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Monday, July 28, 2014

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Monday Morning Eye-Opener: Ron Johnson Talks About Target, Apple & JC Penney

There is a fascinating video online with Ron Johnson - who had impressive runs at both Target and the Apple Store, only to go down in flames as CEO of JC Penney - appearing at Stamford University's Graduate School of Business for a conversation about his business successes and failures.

You can - and should - watch the video, which is at left. It is instructive on a wide variety of levels…

About Target, Johnson says that he learned that "leadership is situational, not positional," and that it can be provided from anywhere within an organizational structure. At Apple, Johnson says, he learned from Steve Jobs that "you have to be willing to start again." And at JC Penney, Johnson concedes, he was guilty of arrogance … but you almost always learn more from your failures than your successes.

There is one amazing statistic cited by Johnson - that just one out of every hundred visitors to the Apple Store actually makes a purchase. Which means that the other 99 are either visiting the Genius Bar or getting some training (both of which only further brings them into the Apple ecosystem), or just browsing - which means they are both embracing and being embraced by the Apple culture. This also, by the way, makes the Apple Store's sales-per-square-foot of $4,551 - the highest in the nation - even more impressive and Eye-Opening.

Great stuff. Check it out.

Market Basket Battle Continues Unabated As Two Sides Refuse To Budge

It was just another weekend in the continuing Market Basket saga in New England, as the two sides in the ongoing battle continued to work at cross purposes with little suggestion that they were moving toward any sort of middle ground in which compromise and resolution might be found.

When last we checked in on the Market Basket story, deposed CEO Arthur T. Demoulas was saying that he was making an offer to buy a majority of the company that he said was fair an in keeping with the chain's valuation, and the board of directors - controlled by Arthur S. Demoulas, Arthur T.'s cousin and the man who engineered his firing - promised to consider the proposal at a meeting it was having last Friday. Also scheduled for Friday was yet another mass rally of Market Basket employees, who have combined their calls for Arthur T.'s reinstatement with systematic slowdowns of shipments to the company's stores, which have left many of the units almost empty of both food and customers.

(In case you've forgotten … The longtime family feud boiled over with the move by Arthur S. Demoulas, to oust CEO Arthur T. Demoulas due to a conflict over the company’s finances. The fight is characterized differently by the two sides. The Arthur S. Demoulas faction argues that Arthur T. Demoulas spends money irresponsibly and refuses to take direction from the board. The Arthur T. Demoulas side maintains that his cousin is fueled by greed, only interested in raising prices, cutting employee compensation, and threatening the formula that has built the company to a New England success story. To be fair, though, this is a battle that goes back decades, and that is beginning to resemble the Hatfields and the McCoys.)

• On Friday, the board released a statement that said, in part: “The negative behavior of certain current and former associates is at variance with the Company’s culture of putting the needs of the Market Basket customers first. It is now clear that it is in the interests of all members of the Market Basket community for normal business operations to resume immediately.”

• Shortly thereafter, however, the current co-CEOs - Felicia Thornton and James Gooch - released a statement that seemed a little less confrontational, saying, in part: “We welcome back associates who are committed to Market Basket’s customers. There will be no penalty or discipline for any associate who joins in what will be a significant effort to return to the unparalleled level of performance and customer service that have been hallmarks of the Market Basket brand.”

This was at odds with their previous declaration that anyone not showing up for work or participating in the slowdown would be fired, as some already have been.

• The opposition, however, is not backing down. On Saturday, Market Basket protestors reiterated their terms for going back to work: “(Market Basket) associates and customers remain fully committed to our cause. (Arthur T. Demoulas) must be reinstated with full authority to CEO of (Demoulas Super Markets). This has been, and will continue to be, non-negotiable.”

• And then, injecting even more uncertainty into the situation, the Boston Globe reports that there are other suitors interested in acquiring Market Basket, including private equity groups and perhaps other chains, with the Market Basket board hiring investment bank JP Morgan Chase & Co. to help evaluate offers that range between $2.8 billion and $3.3 billion.

KC's View: Forgive me, and I could certainly be wrong about this, but it just seems so unlikely that the current board and Arthur S. would ever sell the company to Arthur T., especially if there are other offers on the table. I think they might take the money from a private equity group and run, and let rebuilding Market Basket be some other guy's problem … especially since, from all reports, taking money out of the business seems to have been the priority all along.

Now, it seems equally hard to imagine why anyone else would want to take on the Market Basket headaches, unless the goal would be to bring Arthur T. back into the fold.

I'll repeat what I said last week. This thing may be, to use a military expression, FUBAR.

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Brand Equity, Pricing & The Importance Of A Value Proposition

Reuters has a piece using Chipotle as an example of how a retailer can raise prices without affecting sales or offending customers, and it all comes down to "cultivating a brand that commands pricing power," says Morningstar analyst R.J. Hottovy.

According to the story, "Chipotle is prospering even as it raises prices on burritos that are already expensive – about twice as much as those sold by Taco Bell. Besides its naturally-raised meats and organic ingredients such as beans and avocados, the company occupies the center of fast-casual dining - the booming 'sweet spot of the restaurant industry,' according to Hottovy - in which customers order at a counter but eat quality products inside a hip space.

"And Chipotle is still growing. The chain runs about 1,700 restaurants in the U.S., and analyst Stephen Anderson at Miller Tabak estimates that it could grow to 3,100, expanding in less populated areas beyond its urban strongholds.

"Chipotle hadn't raised menu prices for three years, but the higher cost of ingredients compelled it to roll out up to a 6.5 percent average increase in the second quarter.

"To be sure, the hike did not go unnoticed: some customers said goodbye to steak burritos because their price jumped on average 4 percentage points more than Chipotle's chicken-based dishes, the company said."

But it didn't seem to matter, because Chipotle had established a value proposition that did not depend on low prices. That's something that companies such as McDonald's and Dunkin' Donuts can't say, because price is so much a part of their brand identity that increases have a far great impact on customer perception and behavior.

KC's View: The thing is, depending on low price is always a dicey proposition … since someone somewhere always is capable of beating you by going lower. It all depends on how much margin they are willing to sacrifice and/or how much money they're willing to lose. Now, some companies can afford to play that lowest-common-denominator game … but most can't. Which is why it makes sense to create a value/values proposition that is not dependent on low price.

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Now back to regularly scheduled editorial...

Craft Beer At A Turning Point As Industry Copes With Success

The Wall Street Journal has a story about the growing and thriving craft beer industry, suggesting that craft brewers such as Sierra Nevada are at an important pivot point - moving beyond their initial markets, opening new breweries in often far-away locations, and facing the challenges that come with such growth.

Sierra Nevada's "million barrels a year may not quite rival the nearly 100 million produced annually by Anheuser-Busch InBev, the world's largest brewer, but it's a long way from the 10,000 or so Sierra was putting out in the early years," the Journal writes, and now the California-based brewer is about to open a new $110 million facility in North Carolina that will enable it to expand its reach and sales.

"Other craft brewers have seen their flagship brews become corner-store staples from one coast to another and, like Sierra, are growing apace," the story says. "Fort Collins, Colo.-based New Belgium will soon make its famous Fat Tire at a second, 18-acre site in Asheville, N.C. Another Colorado brewer, Oskar Blues, maker of Dale's Pale Ale, has a plant in Brevard, N.C. Stone Brewing Co., headquartered in Escondido, Calif., just announced a crowdsourced campaign to fund an East Coast brewery, as well as plans for a brewpub in Berlin. Meanwhile, Northern California's Lagunitas Brewing Company is building in Chicago, owner Tony Magee's hometown and a transportation hub.

"Now, instead of convincing the public that good beer can come in tiny batches, the challenge is proving that it can be produced in quantity without losing its soul. And keeping these flagship craft brews consistent across millions of barrels requires another sort of creativity … For some beer geeks, that's a problem. The hippest bartenders in brewing meccas like Denver and Portland, Ore., observe an unofficial law: They only serve beer from breweries they can see from their front door. But in less saturated locales, the growth of breweries like Sierra Nevada is welcome news."

KC's View: Funny that this story came out this weekend, since I spent part of it at the annual Portland BrewFest. (Hey, I was working. I was sacrificing part of my weekend in service of the MNB readership. Tough job, but somebody has to do it…)

It is amazing how much energy there was there - and some amazing beers. I think my favorite may have been Shake, which tasted like beer mixed with a great chocolate milk shake, from the Boulder Beer Co. (A lot of folks agreed me, based on the lines and the buzz.) I also liked Young Franken Stein, a "young lager" from Oregon's Golden Valley Brewery (extra credit for the brewer for coming up with a movie-related name); Breakfast Blend IPA from Klamath Basin Brewing Co in Oregon; and Witty Moron Beer, a wheat beer from California's Stone Brewing Co. (I think I also liked Witty Moron because it made me think I'd be happy with that on my tombstone…)

Anyway, it was a great time. I think the Journal piece is correct in pointing out a potential industry problem, but I don't think - based on the culture that I saw on display in Portland over the weekend - that we're anywhere near the corporatization of the craft beer business.

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Study: Bricks-And-Mortar Stores Remain Foundation Of Retailing

AT Kearney is out with a new omnichannel study saying that while "digital retailing is capturing headlines and inspiring spirited debate as retailers plan how best to invest for future success…. beyond the headlines, physical stores remain the foundation of retailing, evidenced by the fact that 90 percent of all retail sales are transacted in stores and 95 percent of all retail sales are captured by retailers with a brick-and-mortar presence."

The report goes on:

"It is important to acknowledge that shoppers actually find physical stores appealing—especially when we read all the hype about online and digital. Stores provide consumers with a sensory experience that allows them to touch and feel products, immerse in brand experiences, and engage with sales associates who provide tips and reaffirm shopper enthusiasm for their new purchases.

"The store plays a crucial role in online purchases, as two-thirds of customers purchasing online use a physical store before or after the transaction. In these cases, the store makes a significant contribution to converting the sale, even though the transaction is eventually registered online. In other words, the source of value creation (brand building, product awareness) is distinct—or decoupled—from the place of value capture (sales transaction). This is particularly important for retailers, as they consider resource allocation decisions across channels to ensure that the true value the physical store creates is accounted for properly.

"The future of retail is solidly anchored in the brick-and-mortar channel. With customer satisfaction at the core of retailing, successful retailers will do their part to provide consumers with the ability to shop when and where they want. And it’s been proven that having multiple channels is good for business.

"The debate should not be a question of digital or physical. Successful retailers understand how each customer touch point adds value (as defined by the customer) and develop omnichannel strategies - with stores as the foundation - that maximize customer satisfaction and profitability."

KC's View: Of course customers prefer stores. Now. And probably for the foreseeable future.

But … I'd be careful about this. When the study says that the "future of retail is solidly anchored in the brick-and-mortar channel," it is important to remember that while an anchor can keep your moored, it also can drag you the bottom. Not being flexible to enough to change as consumers change … and they will change … would be a serious mistake.

I'm sure the folks at Blockbuster and Circuit City believed right until the bitter end that their futures were anchored by their stores.

If I may digress for a moment … I was with a friend of mine over the weekend, visiting me in Portland, who decided that he wanted to send some postcards to friends and family. He went into a Safeway and asked a young woman if they carried postcards. I swear, she looked at him, utterly mystified - she had no idea what postcards were.

It only would have been better had she said, "Sir, they're in the back … with the buggy whips, eight track tape players and VHS recorders."

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Worth Reading: How The Bricks-And-Mortar Foundation May Be Crumbling

Business Insider has a column by Karyne Levy in which she writes:

"At 1 p.m. on Thursday, I decided to sign up for Google Shopping Express.

"At 1:15 p.m. on Thursday, I finished placing my order and quickly realized that my life from that moment onward would be different. 

"And at 7:20 p.m. the same day, when my items showed up at the door, I decided that I'm never shopping at a brick-and-mortar store for sundries ever again."

Check it out here.

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Safeway Shareholders Approve Acquisition By Cerberus Group

The Wall Street Journal reports that on Friday, Safeway shareholders approved the $9 billion sale of the company to an investor grout controlled by Cerberus Capital Management.

The deal, when completed - which can only happen after being given the go-ahead by federal antitrust regulators - will result in a merger of Safeway with Albertsons, creating a food retailer with more than 2,400 stores.

Loblaw President Says Customers Will Pay More For High Quality Fresh Food

The CBC reports that Galen G. Weston, chairman/president of Loblaw Companies, says that "data from its latest quarter showed that customers are willing to pay more if they can get a wide assortment of high quality fresh food … Early indications across the board suggest that when we put the right proposition in front of the customer, price is not the biggest determinant of what they choose to buy."

Indeed, Weston says that this trend seems to cut across all formats, from no-frills stores to higher end units that have a greater focus on specialty foods.

The story notes that this is important to Loblaw because the company "is currently navigating its way through a competitive time in the grocery industry, with U.S. entrants like Target, Amazon and Walmart trying to lure away customers with lower prices and low-cost or free shipping."

KC's View: Think of this in terms of the story above about how a strong value/values proposition allows a retailer and/or a manufacturer to avoid being dragged down in lowest common denominator pricing battles. Fresh is how you differentiate yourself … and how you make price just a little bit less important.

FastNewsBeat

Reuters reports that "overall U.S. food inflation will remain near the historic norm in 2014, even as prices for meat and seafood are pushed higher by disease and widespread drought, the U.S. Department of Agriculture said on Friday."

"The agency forecast wholesale pork prices to jump by 10 percent to 11 percent in 2014, hurt by declining supplies after a virus has killed some 7 million piglets in the past year," the story says. "Wholesale beef prices are forecast to jump by 8 percent to 9 percent in 2014, although rising imports are helping to offset some of the decline in domestic supplies … U.S. fish and seafood prices were forecast to rise by 3.5 percent to 4.5 percent this year, up from last month's forecast of a 2.5 percent to 3.5 percent gain," mostly because of "decreased supplies of certain species and increased consumer demand as other meats have become more expensive."


• The Chicago Sun Times reports that Tyson Foods plans to close three US plants - in Cherokee, Iowa; Buffalo, New York; and Santa Teresa, New Mexico - that have "struggled financially." The move comes as Tyson acquires Hillshire Brands for $8.5 billion, and Tyson said the closings "will enable it to move some of the operations and equipment at the plants to other, more cost-efficient Tyson plants."


Reuters reports that "OSI Group, the parent company of a scandal-hit Chinese food supplier, said it is withdrawing all products made by its subsidiary Shanghai Husi Food Co.

"Shanghai Husi is at the center of a major food safety scandal, which has spread from China to Hong Kong and Japan, over allegations it mixed fresh and expired meat."

According to the story, OSI "vowed to take 'swift and decisive action' including legal measures against those responsible for the scandal, and said a new management team would be brought to China."


• The New York Times reports on a Chicago-area gathering of fast food workers, noting that it "was by far the largest gathering of fast-food workers, and it was largely underwritten by the Service Employees International Union, a powerhouse with two million members known for unionizing hospital workers, home care aides and janitors. Mary Kay Henry, the union’s president, said the S.E.I.U. has adopted the fast-food workers’ cause to lift low-wage workers and combat income inequality … She attacked the C.E.O.s of McDonald’s and Yum Brands, which owns KFC, Taco Bell and Pizza Hut, for receiving executive compensation of more than $10 million a year. They make more than twice as much in a day as many fast-food workers earn in a year."

However, the Times notes that while "the S.E.I.U. does hope to somehow unionize throngs of fast-food workers … those efforts may prove difficult given that most fast-food employees are scattered among thousands of different franchised restaurants. Moreover, the franchisees and fast-food chains are likely to mount a fierce battle against unionization."


• From the "Now We've seen Everything" file, the Associated Press reports that Seattle Police have learned that it was an Amazon employee from out of town who flew a small drone out of his fifth floor hotel room window and buzzed the Space Needle there.

According to the story, "Police contacted the man and he admitted operating the drone equipped with a camera Tuesday. He told authorities he wanted to try out the craft he recently purchased … The man agreed not to fly his drone in public while in town."

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Now back to regularly scheduled editorial...

Want To Grab A Beer Or A Glass of Wine?

I'm going to be in Portland enjoying what I like to think of as my "adjunctivity" (team-teaching a marketing class at Portland State University with the great Prof. Tom Gillpatrick) until August 1 … and it occurs to me that this would be a great time to try and grab a beer or glass of wine with local members of the MNB community.

I'm thinking Nel Centro, located at 1408 SW 6th Ave, Portland, … on Monday, July 28 … say, from 5:30-7 pm? No need to RSVP…I'll just be there, hanging around outside by the fire pits, looking forward to meeting with anyone who would like to hang with me.

Your Views: Tesco Blues, Gaseous Anomalies, And Simon Says

Regarding Tesco's ongoing problems, one MNB user wrote:

Kevin, I’ve been in Europe this week, in /  out of a few Tesco stores. One of the key issues they face is that they haven’t really reinvented their in-store space. The Extra format stores are simply too large. The multi-level stores need to enhance their lease-space arrangements to include other ancillary stores. The Café seems to get so little traffic and their food selection is very poor. One would have thought Tesco might expand its restaurant offer.  The most exciting department in their stores is eReader / HUDL, where Tesco has done a great job at coming up with a platform to get into the game against Amazon. The phone shops seemed to have some traffic in them; the same cannot be said about the more conventional center store.  Their “price aisle” to compete against Aldi comes up short; reminds me of several US retailers who tried to create club pack aisles to compete against Costco, but prioritized price-only above the treasure hunt atmosphere element.

I also wonder if Tesco hasn’t become too reliant (self confident even) on their Dunnhumby data around what’s selling today vs. tomorrow. The stores just didn’t feel as “trend-right” as they have in the past. And, could the same thing happen to Kroger?




Got the following email from MNB reader Thomas Palmer:

A few years ago I took a little time to satisfy a long time desire to bolster my knowledge of sustainability technologies, a subject I touched on briefly many years ago in college – well before it was cool and could only be found in the Mother Earth News. So I went to my local community college to take classes and then did a few years consulting on the subject.

What I saw was a movement within the US to become more sustainable, but utility and fuel lobby groups were pushing back, as well as, some of the organizations that are known to protect the environment. The general lack of knowledge on the sustainability subject, ways to reduce environmental footprint, and the resistance to change put the small consulting group out of business, but I was involved in state of the art anaerobic digestion, solar, wind, and gasification projects – all renewable energy forms that produce less waste than current energy sources manufactured. That is right, energy is manufacturing that is regulated and taxed – a money train.

It is a shame that as technologically advanced as we are in the U.S., the story is about a European company producing energy from waste. This is the same biogas that exits our landfills – we vent it from under the dirt cap we place over landfills when we are done using them. You have seen these green pipes sticking up out of the ground if you pass an old landfill that has been repurposed. Rather than use this energy (which is methane), we vent it so it will not explode underground and in turn pollute the air. Burning it would be better than adding it to the air as methane is one of the worst greenhouse gases, 4 times worse than CO2 per molecule.

My hats off to the European firm that is making a difference and to all of Europe for their desire to get off the money train (which is much more expensive than in the U.S.) and provide a cleaner solution, take environmental responsibility to reduce waste, and add some self-reliance to produce energy from it.

And a little tidbit of information for thought – if you produce electrical energy, it is against the law to distribute it to anyone. You must sell it to the utility company so they can distribute it. And in my state, if you produce over 5 MW of it, the utility can stall you forever on negotiating a price. According to NPR this morning, something like 3 of 60 recent projects over 50 MW in my state has had a price successfully negotiated with the utility company. Lots of energy sitting there going unused.




Responding to last week's announcement that Bill Simon, who has been running Walmart's US discount business is leaving the company, one MNB user wrote:

Interesting assertion (by an MNB reader) that Simon might end up at Target. This is unlikely for a couple of reasons. First, the Walton family makes its senior leaders sign a multi-year agreement that prohibits them from going to a competing retailer for a sizable time period. Canada has served as a place to “park” a person who needs to sit out one of these type of arrangements when they come into Wal-Mart (for example).  I don’t believe any exiting senior WMT executive has been successful getting one of these agreements reversed.

Secondly, it’s hard to imagine Simon being a good fit for TGT. His personal style isn’t disruptive but his expertise would definitely be difficult to integrate into TGT.  Rather, I think Simon moves from retail to a larger theatre,  one in politics, where he would be a great asset in the next Presidential election.

On the subject of Foran:  he was Doug McMillon’s hire, so it’s no surprise Doug is supporting him. Given Doug’s young tenure in the role, the right person for the WMT-US job is someone that will be in the role for awhile, where they can contribute long-term value add and not get antsy after a few years. Greg’s got potential. What goes unsaid is that Foran really can’t put his name on anything he accomplished since joining WMT, Int’l.  He’s very accomplished – pre WMT.

Potential is the greek word for “ain’t done it yet”.

PWS 29