo money to retailers, the question has to be: How can we reach a mass market through advertising, when the media keep slicing the market thinner and thinner?
