Wal-Mart buying 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.

Newspaper collapse continues

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?

Durables Council

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.

How is Wal-Mart like booze?

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.

Report from the Alamo -- TPMA in San Antonio

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.

Oh yeah, we had fun, too:

TPMA: last-minute reminder

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.

Thoughts on ingredient marketing

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.

Supplies down, prices up, sales down

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."

AMC recommends repeal of Robinson-Patman

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).

Internet up, radio down, newspapers downer

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.

Tough times.

Monday Quick Notes

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.

Can "MSRP" be mandatory?

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.

The death of Life (v3.0)

Life magazine, once among the most important media outlets in the world, has been closed down yet again.

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.

Tribune near sale -- finally

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.

Update: This one isn't over yet. Now some LA billionaires have submitted last-minute bids.

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?

Foot Locker buying Genesco?

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.

Happy birthday, ACB

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.

Free dailies add to newspaper woes

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?

Cadbury to split up

Cadbury Schweppes is going to cut itself in two, breaking off the confectionary and beverage units.

The company intends to spin off its Plano-based U.S. beverages arm, which makes products including Snapple and Dr Pepper, from the rest of Cadbury. That would leave its confectionery business, which has products such as Dairy Milk chocolate and Trident Gum.

Cadbury said it was still evaluating the options for the split and would provide further information in a trading update due in mid-June.

The company is apparently giving into pressure from one of its new investors, Nelson Peltz. The Dallas Morning News speculates that the beverage division, if sold off, could bring in as much as $14 billion.

In-store displays are killing the book section

The Los Angeles Times is planning to kill off its Sunday book review section, according to the Wall Street Journal, joining a trend:

Sometime this spring, the Los Angeles Times is expected to announce that it is folding its highly esteemed Sunday book review into a new section that will combine books with opinion pieces. That would reduce to five the number of separate book-review sections in major metropolitan newspapers still published nationwide, down from an estimated 10 to 12 a decade ago. The reason: not enough ads.

Book publishers in recent years have moved away from buying ads in standalone book-review sections in favor of paying to stack mounds of books in the front of chain bookstores. Some small literary publications, such as the New York Review of Books, are showing growth, but the book review as a separate section is endangered not only at the Los Angeles Times but at other major newspapers like the Washington Post, Chicago Tribune, San Francisco Chronicle and San Diego Union-Tribune.

The trend toward in-store is, of course, not unique to the book biz, as we all know.

In an era of targeted marketing, publishers say the best time to reach readers is when they are in the stores with money in their pockets looking to make an immediate purchase. But with a sea of titles in the stores ... the only way for publishers to stand out is to pay for real estate in the front and pile those books up high.

"You want to see your books in prominent places," says Tom Perry, associate publisher of Bertelsmann AG's Random House Publishing Group. "Such co-op advertising is where marketing dollars are going that might otherwise have been spent on advertising." ...

One publisher says that chain bookstores can charge $1 or more per book to stack titles in desirable locations, such as on a table at the entrance or in a display featuring new nonfiction titles.

This is one of those items where we see the confluence of so many trends -- media fragmentation and the death of newspapers, retail consolidation, the increase in in-store merchandising, and the spread of CPG marketing tactics to consumer durables.

Tuesday Quick Notes

Dollar General was bought by private equity firm KKR. Seems to be a lot of private equity action in retail; my knowledge of finance is minimal (or less), so I won't bother to speculate on why, I just note the fact. The price is $6.9bil.

Carrefour's chairman resigned in an apparent rift with the company's leading family. Coincidentally or not, at the same time it was announced that a private equity firm (is there a pattern here?) had also bought a large stake.

Payless Shoesource bought one of their private-label suppliers, "Collective Licensing International, which owns the Airwalk brand of shoes sold exclusively in Payless stores since 2003."

I nailed it!

Okay, I didn't nail it exactly, but I was close.

Over a year ago, in this post, I speculated that Wal-Mart could carry their private labeling of music to the point of establishing their own record label:

The question is, could Wal-Mart apply the concept of private label to music -- could they, in short, become a label themselves? And the answer is -- you bet they could! In fact, some estimates are that, in country music at least, Wal-Mart accounts for 50% of sales.

I nailed the concept, but I had the wrong party. According to this article, Starbucks has decided to establish their own record label:

Having already proven that it can sell other companies' music, coffee giant Starbucks is planning to launch its own record label and is close to a deal for the next album from former Beatle Sir Paul McCartney to be its first release, according to sources familiar with the plans.

The formation of Starbucks Records, as the unit is expected to be called, could be announced as soon as this week, according to these sources.

So who's next? I still think Wal-Mart, with their 50% market share of country, but Target and Best Buy seem like good options as well. The times they are a-changin'.

States getting fed up with rebates

Most of the action to regulate rebates has been done by the Federal Trade Commission, but a few states have enacted their own rules. The most recent to join the parade (if pending bills are enacted) are Florida and Georgia.

A bill filed in the Florida Legislature would give companies 15 working days to make good on a rebate after getting the request from a consumer. In the Georgia General Assembly, a similar bill would allow 30 days from the date a mail-in request is postmarked.

Fifteen days would be a real strain for many manufacturers and their program administrators.

"There are a lot of people who apply for a rebate and eight weeks, 10 weeks, 12 weeks go by," said Russell Cyphers, legislative assistant to Florida state Sen. Bill Posey, R-Rockledge.

Posey's bill said if the company needs more information to fulfill the request, the rebate offerer must tell the consumer by certified mail within three days about what's lacking. Cyphers said that puts the onus on the company instead of forcing consumers to follow up with time-consuming inquiries.

I think this bill probably goes too far, but it's hard to work up a lot of sympathy for a business that has created so much ill-will -- the many manufacturers who sit on claims for months for cash-flow reasons have created a backlash.

If too many states enact conflicting regulations, it will make things extremely difficult for manufacturers trying to offer rebates -- especially through national retailers.

Oxley says, "I'm sorry"

Well, sorta. From The Australian: "National Institute of Accountants general manager Andrew Conway said Mr Oxley's comments amounted to an apology of sorts for the draconian law."

So what did the co-author of Sarbanes-Oxley say? At a gathering of accountants in Paris, reported in the International Herald Tribune, he acknowledged that the law went too far, excusing the excess by noting that ""it was not normal times."

Was Oxley aware, his questioners asked, that the law that he and Senator Paul Sarbanes, a Maryland Democrat, rushed onto the books five years ago after the collapse of Enron and WorldCom had contributed to a sharp decline in listings on U.S. stock exchanges? And, knowing what he knows now about the cost and effects of the law, would Oxley — who retired in January after 25 years in Congress — have done it any differently?

"Absolutely," Oxley answered. "Frankly, I would have written it differently, and he would have written it differently," he added, referring to Sarbanes. "But it was not normal times."

He also laid the blame for Section 404 on Sarbanes.

At the same time, Sarbanes was pushing through an even tougher version of the bill in the Senate, adding a requirement that companies conduct internal and external audits of their financial controls. That measure, known as Section 404, rang alarm bells among U.S. companies and foreign ones that feared it would exact punitive costs for good governance.

Oxley said he felt at the time that Section 404 could spell trouble.

He's also less than impressed with the board his bill created, the PCAOB:

One reaction, he said, was that auditing entered a period of extremely conservative practice, encouraged by rulings from the Public Company Accounting Oversight Board, a new regulatory body created by Sarbanes-Oxley. The board gave the accounting industry "almost carte blanche to do almost everything they wanted to do, which turned out to be far more expensive than anticipated," Oxley said. "They just went crazy."

Now we can wait to hear Sarbanes' side of the story.

TPMA to form Durables Council

I just got off the phone with Mike Kantor of Trade Promotion Management Associates, discussing a host of issues. Mike mentioned that today is his one-year anniversary with TPMA (congratulations, Mike), and that started us discussing how very far the group has come in that time, and what further opportunities for growth and service to the industry still exist.

We were in full agreement that everyone will benefit if TPMA has greater participation from the consumer durables and business-to-business sectors. CPG, durables and B2B all have much to offer in terms of differing approaches to trade promo and they also have much to learn from each other. The growing convergence of the sectors means they need to share ideas. Everybody will benefit if TPMA provides the forum in which each group can both address the topics specific to their sector and share ideas across sectors.

The upshot of the conversation was a decision to form a Durables Council to address ways to increase participation among durables companies, and to solicit input on the issues such companies want to see addressed.

As the idea develops, I'll be posting more here and in TPM Update. In the meantime, if you'd like to be a part of the Council or just want to share your ideas on what needs to be done, please contact me.

We'll keep you informed on developments.

More private label music

I've posted several times before (here and here, for example) on the subject of music going private label -- a phenomenon that once would have seemed impossible.

Private label began, after all, in commodity categories, and few things are less commoditized than music. It's easy to substitute generic creamed corn for the branded product, but less so one singer for another.

And yet, it seems that a form of private label -- exclusive distribution deals -- is increasingly hot in the music biz.

USA Today reports here on several such deals:

As national music chains dwindle, big-box retailers such as Target and Wal-Mart are taking cues from Starbucks and iTunes by adding more exclusive music to their shelves. Target's new Spotlight Music Series offers 15 discs, including new adult-contemporary music, genre compilations and mixes handpicked by Avril Lavigne, Jason Mraz, Dave Matthews and others.

This is the first article I've seen, by the way, that references the private label analogy:

"It's private branding," says Christman. "How many companies make their own cereal for a supermarket chain? How many companies make their own detergents for a discount retailer? That's a set retail strategy."

You read it here first.

Oracle buys Hyperion

Oracle is continuing their recent imitation of a teenager let loose at the mall with the family credit cards, this time adding Hyperion to the overflowing shopping bag.

AMR's weekly newsletter suggests that this will be the first of a series of purchases of business intelligence companies. Their list: "IBM-Cognos, SAP-Business Objects, and HP-Teradata, for starters."

HP goes CPG

Hewlett-Packard is employing tactics from the world of consumer packaged goods, demonstrating once again something I (and others) have been noting for a while – the growing convergence of the two wings of trade promotion in consumer products, CPG and consumer durables.

BusinessWeek reported recently that HP is making payments to retailers to get them to stop selling private label cartridges for HP printers:

Those executives say the company has approached chain stores that sell store-brand cartridges compatible with its printers and offered them incentives if they end the practice.

Staples is offered as an example. The article goes on to raise questions about the legality of the practice, which is of interest, of course. But I was more struck by how HP, an iconic company in the high-tech arena, is using a marketing tactic more identified with the selling of canned peas.

The fact is that the convergence I spoke of is one-sided – trade promotion practices among consumer durables companies are emulating CPG. And the reason is the one that drives almost all practices – the nature of the channel. As more durables products are driven through big-box retailers (and even B2B products, in many cases), trade promotion programs must be modified to meet the needs and demands of the retailers, and, in this case, to allow the manufacturer to charge a premium price for their branded product. If it works for Del Monte at Kroger in charging an extra fifteen cents for canned peas, it should work for HP at Staples in pricing the ink cartridges a couple bucks higher.

The case also demonstrates how a product can morph in terms of its category. Are ink cartridges a B2B product, or a consumer durable, or CPG? The answer, I suspect, is yes and yes and yes, demonstrating the difficulty of developing channel programs today, and demonstrating the need to constantly re-evaluate the nature of your product.

Is the SEC about to give TPM outsourcing a helping hand?

Could be. At the recent TPMA meeting in St. Petersburg (it was not fun going home to eight inches of snow in Chicago), I made a presentation on benefits to be gained from Sarbanes-Oxley (it was an extended version of this post).

One of my points was that creating Sarbox-compliant trade promotion processes should make it much easier to outsource management of trade promotion – thus eliminating a messy, paperwork-intensive task that is not part of a marketer’s core business. A good argument, I thought.

At the very next session I attended, however, I got a jolt – a much better argument is coming. Ron Lunde was presenting on changes to be made in Sarbox, and said that among proposals being made by the PCAOB is one that one allow outside auditors to rely on data from responsible outside sources.

This could mean (if adopted by the Securities & Exchange Commission) that a company’s auditors might not have to perform audits on work performed by an outside supplier.

… the Board also proposed for public comment a new auditing standard on considering and using the work performed by internal auditors, management and others in an integrated audit of financial statements and internal control, or in an audit of financial statements only. This proposed standard is intended to further clarify how and to what extent an independent auditor may use that work to reduce the work the auditor otherwise would have to perform.

The full report is here.

The effect of this, if a conversation on the subject among the attendees at Ron’s presentation works out, is that a company would not need to have their trade promotion program audited by their Big Four audit firm, if the systems, processes, and practices of that program could be attested to by a responsible, reliable party. While that might be someone internal, it is more likely to be credible if it were an outside party with a SAS-70 certification.

The TPM outsourcing companies currently argue that their costs are not much higher than doing the work internally (actually, they often argue that it’s cheaper, but I’ve never really bought that argument), but if a potential client could also significantly reduce the cost of their annual audit by eliminating trade promotion from the items to by audited, the outsource firms would have a powerful new argument.

The period for comment on the proposed changes has just expired, so we can expect an update on this subject in the next few months.

FTC holding "Rebate Debate"

The Federal Trade Commission is holding a workshop on rebates in San Francisco on April 27.

For many years, manufacturers and retailers have used mail-in rebates as a marketing tool. Despite their popularity, however, many consumers have had negative experiences with rebates, and have begun to distrust them. Moreover, some businesses are beginning to question whether the costs associated with rebates exceed their benefits.

At this public forum, manufacturers, retailers, fulfillment houses, consumers, and government officials will discuss how to implement successful rebate programs and how to avoid the pitfalls others have experienced. Speakers will describe various types of rebate programs, share the “best practices” they have developed for fulfilling or implementing rebates, debate the pros and cons of rebate marketing, and discuss the past and future role of government in improving consumers’ experiences with rebates.

Sounds like an interesting event. Details are available here.

Repeal Robinson-Patman?

In 2002, Congress created something called the Antitrust Modernization Commission. The commission was asked to look into antitrust laws and recommend changes.

The final report from the commission is due in April but tentative recommendations have been released, including the following:

ROBINSON-PATMAN ACT
44. Congress should repeal the Robinson-Patman Act in its entirety.
45. [Note: Discussions at the July 26th deliberation meeting proposed this tentative
recommendation.] Until Congress repeals the Robinson-Patman Act, courts
should interpret the Act to require plaintiffs to make a showing of injury to
competition similar to that required under the Sherman Act.

Full text of tentative findings are here.

I doubt very much that the new congress, which is very different from the one that crearted the AMC, will do as the commission asks. I also wonder how much it matters.

My own opinion, since you asked, is that Robinson-Patman, flawed as it is, should not be repealed. It should be revised to reflect the realities of the marketplace, however. The most important of these is that market power exists more with the retailer than with the manufacturer, and that R-P should therefore be directed at stopping retailers from demanding market-distorting allowances, rather than at punishing manufacturers for giving into such demands.

I have often argued that R-P is written backward, and is comparable to a bank robbery law saying that it is illegal for banks to allow themselves to be robbed, and that the bank president will be jailed if it happens.

Wal-Mart pushing hard internationally

Despite their decidely mixed record in international efforts, Wal-Mart is still going all out:

• They are in talks to acquire a leading Russian retailer, Karusel
• As previously reported here, there are in partnership to enter India
• They are buying a 35% share in TrustMart, a top Chinese retailer, in what is seen as a direct challenge to Carrefour -- up to now the leading foreign retailer in China
• They are also reported to be in talks to have their Asda subsidiary (#2 in the UK market) buy Sainsbury, the #3 chain

It's understandale that they see more growth potential overseas, but their record to date outside North America has been poor. They've been successful in Canada and Mexico, but Asda has struggled, to be polite about it ("Bankers have said they expect Wal-Mart and Asda have looked at Sainsbury because it is the latest realistic chance for it to catch up with Tesco, which is now double Asda's size"), Wal-Mart has done poorly in Japan, and Korea and Germany were total disasters.

Nike doing private label with Payless

Nike is introducing a new brand of athletic shoe, Tailwind, as a private label at Payless stores. The shoes will be made by Nike's Exeter group, which markets the Starter and Shaq brands.

Discount shoe retailer Payless ShoeSource Inc. has paired up with a subsidiary of Nike Inc. to market a high-performance $34.99 running sneaker, a move that both companies hope will take advantage of a highly lucrative market.

Under the terms of the multiyear deal, Exeter Brands Group LLC, a wholly owned subsidiary of Nike, will design and produce the shoes under the Tailwind collection, while Payless will serve as the exclusive retailer.

The question is why Nike wants so many brands at the low end. One thought is that they intend to pursue a private label strategy with mass merchants, with Tailwind exclusively at Payless, Starter at (mostly) Wal-Mart, and Shaq at other mass outlets.

Long time, no post

It's been about three (very busy) weeks since I've posted here. Apologies to loyal readers (I hope you haven't given up and become disloyal readers).

I have lots of good material stockpiled, and I plan to have a bunch of new posts soon.

Thanks for sticking around.

Reminder: TPMA meeting coming soon

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

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

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

Wal-Mart -- lotsa changes

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

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

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

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

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

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

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

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

And Advertising Age reports on additional moves, including the head of the US stores division to international and his replacement by the head of Sam's Club.

In all, the latest round of recent or pending management moves involves 10 to 15 people, according to one person close to the company.

It will be interesting to see if the recent round of problems is just a bump in the road, fixable by moving some people around, or if Wal-Mart has topped out and will now settle into slow decline.

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

Sarbox – the Lemonade Law

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

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

These are legitimate concerns, I think. But as for trade promo, what does Sarbox require? As I understand the requirements, they could be summarized in simplest form as:

• Full audit trail from plan to settlement
• Have a system that accurately tracks what promotion was planned, what actually happened, and what you paid for it
• All changes and deviations must be documented
• Program rules must be documented and appropriately enforced
• Full auditable proof of cost and performance
• There must be documentation of what you paid for
• All funds must be fully and accurately reconciled

So what’s the problem here? None of this is anything that we shouldn’t have been doing all along. It has been a shock to our systems to actually have some rules after so many years of anything goes, but now that we’ve adjusted, the time has come to look at the ways to take what we’ve learned from Sarbox and, whether we like the law or not, make the most of it.

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

Sarbox Lemonade Recipe #1: Deductions and Post-Audits

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

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

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

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

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


Sarbox Lemonade Recipe #2: Outsourcing

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

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

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

Sarbox Lemonade Recipe #3: Documentation/Analytics

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

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

Quick notes

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

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

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

The world's biggest malls

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

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

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

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

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

The news sent shares up 3.5 percent.

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

Meanwhile, the chief marketing officer for Sears stores is out.

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

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

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

India: Tesco + Tata?

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

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

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

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

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

Gap: Changes and rumors

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

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

The day before Andrew left, the president of Gap Adult and one of the top designers for Old Navy also decided that other opportunities were worth pursuing. The same article mentions that:

"Rumors that Gap has hired Goldman Sachs Group to "explore strategic alternatives" fueled an increase in its stock value by as much as 11.4% on Monday.

Meanwhile, the Chicago Sun-Times is reporting that Sears Holding Company may buy Gap (the whole thing or pieces of it). We've been hearing lots of rumors about what Sears might be buying, though, and we're not going to hold our breath on this. Eventually, they'll do something (they have lots of cash), but who knows what?

John Kittle joins MEI

John Kittle, formerly Director of Trade Promotion and Category Development for Meow Mix, has joined MEI as VP-Industry Relations. Kittle had responsibility at Meow Mix for implementing the MEI solution. Prior to Meow Mix, Kittle was Director of Customer Sales Force Development at IRI, and had spent twenty-one years at Nabisco in various sales and marketing positions.

"John was a natural fit for this position given his industry experience and excellent reputation," stated Fred Schroeder, CEO, MEI.

TPMA, February 11 – 13

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

Make your reservations now at the TPMA website.

Mixed messages

It was a good Christmas.

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

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

Christmas stunk.

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

We link, you decide.

Margin pressure on food manufacturers

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

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

"Looking ahead to 2007, our work suggests gross margin performance should gradually deteriorate during the year ..."

With commodity prices rising, one would expect that manufacturers would pass their cost increases along -- but not if Wal-Mart won't allow it.

Is trade promo about to go into decline?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The net effect of these four big trends?

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

· One (the Internet) driving it down.

· One (analytics) with mixed effects.

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

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

The Home Depot severance package

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

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

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

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

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

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

Tesco's US opening nears

The opening of the new Tesco stores in the US is getting closer, as the company has now applied for fourteen liquor licenses in the Phoenix area:

U.K. grocery powerhouse Tesco PLC has applied for 14 liquor licenses across the Valley so far this month, indicating its imminent arrival in the Phoenix metro area, reported The Business Journal of Phoenix.

As has been widely reported, the secretive retailer plans to expand into the United States early next year, including 50 stores in the Valley.

Several sites have also been chosen in Orange County, California, with the sites reported to be around 14,000 square feet.

As might be expected, competitors are nervous:

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

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

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

Big news: Excessive price cuts hurt profitability

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

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

Circuit City took the worst hit, because they are the weaker of the pair:

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

Consumer electronics retailers are frantically trying to beat each other to customers by slashing their prices on things like flat panel TVs, effectively crimping the entire industry's ability to make money....

But Best Buy was hurt, too:

The company’s gross profit rate for the third quarter was 23.5 percent of revenue, down from 24.4 percent last year, and operating income for its U.S. operations fell 6 percent to $186 million for the three-month period, which included the first three days of the Thanksgiving holiday.

Best Buy justified their moves with the market share defense:

However, CEO Brad Anderson defended the aggressive price moves, stating they helped Best Buy win market share, brand loyalty and new customers as the chain headed into the final and most earnings-rich quarter of its fiscal year.

Which has some validity, of course. Particularly if Best Buy is playing a game of chicken with Circuit City -- having deeper pockets and being overall stronger, they can afford to play the price-cut game harder and longer. But there are two problems with the game, as I see it. One is that there's another company that can play it better (and we all know who it is), and the other is that consumers' expectations are changed by such events. Now that we've seen that laptops can be sold for $250 and hi-def TVs for $600, we're not likely to flock into stores to pay triple those prices.

Channel-stuffing at Snapple?

An attorney for sixty distributors suing Snapple (a division of Cadbury) says that an internal study reveals that the company has engaged in channel-stuffing.

A study ... Snapple Beverage Corp. has presented in court "apparently establishes" that the company used questionable distribution practices to meet a sales quota, a lawyer for 60 distributors suing the company said in a recent letter to the judge.

The letter by Howard B. Cohen to U.S. District Court Magistrate Judge Mark D. Fox says the study seems to show Snapple "engaged in a pattern and practice of channel stuffing. ..." The letter says the study - which is not part of the court file in White Plains - also seems to show that the company sold product at greatly reduced prices to certain distributors - but not to those who brought the lawsuit.

We all know that a great deal of channel-stuffing occurs in every product category, but the increasing frequency of legal action involving the practice is beginning to make it extremely dangerous (in addition to short-sighted and stupid, which it has always been).

Tesco is half of new space in UK

While we in the US are watching Tesco's moves as they prepare to open soon here, in its homeland, they are apparently trying to ignite a price war, according to The Guardian:

Britain's biggest supermarket chain, Tesco, is further turning the screws on its rivals by triggering a price war.

It is permanently cutting prices on 600 key items by a total of £80m. The move will be viewed by critics as another example of how the increasingly dominant retailer is flexing its muscles against smaller competitors.

The other point covered in the article is of equal interest -- that half of all new retail space in the UK in the past year was opened by Tesco. This would indicate the likelihood of substantial growth in their current 21.6% market share. Meanwhile, the Competition Commission's report on concentration in the retail sector is expected soon (it has already been delayed).

Britain's Office of Fair Trading highlighted four areas of potential concern when it decided to refer the sector to the Competition Commission in March this year: planning, price flexing, supermarkets' relationships with suppliers, and their entry into the convenience sector.

More about the latest rumors on Tesco's US operations in a later post.