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    Published on: February 25, 2003

    We continue to get email about the obesity issue. MNB user Sharon Riddle writes:

    “Why can't people take responsibility for their own actions and the choices that they make? Why is it the bartender's fault if you choose to drive drunk, don't you know when you are drunk? The tobacco company doesn't hold a gun to your head and make you smoke. We are bombarded everyday and have been for years on the elements of a healthily lifestyle, if you choose to do things that could harm your health, you are responsible, no one else.”

    For the moment, let’s play devil’s advocate. Sure, you harm only yourself. But what if an epidemic of obesity puts pressure on the health care system, which gets prohibitively expensive, which causes economic problems for the company, which then results in government action that requires higher taxes?

    If this is the chain of events, does it make sense to have some kind of social-cultural response to the issue so the long-term problems don’t emerge?

    Just asking…

    We got some email regarding our story yesterday about reported pricing discrepancies in various Wal-Mart stores in Dallas. One MNB user wrote:

    “If the discrepancies were being advertised by Wal-Mart…then that is a problem. If however, they are simply responding to local competitors, then that is good business and done all the time. The ability of a Wal-Mart to have autonomy in pricing is a competitive advantage.”

    And another MNB user added:

    “Funny, I purchased a box of steaks (8-6 oz) at my local Wal-Mart Neighborhood Market yesterday. The price listed on the display was $10. When I got to the checkout, I was charged $7. Needless to say, I'm going by there again today, and if the price is still $7, I'm getting a couple more.”

    Not if they read this first…

    Finally, MNB user Westall Parr was very interested in yesterday’s report from FMI’s MarkeTechnics conference about human genome research and its impact on the food industry:

    “I am looking to you for some real content leadership on the Genome stuff. It must have been fascinating to hear the guy speak - but I didn't get any sense of the awesome future - just out there.

    “More on the genome mapping and what is being done. You're in a position to lead in the educating of the food industry.

    “Go for it.”

    Well, if you didn’t get a sense of the awesome future that human genome mapping can bring about, we didn’t do our job right.

    But we may be to the end of our expertise on the issue, not having taken a science course since 1971.

    However, the presenter at FMI, Juan Enriquez, has written a book on the subject: As the Future Catches You: How Genomics & Other Forces Are Changing Your Life, Work, Health & Wealth.

    We’re planning to read it, and you might want to do the same. And we’ll report back…

    Until tomorrow, when we’ll be reporting from the annual Leadership Conference sponsored by the National Association of Convenience Stores (NACS)…
    KC's View:

    Published on: February 25, 2003

    In an reflection of just how pervasive the Wal-Mart business model is, United Airlines CEO Glen Tilton told the Chicago Sun-Times that as he attempts to transform his company and take it out of bankruptcy, he is using the Arkansas retailer as his archetype.

    How? Tilton told that paper that just as Wal-Mart evolved from being a rural discount store to being the biggest retailer in the world, offering a variety of formats and services to match the needs of varying demographics, United needs to offer a broader range of services for a wider range of customers.

    So, just as Wal-Mart offers discount stores, supercenters and neighborhood food markets, United will offer its traditional international service, expand its regional carrier operation, and develop a new low-fare carrier that could compete with the likes of JetBlue and Southwest Airlines.

    “This is not remarkable stuff,” said Tilton. “All I'm doing is resegmenting my market.”
    KC's View:
    Maybe it isn’t a remarkable goal, but achieving it will take an enormous amount of work, not to mention a large dose of concessions from the unions.

    We’re not sure we entirely buy the Wal-Mart metaphor, but we see where Tilton is going with this. It is, in fact, what more retailers probably should be doing. Segmenting the market as well as the offerings made to those various markets.

    Think about it for a minute, While Wal-Mart has the reputation of being the most mass-oriented of the mass retailers, maybe that’s not entirely accurate. Sure, it sells to everybody…but more and more, it is creating different kinds of stores for different kinds of markets. And perhaps it is fair to suggest that as it rolls out more and more Neighborhood Markets, and expands its urban strategy, this will become even more true.

    To compete with Wal-Mart, then, maybe it is equally critical for other retailers to segment their stores…to come up with new formats for different geographic and demographic markets.

    If the biggest retailer in the world is a mass retailer, maybe the only way to compete is to be a niche retailer…even if it means creating a series of niches that, when added together, creates mass.

    This isn’t a fully formed theory yet. It’s more a “it’s-five-in-the-morning-and-we’ve-already-had-four-cups-of-coffee” hypothesis.

    But we’re working on it.

    Postscript: We were taking a United flight yesterday and mentioned the Wal-Mart segmentation metaphor to one of the flight attendants, who said he was confident of United’s ability to survive, noting that he’d worked for the airline for 11 years and they’d been the best years of his life. His reaction: “They probably should have done it years ago.”

    But when we joked that we weren’t sure we wanted to fly “Wal-Mart Air,” he agreed. “I don’t want to work for Wal-Mart Air,” he said. “We’ll have to see what happens.”

    Published on: February 25, 2003

    • Seiyu, the Japanese retailer that is one-third owned by Wal-Mart, predicts a larger than expected loss for the current fiscal year, telling analysts that it expects to lose the equivalent of more than $700 million for the fiscal year about to end; last fall, it predicted a $180 million loss for the year. The change is due both to one-time losses connected to its department store operation, as well as price slashing because of slow sales.

    KC's View:

    Published on: February 25, 2003

    The Lakeland ledger reports that Wal-Mart has opened its first Florida Neighborhood Market, a 40,000 sq. ft. store in Oviedo, a suburb of Orlando.

    According to the story, “The Ledger did a price comparison between the Neighborhood Market and a Publix supermarket across Alafaya Trail in Oviedo. Among 12 common grocery items, the Neighborhood Market was cheaper on nine items, Publix was cheaper on two and the stores had the same price on one.” At least two more Neighborhood Markets are planned for Orlando, with Wal-Mart planning to then move west toward Tampa.

    Which leads the paper to ask how Publix and other competitors will differentiate themselves in a Wal-Mart world.
    KC's View:
    Good question. (Albeit one that Publix would probably not want to see posed in newspaper headlines…)

    While in Dallas for MarkeTechnics, we visited a Neighborhood Market there. The first thing that we noticed was how many out of stocks there were…and then we realized that it was late Saturday afternoon, and the store had been picked over. It was that busy. The stockers couldn't keep up...which is a powerful message in itself.

    To compete with that, you have to differentiate.

    Published on: February 25, 2003

    Saks Inc. announced yesterday that it plans to open FAO Schwarz toy boutiques inside a number of its department stores, selling toys, games, books, multimedia products and candy.

    Saks is investing in FAO, which is in bankruptcy protection. In return, it will put boutiques in a number of its chains, including Parisian and Carson Pirie Scott. Its flagship Saks Fifth Avenue chain is not included; separate negotiations for that deal are ongoing.
    KC's View:
    This seems, at least in terms of the marketing synergies, similar to the deals Albertsons struck to open up Toys R Us boutiques inside a number of its stores, and CVS made with KB Toys.

    Clearly, at a time when department stores are suffering through economic woes, this is a way for Saks to differentiate itself…and by allying itself with the famous upscale toy store, it creates a value network that should have broad appeal to shoppers.

    Published on: February 25, 2003

    Reuters reports that a number of snack food manufacturers, including Frito Lay and Procter & Gamble, are looking for ways to reduce the levels of acrylamides in their products, while still examining how the chemical is formed.

    Last year, there were numerous reports that high levels of acrylamides are found in foods baked or fried at high temperatures; bread, French fries and chips were identified as prime culprits. While acrylamides have been identified as causing cancer in rodents, they have not been firmly established as being carcinogenic for humans. In addition, there have been numerous conflicting studies about the impact of acrylamides.

    Still, the US Food and Drug Administration (FDA) has created an advisory panel on the subject, while stressing that not enough is known about the subject to suggest that people need to dramatically alter their diets.
    KC's View:
    Except, of course, that it probably makes sense to eat fewer chips and fries and eat more fruits and vegetables anyway.

    Published on: February 25, 2003

    The Detroit Free Press reports that as it continues to move toward its planned emergence from bankruptcy protection in April, Kmart will lay off about 1,000 employees from its Troy, Michigan, headquarters.

    The layoffs are scheduled for mid-April, and are part of the company’s reorganization plan, which is scheduled to be amended and resubmitted to the bankruptcy court this week.

    The paper also reports that there is speculation that Kmart plans to sell its headquarters building. There used to be some 5,000 people employed there, but with the new layoffs that will leave fewer than 2,000 employees inn the building, which could fetch as much as $24 million in the real estate market.
    KC's View:

    Published on: February 25, 2003

    Published reports say that Supervalu plans to more than double its Save-A-Lot fleet of stores from the current 1,100 to some 2,500 stores, though no timetable has been announced. Roughly 25 percent of the current fleet is corporately owned, and the concept contributes close to 30 percent of Supervalu’s gross revenue.
    KC's View:
    Interesting how, as Fleming bails out of retailing, Supervalu seems to see that it has greater value.

    Focusing on the Save-A-Lot format is a smart move, especially since it creates a clear alternative to the Wal-Mart shopping experience.

    Published on: February 25, 2003

    The New York Times this morning reports on the growth of radio-frequency identification (RFID) technology, which is being utilized in specific tests -- conducted by Tesco and Gillette in the UK, and Procter & Gamble and Wal-Mart in Oklahoma, for example -- to deal with issues of both security and product movement.

    RFID, according to the NYT, allows companies to tag “clothes, drugs, auto parts, copy machines and even mail with chips laden with information about content, origin and destination. They are also equipping shelves, doors and walls with sensors that can record that data when the products are near. ‘We want to track all of our merchandise, and that includes items that people are unlikely to steal,’” William C. Wertz, a spokesman for Wal-Mart, told the NYT.

    The paper cites one test at the Gap, where use of RFID helped sales because the company was able to keep from running out of popular items.

    The only thing keeping the tags from becoming ubiquitous is cost. Currently they cost roughly 30 cents apiece, but when they get down to a nickel or less, the industry and consumers can expect to see the technology explode, especially once product tags are as universally readable as bar codes.
    KC's View:
    The only downside to this that we (and others) see is the consumer privacy issue.

    How will industry convince consumers that once the product goes out the door, it no longer will be tracked? Or that if it is tracked, it will be for reasons that help, not hurt, the consumer?

    Good piece. And worth reading over at (Free registration required.)

    Published on: February 25, 2003

    Reporting in from the FMI MarkeTechnics Conference…
    DALLAS -- Technology, according to Jim Keyes, president and CEO of 7-Eleven, created an environment during the mid-eighties in which the company was suffering because it was focused on the wrong things. The company focused relentlessly on price, depended on products being “pushed” through by suppliers, and it almost killed 7-Eleven. “We had lost control of out business,” Keyes told a general session audience at the Food Marketing Institute (FMI) MarkeTechnics Conference yesterday.

    Now, Keyes said, 7-Eleven uses technology enable better customer information, better supply chain controls, better relations with suppliers, and a better environment for employees.

    "I can make every store as nimble as a mom and pop" with technology, Keyes said, noting that it allows 7-Eleven top better react to new products or local conditions.

    A new model for the new 7-Eleven approach is its doughnut program. The company knew it wanted to get into the burgeoning doughnut business, and had three choices: go the low price route, partner with a company like Krispy Kreme, or develop (at greater expense, with a longer ROI time) a quality, proprietary doughnut program. 7-Eleven picked the latter.

    Keyes also said, reflecting a common problem in the grocery industry, that 7-Eleven became too reliant on making money through buying, as opposed to selling. The company asked itself it if was making money by retailing, or by “subletting shelf space.”

    While Keyes pointed to the ways in which 7-Eleven is working to redefine the c-store business, he noted that it is not something his company can do by itself, despite its size and dominance. 7-Eleven, he said, cannot enable all these changes by itself. It must work with other retailers to create new and effective standards for the industry.

    In other news from FMI’s MarkeTechnics…

    • A new FMI report, Technology Review Highlights 2003, revealed that:

      • Nearly 30 percent of food retailers are now experimenting with self-checkout systems, which provide a solution to cashier shortages and improves customer service by allowing more checkouts to remain open during busy times. There are two main types of systems in use: self-scanning checkout lanes, which are more popular in the US, and hand-held (portable) scanners, which seem to be more common in Europe.

      • Data communication between stores and company headquarters has become a daily activity for food retailers. Currently, 90 percent of survey respondents use e-mail systems at store level and 85 percent provide stores with Internet access. Retailers are also using the Internet to communicate with vendors and customers. Nearly one-third of retailers use it to communicate regularly with vendors, particularly for product ordering.

      • Just over six in 10 companies surveyed use electronic data interchange (EDI) for transactions with suppliers. A smaller number, 29 percent, have participated in B2B exchanges, which allow companies to perform efficient transactions via a network of companies worldwide. Approximately 23 percent use scan-based trading (SBT), which allows retailers to synchronize supply and demand at the POS and to reduce inefficiencies that increase overhead in the direct-store-delivery (DSD) supply chain.

      • Just over one-quarter of companies offer home shopping and other store services through the Internet.

      • Biometrics, a method of scanning thumbprints, eyes or other unique physical qualities, are primarily being used in the retail arena as a method of customer and employee identification. Currently, eight percent of respondents are using this technology, but nearly three times that number plan to implement biometrics at store level. Fingerprint recognition systems are the most widely used. Two out of three food retailers employing biometrics have used the systems for managing employee attendance. Half have used them to authorize checks and 17 percent to process POS payments.

      • Wireless systems have become much more common at the store level, with close to 90 percent of the surveyed companies using some form of wireless communication. The majority, 66 percent, is using them for in-store communications. Nearly 40 percent use wireless networks at the POS, 16 percent use wireless scales and 6 percent use wireless hand-held payment terminals.

      • Companies surveyed expressed an increasing interest in the electronic product code (EPC), a system of microchips embedded in product packaging and radio frequency technology to communicate with readers throughout the supply chain. The chips provide individual item identification and enable retailers and manufacturers track products as they are produced, distributed and sold at checkout. Although commercial use of the EPC may be years away, several major manufacturers and retailers are participating in trial uses of the system. The technology is currently being studied and demonstrated at the Massachusetts Institute of Technology (MIT) Auto-ID Center.

      • Six our of ten companies surveyed said they have a policy statement on consumer privacy, and an additional 15 percent plan to establish policies. In addition, 90 percent of companies are using firewalls to keep shopper data private and an another 8 percent plan to install firewalls.

      • Just over half of the companies participating in the survey have stores capable of scanning the EAN-13 code at the POS. This multi-industry standard was established by the UCC to facilitate trade on a global scale. The UCC set January 1, 2005, as the deadline for North American retailers to be capable of handling the standard. Of those companies not yet compliant with EAN-13, 97 percent plan to be so by 2004.

      Nearly three in 10 are currently capable of scanning the EAN-14, an even more important standard that the food industry worldwide is expected to move to in the next few years. Ninety-five percent of remaining companies plan to be capable of scanning EAN-14 by 2004.

      At the database level, 67 percent of respondents are capable of storing EAN-13 transactions and just over one-third can handle EAN-14 ones.

    KC's View:

    Published on: February 25, 2003

    There were further developments in the accounting scandal that forced the resignations of Ahold CEO Cees van der Hoeven and CFO Michael Meurs. As reported yesterday on MNB and elsewhere, both executives had to resign when it was revealed that there were accounting irregularities at Ahold’s U.S. Foodservice unit, with a $500 million (US) overstatement of earnings, as well as an investigation into accounting problems in the company’s Argentine operations.

    At the very least, Monday was a black day for Ahold, which was founded in 1887. Not only did it lose two of its top executives in a cloud of scandal and ethical questions, but its stock lost more than 60 percent its value (and, as we write this, continues to drop in morning trading). After a decade in which it spent more than $19 billion (US) acquiring companies, becoming a major force in US retailing, the company came face-to-face with what some observers were terming a scandal of Enron proportions, bringing into question the company’s future existence.

    • Analysts were saying that the U.S. Foodservice business might have to be sold because of mushrooming debt. Ahold bought the company in 2000 for $3.6 billion (US). However, Ahold board member and acting CEO Henny de Ruiter said that there were no plans to sell the division at this time.

    • Analysts are saying that while U.S. Foodservice might be worth $5 billion (US), a forced sale in the bear market because of accounting issues likely would mean that the division would fetch considerably less.

    • There are some estimates that Ahold’s debt could be more than $20 billion (US) once all the irregularities are factored in. Ahold had stated that its debt was about 13 billion euros.

    • There is even some speculation that the company may have to sell more of its “crown jewels” if it is to survive, with the likely candidates being Albert Heijn in the Netherlands, and Giant and Stop & Shop in the US. Ahold says this isn’t in the cards at the present time.

    • It appears as if it is likely that the US Securities and Exchange Commission (SEC) will investigate the Ahold accounting irregularities. A spokesman for the SEC said that a probe is standard procedure whenever a company restates earnings.

    • Ahold's auditors, Deloitte Touche Tohmatsu International, said yesterday that it was not responsible for the accounting problems at Ahold because “some information wasn’t available to us.”

    • However, there are those who believe this is much ado about little. Burt Flickinger III, of the Strategic Resource Group, told USAToday that “this is one of the grossest overreactions that I’ve ever seen. There is a lot of institutional integrity at Ahold.”

    KC's View:
    Even if “integrity” and “Ahold” are two words that most people wouldn’t put in the same sentence at the moment, we’ll accept Flickinger’s cautionary note at face value. He’s right, there are a lot of calls to judgment in the passion of the moment, and we all have to careful about overestimating the impact on the company and the industry.

    We’ll certainly buy into the argument that there isn’t a lot of connection between Enron and Ahold. Enron, as it happens, was a kind of ghost business; there was no there there. You can’t say that about Ahold. It serves millions of customers every year, and has a real place at the table of global food retailing.

    Nevertheless, at the very least these new revelations do seem to be a lesson in how hubris can lead to one’s downfall.

    Several years ago, at the CIES annual summit, there was a presentation made by a consultant about the power of independent retailing. (We can’t remember the speaker’s name; it has faded now into the recesses of memory.) In that speech, one of the independent operators cited as being exceptional was Lees Supermarket in Massachusetts, which was quite successful despite the fact that it was competing with Ahold’s Stop & Shop and other chains. Owner Al Lees was quoted by the consultant as saying something along the lines of “Stop & Shop doesn’t even know where we are,” and that they were practicing a kind of guerilla marketing that kept them relevant to their shoppers.

    As were leaving the hall that day, we happened to be just behind Cees van der Hoeven, who said to the man he was walking with that “they should tell Mr. Lees that we know where he is now.” We got a chill at that moment; it just seemed…well, inappropriate.

    Well, we know where Al Lees is, too. Yesterday, he was prowling the halls of FMI’s MarkeTechnics conference, knowing that the lot of the independent retailer is hardly a happy one, and yet relentlessly looking for new ideas and concepts that will help keep his company thriving in the face of incredible competition.

    And while Al Lees is looking for new ideas to stay competitive, Cees van der Hoeven is looking at the tattered reputation of a company in turmoil. He is losing his job amid questions about his personal integrity and character. And he no doubt wonders what awaits at the bottom of the black hole that seems to have opened up beneath him.