Apologies and alibis

I've had little time for blogging in the past several days -- the first draft of my next book is due to the editor early next week.

I'll try to get a post or two up over the weekend, and then resume full-scale posting after the draft is done.

Watching a business die

Watches are disappearing. I stopped wearing one years ago, and it seems many other people have as well (using cellphones when they need to know the time).

Last year, the number of people who bought watches not in the Rolex and Patek Philippe stratosphere dropped 12% from 2004, according to a leading market research group. The runaway favorite brand for teens, Fossil Inc. of Texas, acknowledged an 18.6% decline in wholesale U.S. sales of its namesake brand.

Oakley Inc., which is based in Orange County, said watch sales fell 11% last year as it phased out digital watches and styles that weren't selling well.

The article concludes that watches won't disappear (despite my opening sentence and my even more dramatic headline) but will become a fashion statement -- with high-end watches continuing to sell well.

Chinese retail boom to continue

China's retail sector grew 12.9% last year, and the government, which has begun to push for more domestic consumption, is predicting the growth to continue at an 11% annual rate through 2010.

As might be anticipated, the giants are grabbing the lion's share, with the top thirty retailers averaging an amazing 31% growth last year, according to government figures.

Although foreigners are, understandably, trying to grab as much of this growing pie as possible, they are not likely to get it all.

So far, however, Chinese retailers are holding their own. Domestic companies continue to dominate the Commerce Ministry's list of China's top 30 retailers - whose sales, the ministry reports, rose by 31% in 2005 to $61 billion.

Shanghai Brilliance sits at the top of the heap, recording sales of $9 billion last year. The closest foreign competition at this point is the French giant Carrefour, whose 25% rise in sales last year boosted it to ninth place on the ministry's list, with sales of $2.2 billion. Carrefour, the world's second largest retailer, now has 78 stores in China and plans for many more.

Wal-Mart is not doing all that well, which is true in most of the world outside North America. Suppliers in China tell me that Wal-Mart China is not an impressive operation.

Mattel: A tale of two dolls

Or two doll lines, actually. Here are a couple links I came across concerning the fortunes of Mattel's Barbie and American Girl brands.

Barbie has been steadily losing ground to Bratz, so Mattel is trying some new approaches. They've worked a deal with Universal to upgrade production of Barbie's direct-to-DVD (which appear to be a nice little money-maker on their own -- 27 million units at about $14 bucks each).

The two companies also discussed the possibility of a Barbie tie-in with Universal's theme parks and theatrical premieres for upcoming Barbie animated films.

American Girl, meanwhile, has a nice problem, but one that sometimes afflicts fast-growing elite brands -- how do you grow fast and stay elite?

"When something's value is wrapped around its uniqueness, it's hard to exploit that in scale," said toy industry analyst Sean McGowan at Harris Nesbitt Corp. in New York. "The specialness of the product is a big part of its appeal — if it becomes available to everybody, it loses some of that."

The company is currently opening its third store, in LA, after operating only one, in Chicago, for several years, and then adding one in New York. For the present there are no plans to expand widely -- in fact the company president indicates that they may never go beyond five stores. The idea seems to be that there's no reason to mess with something that works so well.

In 2005, while Barbie's sales slumped 13% worldwide, American Girl's revenue rose 15% to $436 million. Oppenheimer & Co. analyst Linda Bolton Weiser pegged American Girl's operating profit at about $100 million, meaning that the division accounted for 8% of Mattel's gross sales and about 15% of the parent company's operating profit.

I hope they don't mess up a good thing. As a parent, I spent a ton of money on those books and dolls (my daughter has Felicity, Samantha, and Kirsten) -- and I don't regret a dime of it.

Saks is going to China

Saks Fifth Avenue will be opening stores in China, franchising its name to a local operator. The first store will open in 2008 in Shanghai.

The operator of the world's biggest luxury department store yesterday granted Roosevelt China Investments Corp the right to open Fifth Avenue stores on the mainland, according to Stanley & Partners which offers real estate investment banking services to the two US-based firms.

Roosevelt China Investments Corp will be responsible for selecting locations and managing the Fifth Avenue stores in mainland and Macau.

The Shanghai location will be on the Bund, the city's legendary waterfront. I was hoping it would be on Nanjing Road where it could compete with what I think is the best-named store ever: Shanghai Department Store #1.

Piling on Estee

I came across a news item the other day, announcing that a law firm was filing a class action against Estee Lauder for channel-stuffing. Since I had posted an item about that two weeks ago, I went back to the old item, but noticed that the law firm was different. So I checked Yahoo, doing a search for "estee lauder channel stuffing" and found that at least six firms have announced such actions.

It seems that suing folks for channel-stuffing is seen as a potential hot area in the legal community.

Greenspan disses Sarbox

Alan Greenspan, former chairman of the Federal Reserve, who supported passage of the Sarbanes-Oxley Act, now says it should be revised.

"The Sarbanes-Oxley Act has created significant problems for foreign investors with its regulatory structure," he said at a question and answer session at the Asian Financial Centres conference in Seoul, organised by the Financial Times. "I am nevertheless acutely aware and disturbed by the fact that initial public offerings have moved away from the US - and to a large extent have moved to London."

Greenspan specifically criticized Section 404:

Although the basis of the law was a definite advance in terms of governance, some parts of it created too many burdens for business, he said, emphasising the provision that forces companies to have their internal controls certified by auditors.

Greenspan said he thought the law would be changed, but FT seemed to question that. Rudy Giuliani, speaking at the same conference said he thought London and Tokyo would likely pass similar rules.

As we've previously reported, there is also a challenge to Sarbox in the courts.

Masterfoods cuts brands & trade spending

Masterfoods says it is killing some of its "dog" brands, such as Aquadrops mints, cookie line Cookies & and bite-size Pop'ables candy. I guess they are dogs, I never heard of any of them.

They are also planning to cut trade spending, which they will switch into national advertising.

Mr. Gamgort said by cutting trade spending and what he called "the dogs in our portfolio" Masterfoods can afford a 20% increase in advertising for its brands as well as fund acquisitions. The first acquisition is expected to be announced in the next two weeks, he said. "If we were public, analysts would be applauding us."

Retailers are predictably unhappy:

Retailers, however, warn a cutback in promotional spending could hasten Masterfoods' rising share losses to rivals Hershey Co. and Nestle.

"Our Masterfoods candy business is down at least 20% from the $1.6 million we did with them last year because of their cutbacks in promotional spending," said one Northeast wholesale buyer, who noted that Hershey and Nestle are reaping the benefits.

Another East Coast retail buyer predicted a big sales tumble due to the cutbacks, which a Masterfoods executive told him were undertaken to drive profits. "You've got to spend money to make money," said the retail executive.

Masterfoods replies that the cuts are selective:

Mr. Gamgort responded that the company isn't cutting off its promotional spending for its more profit-driving customers. "We're being more selective about where we spend our money," he said.

I've long been an advocate of directing trade spending toward your most profitable accounts. My concern is whether Masterfoods will have the courage to stay with the plan when some big, but less-profitable, accounts begin cutting back their share of shelf space.

This might make an interesting case study in two or three years.

Wednesday quick notes

NASCAR is planning to increase its licensed merchandise directed toward women, recognizing that women are now 40% of its fan base. NASCAR-branded swimwear, shoes and boots, and leather jackets are among the items planned. "Sales of NASCAR's licensed merchandise have flattened at $2 billion, and the brand thinks it can boost product sales - and image - by courting female fans."

Home Depot is testing an expansion into automotive supplies. The test will consist of about 500 square feet in ten stores in the Jacksonville area.

Ahold's Tops Markets chain in upstate New York is planning to spend up to $60 million renovating stores over the next two years, and says it will "be more aggressive in its marketing, so as to better compete not only with Wal-Mart, but also with Northeast star players such as Wegmans."

SEC investigating Zale

Zale Corp. announced that t he Securities & Exchange Commission is investigating the company in regard to several accounting issues, including "the timing of certain vendor payments."

The company said the probe relates to accounting for extended service agreements, leases and accrued payroll. Zale said subpoenas request materials relating to these accounting matters, executive compensation and severance, earnings guidance, stock trading and the timing of certain vendor payments.

There's no fight like a family fight

It's bad enough when your enemies point out all your failings, but what really hurts is when it comes from inside the family. That's what happened at the 4A (American Association of Adverising Agencies) meeting last week in Tucson.

The outgoing chairman of the association, Ron Berger, CEO of Euro RSCG, said that:

• * He doesn't much like Martin Sorrell, the honcho of rival WPP, because Sorrell is "concerned with pleasing Wall Street at the expense of Madison Avenue."
• * Nor does he care for Jack Klues, the boss of Starcom MediaVest, "whom he chided for comments made last month at the AAAAs media conference. In a discussion on the topic of whether media planning and creative functions--once mostly housed at the same agency but now frequently separate--should be reunited or 're-bundled,' Klues said that would amount to 'going back to the 80s.'" Apparently Berger disagrees.
• * In addition, the TV networks, Berger says, are "arrogant" and want to "simply take billions of dollars from us" without being partners.
• * Then Berger take his axe to Bob Liodice, the CEO of the Association of National Advertisers (the trade association for people who hire ad agencies), "for comments he made in favor of advertisers employing more than one agency, rather than consolidating their business."
• * And, finally, Berger attacked the trade press, suggesting that the "industry would be better if some of the people who write about our industry had a deeper understanding of it."

When we have a moment we'll try to have a few comments on the ad industry from its enemies. But that won't be anywhere near as much fun, will it?

Wal-Mart says newspapers are no good

Wal-Mart has long avoided using newspapers, but in the face of criticism from the press ran a test in the Christmas season last year. "It placed a full-page color ad for its electronics department in 336 smaller papers in Missouri and Oklahoma between Nov. 30 and Dec. 6."

According to Wal-Mart, the slight bump in sales from the ads was insufficient to pay for their cost.

"Our test showed that it did increase product sales but our margins are so thin that we didn't even come close to offsetting the cost of the ads ..."

While the newsies are, justifiably, saying that you can't prove much from a single insertion, they might more justifiably be asking themselves what it says about their medium that Wal-Mart has prospered so mightily while ignoring them.

Thursday quick notes

Rumors are abounding that two east coast supermarket chains, A&P and Pathmark, are planning to merge.

Radio isn't doing much better than newspaper these days. "For the industry to see stronger growth, it must better attract younger listeners by offering new formats and utilizing multiple distribution platforms. Also at the same time, radio needs to demonstrate its effectiveness as an advertising medium by utilizing improved research methods."

Federated choosing their brands

As Federated decides which brands will make it onto their shelves after the merger (hint: the May Company brands aren't winning many of the battles), some well-known names are losing a big piece of their distribution. Florsheim and Nunn Bush, two top shoe brands formerly carried at May stores, but not at Federated, are among the losers.

The article linked, from the Pittsburgh Post-Gazette, is a good overview of many of the issues involved in the merger -- there's more info than we can excerpt, so I suggest you read it.

Of particular interest is the info on brands reacting to the shrinking channel by opening their own stores (Jones and Liz Claiborne are mentioned). We've hit on the same point -- as retailers go more private label and as manufacturers open their own stores, there will eventually be little difference between them.

84 Lumber closing/opening stores

84 Lumber announced that they're closing 67 stores, but planning to open 125 others.

Stores in “no-growth” and rural markets will be closed, as the company tries to boost its annual sales to $10 billion by the end of 2009, 84 Lumber said in a statement.

The company had 521 stores and reported sales of nearly $4 billion in 2005.

“We determined that we needed to make some tough decisions regarding underperforming stores and close them,” said company president Maggie Hardy Magerko.

84 markets exclusively to contractors and professionals, a segment that Home Depot has been targeting lately, including making significant acquisitions.

Tuesday quick notes

Pfizer's plan to sell their consumer brands all to one buyer may create a behemoth. The question is who's the buyer -- betting centers on Colgate and Glaxo. Listerine is the big prize, totaaly dominant in its category.

Wal-Mart has apparently liqidated its Hungarian operation, according to this short item in the Budapest Business Journal, quoting a Magyar-language source. They had been reported to be interested in acquiring a Central European operation.

Carrefour is looking for a local partner to aid expansion in Thailand. "We are open to any local retailers that are interested in expanding their hypermarket stores in the Kingdom." Carrefour wants to open smaller hypermarkets (isn't that like "jumbo shrimp"?) in provincial areas.

Budget axe falls at Best Buy

Best Buy is out to cut spending -- $300 million of it.

The belt-tightening is seen as a reaction to Wall Street criticism that Best Buy hasn't done enough to rein in costs. In December, the company disclosed that its sales and administrative expenses rose 22 percent in the third quarter -- more than double the company's overall sales increase. The news caused Best Buy's stock to fall 12 percent in a single day.

Best Buy has been doing a lot of talking about customizing its stores to certain demo/psychographic customer profiles (Jill the soccer mom, Barry the affluent professional, etc). It seems inevitable that such customization would result in higher costs -- did nobody foresee this? And aren't $300 million in cuts going to impact service at a store that is trying to differentiate itself by being "customer-centric"? Not that customer-centricity ever got me a quick answer to my questions at Best Buy.

Pursuing a strategy for a short time and then quickly changing to another strategy is usually a poor idea.

Penney tackling Kohl's off-mall

JCPenney is reported to be going off-mall, pitting it head-to-head with Kohl's.

They're planning 200 new stores in the next few years -- this year they will be opening 29, of which 20 will be off-mall locations.

Building new stores beyond malls gives J.C. Penney more flexibility in location, allows the company to locate closer to its customers.

It's a strategy that's worked for fast-growing Kohl's the past 15 years and could cut into the Menomonee Falls company's market share throughout the United States.

Other indications that they may be targeting Kohl's are the store layouts and merchandise assortments, which are similar to Kohl's:

The off-mall stores are slightly smaller than traditional, mall-based Penney's and are built on one level, rather than two. The stores also are laid out differently, with a central checkout stations. They offer clothing and home items, but not furniture.

With that concept, J.C. Penney is chasing the same type of customers as Kohl's...

Kohl's, though, is planning even more growth, with 500 new stores projected in the next five years. If both chains meet their plans in new-store openings, they'll be roughly ties at about 1200 stores each.

I've got to wonder if there's enough business to support that many stores.

Weekend quick notes

General Motors is looking to dump its share of Isuzu. This marks an almost complete pull-out from Japan -- they had big investments in Suzuki and Fuji (Subaru), but have sold all or most of them. But right now what they need is cash.

Estee Lauder is about to get hit with a class-action for alleged channel stuffing last year, according to this law firm's press release: "... defendants launched a largely successful campaign that employed channel stuffing and the dissemination of materially false statements to prop up ... the Company's share price."

Alcatel is buying Lucent. The merger will give Alcatel a significant presence in the US: "With about one-third of revenues coming each from North America, Europe and Asia ... the new company will have a geographic reach few competitors could match, likely forcing other mergers."