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    Published on: January 13, 2003

    In the weekend’s NFL payoff action…

    TENNESSEE 34 Pittsburgh 31
    PHILADELPHIA 20 Atlanta 6
    TAMPA BAY 31 San Francisco 6
    OAKLAND 30 NY Jets 10
    KC's View:
    With the Jets gone, who do we root for now?

    Published on: January 13, 2003

    As we mentioned above, there was a lot of reaction to Friday’s story about Wal-Mart considering a move into the wholesale business, which would opt it in the position of serving the very independent retailers that its threatens to put out of business every day.

    MNB user Art Turock wrote:

    “If Wal-Mart were to get involved as a wholesaler, we'd be witnessing a classic move by the market leader to solidify its control on the total supply channel. Kevin, you did an excellent job covering most of the implications but let's look at two more groups-- consumers and chains. The large chains will face even stiffer price wars than they've known before.... that's a no-brainer. But will the consumer end up better off... on price on national brands-yes. On broad assortment in a large range of product categories--maybe not.

    “One other implication, Wal-Mart's commitment to continued growth could someday become an issue for the Federal Government around monopoly criteria. Becoming a wholesaler wielding significant control of pricing in the supply channel could be viewed in an unfavorable light to the folks in Bentonville.

    “Nevertheless, this is a fascinating scenario to contemplate!”


    (Incidentally, Art has written an excellent book that has a title appropriate to this discussion: Invent Business Opportunities No One Else Can Imagine, available on Amazon.com. It is a must-read for people looking to reinvent their approach to business.)

    MNB user Eric Peabody wrote:

    “…The thought of Wal-Mart controlling yet another level of the North American food marketplace is a little frightening. It is natural that they consider this opportunity though. It's only a matter of time before they have some sort of retail establishment in every viable location in the world. Where to go after that?”

    Another member of the MNB community added:

    “Your comments today about Wal-Mart possibly going into the grocery wholesale business is already happening. I think it is just a matter of when they begin to further develop the infrastructure already in place. Check out the McLane web site. Following is an excerpt:

      ‘McLane was an independent company for nearly a century before Wal-Mart bought it in 1990. It controls about one-third of the distribution to U.S. convenience stores and also supplies fast-food restaurants, theaters and Wal-Mart stores. It has annual sales of $8.76 billion and about 11,000 employees.’


    “Perhaps it is the small retailers who are selling superior service and/or different services from the retailer Wal-Mart who will add to their profit margin by buying from the wholesaler Wal-Mart that welcome this move by Wal-Mart into wholesaling.

    “Hasn't it been said here by many that it's making a difference in your presentation, your attractiveness to your customer that makes a successful merchant rise above their competition?

    “Lower costs should help a retailer continue to find new and better ways to be a better merchant and attract more customers who are getting fed up with a lack of service at many "big box" merchants who have, mainly, only a wider selection of products to offer at a lower cost to the public.”


    MNB user Larkin Toler added:

    “’To be or not YET to be, that is the question.’ I thought the question was more of where Wal-Mart was or to 'Where' they will soon be. After reading your Friday's Essay, we now need to also worry about 'WHAT' all Wal-Mart is or will soon be. I did not know they ARE McLane Corp and that they "OWN" 10% of Kraft and 17% of Procter & Gamble's sales. Wal-Mart's want to achieve "a 30 percent market share in every category it sells or occupies" means Wal-Mart has their crosshairs on us quicker than I realized. It may not be a question of "IF," but "WHEN." "WHO" is easy, All those standing still in the crossroad.

    “Remember the futuristic movie ‘Judge Dredd' ("I am duh law") with Sylvester Stallone where it evolved into having only one restaurant, Taco Bell. It seems quite clear who the one Mega-Merchant is becoming. The crush of the Wal-Mart locomotive is definitely here. I think they make all the laws and rules, and its number one law is, "No Riders." Do not be fooled, and sell your soul to the devil by embracing cheaper Oreos.”


    And MNB user Rob Rice makes an excellent point:

    “I don't get why an Independent would chose a lower-cost supplier that would then have all his ordering/inventory data? Wouldn't this help Wal-Mart be more competitive against them? I must be missing something here(?).”

    MNB user Dennis Barthuly chimes in:

    “Wouldn’t that just be the glass slipper for Wal-Mart? What better way to control your competition than by becoming their main source of supply. And make no mistake about it, this is a direct attack on wholesale distributors and would likely have the same result as the retail blitz. Cheaper than building a store in every hamlet in the country, too.”


    On to other subjects…




    In response to Friday’s story about Delhaize closing 42 stores and streamlining its US operations, MNB user Robert D. Reynolds writes:

    “Can you remember when Food Lion was the feared carnivorous shark threatening the very existence of the rest of the grocery business in the Southeast and mid-Atlantic?

    “What goes around -- come around -- I guess.”


    And MNB user Norma Gilliam adds:

    “I suppose this could be the year to "pay the piper." Many retailers have reported trouble with sales & profits. As far as Food Lion goes, I wonder how this will affect the new store look they were shooting for....specifically upscale, fresher look. Even before the "unprofitable" news, I have to say that I was skeptical that they could pull that off.
    After all, from the beginning their market ploy has been one of "no-frills." I have to wonder if 2003 will be the year of balancing the over-storing in the U.S. by the closings of many more unprofitable stores. If you take the total population into consideration, we have been over-built for some time.

    Maybe retailers should not focus so much on "adding" the same kind of formats to their chain, but look for a more "specialized" type of store. For example, since the ethnic population will continue to change for some time in the future, they could focus on the ethnic store, and some more "specialty" kind of stores. And perhaps ten years from now, (or even less), we will all do even more of the stocking up of grocery items at a
    "wholesale" house like Sam's and do our "specialty" shopping at one of the other smaller formats.”





    Regarding Kroger’s opening a Food 4 less store in Chicago, one member of the MNB community writes:

    “I can only hope, as a Chicago resident and member of the vendor community here, that this is Kroger's first step into the Chicago market and its second step will be acquiring Dominick's from Safeway. Kroger could use the Food 4 Less format in the old Omni Store formats Dominick's had and force Jewel to be more competitive in its core marketing areas. I admire and respect Jewel's commitment to the market and their excellent management team, but right now they can make money blindfolded given the way Dominick's is losing consumer share. Also, Kroger knows how to compete with Meijer, who has a growing presence here. All this would be good news for Chicago area grocery shoppers. Hey, I can dream, can't I?”




    On the subject of the extension of employment benefits, passed by Congress and signed by President Bush last week, one MNB user writes:

    “I understand there are many, many people who truly need this to occur. It bothers me though when there are those who don't need it that view it as an extension to time off. We have a friend who has been receiving unemployment (from a $120k job) for most of the past two years, and makes more than either my husband or myself, both self employed. Additionally, he's fully employable, maybe not at that old rate of $120k, and has viewed it as his paid holiday. I hope Bush placed parameters on this to insure those who truly need it are receiving it.”

    Another member of the MNB community wrote:

    “Obviously a good thing for those who are in danger of having their benefits run out but how does this kickstart the economy? Surely job creation and therefore improved chances of earning a living would be preferable.”




    And, regarding the battle for Safeway in the UK, one MNB user wrote:

    “An interesting result of the announced acquisition of Safeway by Morrisons and the speculation of a rival joint bid by Asda and Sainsburys is the effect each will have on Sainsburys market position. As you noted yesterday, Sainsburys' market share of 17.2% ranks second behind Tesco's 25.8%. However, this is only slightly above Asda's market share (not mentioned specifically, but somewhere around 16.2%-16.5% and that of the combined Morrisons/Safeway (16.1%).

    “For the past few years, Sainsburys has been trying desperately to maintain its standing as the number 2 player ahead of the fast rising Asda. A combined Morrisons/Safeway might place Sainsburys in jeopardy of actually falling to fourth. On the other hand, if Asda and Sainsburys were successful in the rumored joint bid, Sainsburys would
    definitely be relegated to third behind Asda, but would be fairly secure in that position as Morrisons would be a far distant fourth in market share.

    “I do agree that the Competition Commission would probably not want to concentrate that much market share (around 67%) in the hands of only three companies.”
    KC's View:

    Published on: January 13, 2003


    • The Great Atlantic & Pacific Tea Co. posted a steep third quarter net loss of $29.7 million. However, compared to a year ago, the number was an improvement; A&P then reported red ink of $89.6 million. Comparable-store sales for the quarter rose 0.1%, and total sales dropped to $2.47 billion from $2.53 billion a year ago.


    • Longs Drug Stores Corporation reported preliminary December total sales of $510.7 million, a 2.5 percent increase over the $498.3 million recorded in the comparable period a year ago. Pharmacy sales were 36.5 percent of total drug store sales compared to 36.6% a year ago.

      Preliminary year-to-date total sales were reported to be $4.1 billion for the 48 weeks ended January 2, 2003, five percent above those of last year. Same-store sales increased 3.1 percent, with pharmacy same-store sales up 5.9 percent and front-end same-store sales increasing 0.8 percent.

    KC's View:

    Published on: January 13, 2003

    The San Francisco Chronicle reports that the US Department of Agriculture (USDA) has expanded the quarantine of chickens to cover the six counties that make up Southern California, as Gov. Gray Davis declared a state of emergency there in an effort to deal with the spread of Newcastle disease, one of the most infectious poultry diseases that threatens the state’s $3 billion poultry industry.

    Some 1.2 million chickens in Southern California already have been slaughtered to make sure that it is contained there. The quarantine bars transporting poultry, poultry products and nesting materials.

    Newcastle disease is harmless to humans, but fatal to birds. Eggs are not included in the quarantine but must be sanitized; there are more than nine million egg-laying hens within the quarantine zone.
    KC's View:

    Published on: January 13, 2003

    The new edition of Facts, Figures and the Future, from ACNielsen, the Food Marketing Institute, and The Lempert Report, is out, including the following stories:

    • Economic Snapshot. A look at the major economic events of 2002, putting them in context so we can get a better sense of what might happen in 2003.


    • Highlights Of ACNielsen’s Trade Promotion Study. “About 65% of the surveyed manufacturers reported a measurable increase in the total budget spending, including advertising and promotional dollars allocated across trade promotion, consumer promotion and media advertising over the previous year,” according to the report. “Although the total spending increased, an even larger proportion of surveyed manufacturers in this study (58%) reported that their organization's trade spending as a percent of gross dollar sales, decreased in 2001 compared to 2000. Just over 40% of surveyed retailers reported an increase in trade promotion dollars received in 2001 over 2000. With the manufacturers cutting back on the budgets, the promotional dollars among the retailers were sourced more from Internal Retailer funds than from Manufacturer or Coop funding.”


    • The Warehouse Club Threat. “The Warehouse Club channel sales reached $70 billion last year and, with 900+ stores, is expected to grow 9-10% throughout the next year,” according to this report. “These sales pose a threat to the Grocery store channel particularly in the top ten selling mega-categories.”


    • Plus, there are pieces on Shopping For Better Health, and the Kinesthetics Of The Supermarket.



    For more, click on the Facts, Figures and the Future logo on the right hand side of the home page.
    KC's View:

    Published on: January 13, 2003

    At a summary judgment hearing in New York City, lawyers representing Visa and Mastercard asked to have an antitrust suit filed against them by Wal-Mart and four million other retailers dismissed, charging that their policies were pro-choice and not anti-competitive.

    The suit, which dates back to 1996, maintains that Visa and Mastercard illegally used their market dominance to try and force retailers that accepted their credit cards to accept signature-based Visa and Mastercard debit or check cards which carry high transaction fees. According to the retailers, this policy hurt smaller debit card competitors in an emerging market.

    At the same hearing, attorneys representing the retailers argued that the judge should find in favor of them without a trial, and use a trial scheduled for late April simply to determine damages -- which, depending on which estimate is used, could be as high as $39 billion.

    U.S. District Judge John Gleeson took both arguments under advisement, but made no ruling.
    KC's View:
    We keep wondering how they come up with a jury pool that won’t be dominated by people who hate the credit card companies, what with their usurious fees and obnoxiously aggressive attitude.

    Consumers don’t like ‘em. Retailers don’t like ‘em.

    If fact, is there anyone out there who likes ‘em?

    There must be a thousand good reasons why Visa and Mastercard have resisted settling this suit, but we can’t imagine why they’d want to face a jury on this.

    Published on: January 13, 2003

    The Atlanta Journal Constitution reports that the US Department of Agriculture (USDA) is considering rebuilding its Food Guide Pyramid to bring it in line with current and conventional wisdom about dietary guidelines.

    The current Food Pyramid advises people to eat a diet loaded with breads and pastas, and labels all fat as evil. However, current theory suggests that a low-fat, high-carbohydrate diet isn’t ideal for everyone, and a moderate amount of polyunsaturated fats may actually be good for you.

    A new model could debut in 2005.
    KC's View:

    Published on: January 13, 2003

    Over the past year, there has been ample discussion on MNB about the phenomenon of self-checkout, but the September 13, 2003, issue of The New Yorker offers a different look at the art of getting customers to pay for their food.

    In New York City, at a Whole Foods on Seventh Avenue in Chelsea, a man named Bill Jones has an unusual job for the supermarket employee. He’s called a “line director,” and in essence, he directs traffic as a single line of people with shopping carts feeds into a group of 24 checkouts. The job was created because the line was growing “serpentine,” and there was recognition that shoppers were growing testy.

    Jones’s job is to keep the line moving and to keep the customers entertained and happy…bantering and joking with them, reassuring them that they’ll be getting through soon, and generally approaching the task with what the article calls “mythmaking confidence and authority.”
    KC's View:
    What Jones and Whole Foods are doing, it seems to us, is putting a human face on the worst part of the shopping experience, creating an identity for the store and a connection for the customer.

    It is the opposite of what some retailers do with self-checkout, which is to eliminate people so they can eliminate cost, but by eliminating people, they cut out human contact.

    To compete today, a retailer has to find a way to differentiate itself. How better than with a smile, a joke, and human face?

    Published on: January 13, 2003

    Excellent piece in the January 13, 2003, issue of The New Yorker, entitled “The Tastemakers.”

    The piece purports to be a brief but pithy examination of how Starbucks has managed to continue growing despite the tough economy. But it also makes a larger point about business that seems worth emphasizing:

    “Broadly speaking, there are two ways to build a business,” according to writer James Surowieki. “You can give people what they want but give it to them more efficiently, as Wal-Mart and Dell have done. Or you can persuade them to want something they didn’t previously want, as Starbucks has done. One might call this the tastemaker approach.”

    Successful tastemakers, the piece notes, “tend top have history’s wind at their backs.” And, they are right on in terms of defining a business and then executing it, they can be “powerful engines of economic growth.”
    KC's View:
    Here are the questions that this New Yorker piece makes us ask:

    • Since Wal-Mart has the first approach to business pretty much sewn up, does the retailer competing with Wal-Mart have any choice but to take the tastemaker approach?

    • Is the food retailing business doing enough to create tastes, has opposed to simply responding to obvious and existing consumer trends?

    Simple questions. But we’re not sure the answers would be reassuring -- to anyone without a home office in Bentonville, that is.

    Published on: January 13, 2003

    A Guest Column, by Glen A. Terbeek

    On Friday, we reported that Wal-Mart is exploring the possibility of creating a wholesale division that would compete directly with companies such as Supervalu and Fleming and sell grocery products to the very independent retailers the existence of which it threatens with every new store opening. This report, and the essay that accompanied it, generated a lot of email, a portion of which is included in “Your Views,” below. However, Glen Terbeek, author of “Agentry Agenda,” a member of the MNB community, and longtime industry observer, offered a perspective that we felt should be presented as a guest column.

      Will Wal-Mart become a wholesaler?

      Absolutely not. Not as the industry has defined wholesalers, anyway. However, supplying independents could be another step taken by Wal-Mart in defining the emerging new consumer industry model. Let me explain.

      Wal-Mart made its success by being very store/shopper focused, because Sam realized that is the only place that retailers and manufacturers really compete and make money. They built their “supporting” infrastructure and organization around this simple principle. This is demonstrated by such things as their Retail Link with shared item visibility (sales and inventory) down to each store, “net, net cost” trading practices, least cost logistics system, and treating each store as a profit/yield opportunity. These “support” practices have served them well, growing from a handful of stores in 1970 to what they are today; from a minor player to the dominant retailer.

      Wal-Mart is already what I call in my book a “Barrier-buster” for their own stores, creating a frictionless connection between the shoppers and the items they need or might want; again consistent with Sam’s simple principle. Isn’t this what all retailers, manufacturers and shoppers really (should) want? Now compare this to the logistics redundancy, buying and reselling national brands multiple times, inside margins, rewarding buying not selling, functional (or really dysfunctional) organizations, and other barriers that have developed in the current supermarket/wholesaler industry that do just the opposite.

      No wonder independent retailers don’t trust their current wholesalers; no wonder independents are potentially interested in doing business with Wal-Mart, their dreaded enemy. After all, independents know, if any retailer would know, that the only way to compete with anyone is by what happens in the store; not before the product gets to the store. Do they care if their national brands are delivered on the same truck that delivers to a Supercenter? I don’t think so. Not if it is the frictionless, least expensive, most transparent routing. After all, their current wholesaler delivers to competing independents, and their DSD suppliers also deliver to Wal-mart.

      I believe it would be very easy for Wal-Mart to extend their “Barrier-buster” infrastructure to independents (and even other self distributing chains). More scale would help their own stores as well as the independents serving markets that Wal-Mart is not able to compete in profitably, at least short term. It would also spread the operating costs of their infrastructure.

      However, I believe it would be a mistake for Wal-Mart to become the “Barrier-buster”. The “Barrier-buster” should be an open network of service providers that move product, information and funds between retailers and manufacturers. They would compete on quality of service, special product and handling skills, and price. Revenues would only be earned when true value is added. Accordingly, they should be independent of retailers or manufacturers to eliminate potential conflicts of interest and to focus their core competencies around the service that they provide.

      The new consumer model continues to emerge. It started many years ago. Wal-Mart continues to take the lead; and business as a result.

      In my opinion, there are two options; watch the model develop, complain, maybe restart ECR II, and go broke; or take a leadership role in its development and create long term wealth. Why should the wholesale community let Wal-Mart take their business just like the retailers let Wal-Mart use core grocery items to steal their traffic and business? Unfortunately, we all know why.

      The place to start is to honestly access the discontinuities of the industry’s “yesterday” business practices with the marketplace realities of today and tomorrow. There is still a short-term opportunity until Wal-Mart has over 50% market share. Then it would be tough.
    KC's View:

    Published on: January 13, 2003

    In the UK, The Telegraph reports that Wal-Mart’s Asda Group and J. Sainsbury are planning to submit separate offers for the equivalent of more than $4.8 billion dollars (US) to acquire Safeway Plc, which already has agreed to be bought by the Wm. Morrison chain for $4 billion (US).

    There is one report out of the UK that Sainsbury, which maintains it has been having merger talks with Safeway for some time, is willing to bid as much as $5.15 billion for the company, contingent on Safeway opening its books to be examined.

    Further complicating the issue for Wm. Morrison is the news that at least one of Safeway’s major shareholders, a fund for Scottish widows, has said it wants to hold out for a higher price for its shares.

    In addition, reports are that Safeway’s deal with Morrison gives it the ability to buy its way out in order to sell to another company.

    This latest news trumps press reports last Friday that Wal-Mart and Sainsbury were discussing a possible joint bid for Safeway, and then would have broken the company with 75 percent of the stores being absorbed into the Asda Group and the balance going to Sainsbury. It is possible, based largely on press speculation, that the stumbling block to a joint bid was an inability to agree on how the stores would be split up.

    The Observer, another UK newspaper, reports that government sources were telling it that the Competition Commission there was highly unlikely to approve an acquisition by either Sainsbury or Asda, the UK’s number two and three ranked supermarket chains, because it would diminish competition. A Morrison bid is viewed more enthusiastically because it creates a stronger entity that can compete with the UK’s top three grocery chains in a cutthroat retailing environment.

    Tesco is the nation’s number one-ranked food retailer, with better than 25 percent of the market.

    The bids from Wal-Mart and Sainsbury, if press reports are to be believed, would be structured differently. Wal-Mart reportedly would make an all-cash bid, while Sainsbury would offer a 50-50 mix of stock.

    Sainsbury reportedly met “late into the night” with financial adviser UBS Warburg, as it tried to decide what to do. There were reports Sainsbury CEO Peter Davis was facing some resistance from his board of directors, some of whom felt that there is little chance such an acquisition would be approved by the government; this morning, however, Davis seemed to feel he had sufficient board support to move ahead.
    KC's View:
    We suspect that the finale to this story is far from being written, with all sorts of twists and permutations likely to emerge.

    To us, it seems clear that the Wm. Morrison bid is the best one, both for consumers and for the broader health of the UK’s food retailing business. Four strong competitors is better than three.

    Equally clear is the fact that the UK’s grocery competition is being changed forever, with the inevitable result being very few major players and even tougher price-based competition.

    For US retailers, there must be a sense of deep foreboding as they watch events unfold there, wondering if it could happen here.

    Published on: January 13, 2003

    The New York Times reports that Kmart Corp. will ask the United States Bankruptcy Court this week for permission to close more than 300 stores, or one-sixth of its existing fleet of about 1,800 stores.

    The NYT also reported that Kmart will ask for approval to close yet another 122 stores, should it become necessary to do so.

    Kmart closed more that 280 stores last year in an effort to shore up its finances, but it hasn’t worked.

    Kmart would not confirm the numbers, and would only say that it expected to complete its evaluation of the current store network by mid-January.
    KC's View:
    Which, of course, is Wednesday...