Harry Potter and the Disappearing Channels

This is going to be, to some extent, a repetition of previous items I’ve written. But there have been some interesting developments that indicate that it is time for an updating and review of the Two-Per-Channel Theory.

I've often advanced this theory (as have others), which says that we are moving toward a retail landscape in which there will be only two significant outlets in each channel. I've used as examples:

• Best Buy/Circuit City
• Home Depot/Lowe's
• Barnes & Noble/Borders
• Target/Wal-Mart
• Kroger/Super-Valu
• etc.

There are a corollary and a variant to this theory. The Manufacturers’ Corollary holds that there will be only two suppliers in each product category. The logic behind this is that suppliers will have to be large enough to deal with the retail giants, and is supported by the tendency of the retailers to want to improve efficiency by winnowing their supplier base. Supporters of this corollary point to P&G’s acquisition of Gillette. They argue that P&G was already bigger than its competitors, so the acquisition was not intended primarily to strengthen their hand vis-à-vis Unilever, but rather its purpose was to allow them to sit at the table with Wal-Mart as equals.

Which brings up the Wal-Mart Variant to the Two-Per-Channel Theory. It holds that the final two in each channel will be:

• Best Buy/Wal-Mart
• Home Depot/Wal-Mart
• Barnes & Noble/Wal-Mart
• Target/Wal-Mart
• Kroger/Wal-Mart
• etc.

Neither version, of course, takes into account channels that utterly disappear, as the music stores have, and as has seemed possible at times with toys.

I've expressed my concern frequently for anybody running third in their race, but it seems that perhaps running second may be little better, and that the Wal-Mart Variant might be the stronger version of the theory, based on recent rumblings from two prominent #2s.

Circuit City: This chain’s problems have received a lot of press lately. Even after the negative publicity on their big layoffs, the bad news has continued:

… Circuit City Stores Inc., the nation's second-largest consumer electronics retailer, said it expected a pretax loss of as much as $90 million this quarter and revised its forecast for the first half of 2007.

The news sent the company's shares down more than 7% in after-hours trading.

Sales in April were "substantially below plan," the company said.

Problems in this channel go beyond Circuit City, as BusinessWeek's summary of both cause and effect make clear:

Last "Black Friday," for its annual post-Thanksgiving sales blitz, Wal-Mart Stores decided to slash the price of one of the hottest electronics items for the holidays—the 42-inch flat-panel TV—to $988. The world's largest retailer had staked similarly audacious positions before, in numerous product categories, as part of its quest to remain U.S. retailing's "low-price leader." In turn, Wal-Mart's move caused a freefall in prices of flat-panel televisions at hundreds of retailers—to the glee of many people who were then able to afford their first big-screen plasma or liquid-crystal-display model.

Now, it is becoming apparent that Wal-Mart's calculated decision to break the $1,000 barrier for flat-panel TVs triggered a disastrous financial meltdown among some consumer-electronics retailers over the past four months.

The fallout is evident: After closing 70 stores in February, Circuit City Stores on Mar. 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group, the high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. Dallas-based CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores is boarding up dozens of outlets, as well as selling 94 of its 211 stores.

It’s so bad that Radio Shack’s CEO said that he has no idea how the chain manages to stay in business: Well, okay, he didn’t really say that, but The Onion, as is true of the best satire, captured the mood of the consumer electronics channel in a few paragraphs:

"I'd like to capitalize on the store's strong points, but I honestly don't know what they are," Day said. "Every location is full of bizarre adapters, random chargers, and old boom boxes, and some sales guy is constantly hovering over you. It's like walking into your grandpa's basement. You always expect to see something cool, but it never delivers."

Added Day: "I may never know the answer. No matter how many times I punch the sales figures into this crappy Tandy desk calculator, it just doesn't add up."

But it isn’t just consumer electronics.

Borders: Both the big book chains are hurting, as we’ll discuss, but Borders is in serious pain:

Borders, which reported a loss in the quarter, announced a dramatic shakeup of its business -- it plans to cut its number of Waldenbooks stores in half, to about 300 by the end of next year, and is considering the possible sale of most of its international businesses.

Why?:

Competition from discounters such as Wal-Mart Stores Inc., which can afford to slash prices on books, has squeezed profits at Barnes & Noble and Borders, which have responded with their own discounts.

In this channel we see the clearest parallels to the record biz, and the possibility is strong that bookstores may likewise just go away. Harry Potter tells us why (in case you were wondering when I was going to finally get around to justifying the title).

The book world has been eagerly anticipating the publication of the newest Harry Potter book, but indications are that booksellers will see no profit from it, as reported in the UK's Times:

HMV Group gave warning yesterday that Harry Potter would not fly to the rescue of the ailing retailer this summer as it revealed further sales declines at its Waterstone’s bookstore chain.

The seventh and final adventure of the young wizard, Harry Potter and the Deathly Hallows, comes out on July 21 and Simon Fox, the chief executive, said that Waterstone’s had already sold nearly as many by preorder as were sold in total of the sixth Harry Potter book.

He said that it was vitally important for Waterstone’s to offer the book at a competitive price but because it was selling it at £8.99 – half price – it would be “hard to make money”.

So why are they selling a product for which there is great demand at a no-profit price? Glad you asked:

Mr Fox’s comments reflect the fears of Kate Swann, the chief executive of WH Smith, and Philip Downer, the retail director of Borders, as the high street prepares for a Harry Potter price war with the supermarkets and online stores such as Amazon, which is already offering the book for £8.99. Asda and Tesco will deliver the Bloomsbury publication for 12p less, plus postage and packing.

The retailers admit that the preorder price may fall to a 55 per cent discount closer to the publication date.

The big boxes are skimming off the cream, the bestsellers, and leaving the remainder to the booksellers – which is almost exactly what killed off the record stores (digital music and piracy were the other ingredients, but those factors aren’t far off for book stores – we await only a good reader for e-books to fill the role of the iPod). It’s also not dissimilar to the effect on Circuit City, et al. of Wal-Mart’s flat panel move.

As I look at these examples, I move more to the idea that the Wal-Mart Variation may be more likely than the original Two-Per-Channel Theory. Or perhaps the final two, in every channel, will be Wal-Mart and Amazon. That would be interesting.

The effect on trade promotion? We know what has happened to trade spending in the last couple decades, as retail concentration has grown. Presumably, we would see a continuance – to the point where we would equal Australia, where two huge chains have dominated for a long time. There, trade spending has topped 30%.

Competition

I've often described TPMtoday as the world's first and only blog dealing with trade promotion marketing. I'm going to have to change the description, though -- Multi-Ad has launched a blog recently called The Co-op Connection, and when I visited it I found a link to another blog called Co-op Queen Buzz, which has been around for almost a year. I'll have to drop the "only".

Both look interesting, especially for those involved in media sales.

If anybody knows of other blogs relating to trade promotion, co-op/mdf, or other channel management subjects, please let me know, and I'll pass on the word.

More rebate complaints

This article summarizes some past rebate fiascos:

The history of rebates is replete with programs that have been, to put it kindly, less than consumer-friendly.

Microsoft once offered a $300 rebate on a software upgrade but required customers to send in a UPC code from the box for the original software.

Cell phone maker Samsung paid $200,000 to settle a case in New York involving 4,100 residents of apartment buildings whose rebates were wrongly rejected. It turned out the rebate system only allowed one rebate per address but couldn't account for apartment numbers.

And consumer electronics retailer CompUSA was charged by the FTC for failing to promptly pay rebates.

The government alleged that CompUSA advertised rebates from one of its suppliers even after it knew the company was failing to pay rebates, Gold said.

This item details two more actions by the FTC:

• "The Commission’s complaint against the InPhonic alleges that, in connection with its advertised rebate offers, among other things, the company failed to provide promised documents needed to obtain rebates, to send out checks in the time promised, and to disclose adequately certain material terms and conditions prior to purchase."
• "The Commission’s complaint against Soyo, Inc., alleges that most of Soyo’s rebates were delivered late – in some cases, consumers had to wait a year or longer for their checks to arrive."

And this one details another problem -- a manufacturer has failed to give their processing firm funding for the rebate checks, with Office Depot ending up making the rebates good.

The whole rebate business has such a bad reputation no that I wonder why manufacturers continue to associate their brand with it. Well, okay, I do know -- it pumps up sales. Sales up, brand image down.

In-store accountability

There have been a couple developments in the efforts to make in-store marketing more effective and accountable.

Nielsen has expanded their test of in-store measurement (we reported on it last December):

During this phase, Nielsen In-Store will extend P.R.I.S.M.'s coverage to all in-store marketing media, among them merchandising activity, retail TV and radio networks, shelf talkers, cart talkers, digital signage and other point-of-purchase displays. The research also will be expanded to a national sample of about 200 stores. Final specifications for linking information about consumer traffic and the presence of in-store media will be defined over the following six months, and the first robust reach-and-frequency measures are expected by the close of the year.

Meanwhile, Kimberley-Clark has started use of an idea that has been frequently discussed over the past couple years -- using RFID chips to track stores' deployment of POP materials.

Kimberly-Clark customized an RFID application that, after RFID tags are placed on the display cases, records when a promotional display is received at a store and checked into its backroom warehouse, and when the displays reach the designated sales floor.

Good results thus far: "Kimberly-Clark has increased compliance with its promotions to 75% from 55% of its participating stores, the company says."

As reliance on in-store marketing increases, as appears inevitable given media fragmentation, efforts such as these will become ever more important.

Sears comps down again, but still profitable

Once again (how many times?), Sears reported that same-store sales were down in the first quarter -- Sears down 2.4%, Kmart down 4.7%. But they remain profitable and heavy on cash.

Despite the softer sales, the company is projecting an increase in first quarter earnings thanks to $69 million in unrelated gains, including a favorable legal settlement, a dividend from Sears Mexico, and insurance payments for hurricane damage in 2005.

Sears Holdings will end the quarter with about $3 billion in cash and cash equivalents.

In other reports, they said they will be starting up new branding campaigns for both chains, and that the worst of the Kmart locations may be turned into Sears Grand stores. (Is anybody willing to bet that Kmart will still be around in, say, three years?). And also,

Sears Chairman Edward S. Lampert, a 44-year-old billionaire hedge-fund manager, said turning around Sears may take another three years. The process has been one of the most difficult things he has done, Lampert said.

They also mentioned an interest in using that three billion to buy something. Wonder if he's looked at Gottschalk's?

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.