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    Published on: February 27, 2003

    In a week filled with I&I stories (Irregularities & Indictments), it’s nice to have commentary on other matters…

    In response to our piece about the “Raise the Bar” coalition of independent retailers, one MNB user wrote:
    “The Raise the Bar model shows how independent operators can leverage their individual strengths to improve the performance of their stores. Collaborating and sharing best practices to improve operations and service levels appears to be making a measurable difference with this group of operators. But the most impressive part is the shared learning that is taking place, not just with store employees, but with the owners themselves. Taking advantage of these types of opportunities is just another way innovative independents can create additional points of differentiation and grow their businesses.”



    The obesity epidemic, and the appropriate response to it, continues to be a major discussion point. Earlier this week, when an MNB user championed the notion of personal responsibility, we responded: “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?”

    MNB S. Kirk Lammert wanted to get in on the discussion:

    “The epidemic of obesity that you spoke about is already here, in my opinion. You see it everywhere... people having to use scooters to get around just because they've become obese and not for any other reason. I have relatives in this condition. At least 40% of the time, she is getting medical attention of some type or another. Although this is sad and unfortunate, it is not something that needs to be legislated…it was their choice to get that way. It has to be their choice to reverse the trend.

    “Years ago, folks constantly heard about the "President's Council on Physical Fitness.” Believe it or not, this still exists (http://www.fitness.gov/). But you never hear about it anymore. All that you do hear about is this person suing the fast food industry for making them fat. Another one sues the tobacco industry for giving them cancer. And so on. It sounds as if they had no choice, no free will, but to swallow the meals and inhale the smoke. Being a former smoker and former obesity candidate, I say this is bull.

    “This society seems hell-bent on trying to find someone, anyone that will take the responsibility for their choices onto their shoulders. It is not society's job to keep people from doing things harmful to their health (anyone remember "Demolition Man" and that the star couldn't get salt because it was bad for you, so therefore illegal??). You make the choice. You deal with the consequences.”



    Another MNB user chimed in:

    “As the culture slides into further socialism in health care, less of your personal life will be in any way personal. From what you eat to how many children you have will be everybody's business because everybody has to pay for it. The banner of personal responsibility will be waved but not for the good of the individual - rather for the good of our 'new' socialist system. This isn't a 'What if' question, unfortunately, it's already here.”




    In response to our story about 7-Eleven CEO Jim Keyes described his company’s use of technology to be nimble, MNB user Charles Young wrote:

    “Listening to Jim Keyes speak to the repositioning of his company made me think of another large retail chain that should take his advice on defining their role. I am thinking of the US Post Office. They have some of the best retail space around, cluttered with old-fashioned services. They have not innovated since the zip code!

    “Their in-store service levels are awful, both in attitude and in customer care. While not sub-letting "shelf space" they certainly are not delivering a better product to keep their customers happy.

    “Faced with technology they turn away... paid no attention to the FAX and now don't recognize the challenge of E-mail. Finally, they made a deal with FedEx, because they could not offer an effective competing service of their own.

    Should the PO have just moved inside supermarkets? Should the PO have been franchised like Mail Boxes etc., should they be a retail check cashing service... there are many ideas and still opportunities. Perhaps when Jim Keyes is finished at 7-Eleven, he can help the PO... unless that system has already been finished off.”





    In response to our piece about a Wal-Mart Neighborhood Market opening near Orlando, and Publix’s attempts to differentiate itself, one MNB user wrote:

    “Publix will be able to differentiate themselves from Neighborhood Markets in the same way they've differentiated themselves from Kash and Karry, Albertson's, Winn-Dixie, et al. They are, by a long shot, an emotional favorite here in West-Central Florida, and I cannot imagine how the Bentonville Behemoth could sway the affection we all have for the folks in Lakeland. (Not to say it will never happen, just that I cannot come up with a way to make it happen...)

    “I've run my own price comparisons, and everything comes out about the same -- and "market basket surveys" printed in the Tampa Tribune back me up. Most consumers aren't always looking for the lowest price -- a sizable proportion, I think, are looking for a price that's not out of line, compared with a shopping experience that is pleasant. (Any idiot can mark prices down – it takes a decent businessman to make us want to come back.)

    “The stores are always a little cleaner, a little brighter, the staff a little more friendly and willing to help, and I simply cannot see this changing. Long live Publix.”





    Regarding the growth of radio-frequency identification (RFID) technology, and the issue of consumer trust, MNB user Kevin T. Foley wrote:

    “I do not think in this day and age of distrust (post Enron et al) that
    consumers are trusting of any institution. There are many consumers who will not use a credit card on the web because they distrust the vastness of it and the corresponding risk association.

    “So to think that consumers will trust any retailer or manufacturer to track or not track a product once they (consumers) take possession is hard to fathom in this current state of uncertainty.

    “It is appears to me that there is tremendous value to retailers and suppliers in the RFID. However, it does not translate to anything tangible to the consumer with the exception of a new way to invade their privacy. We must also keep in mind that most of our population is still "technically challenged" and it will not be until our children's generation are adults that the true tech generation is dominant in our country. So wide spread acceptance of any technology that smacks of getting too personal will be met with resistance.

    “That is my bet. Test it with a group of 40 somethings and see the answers you get and then ask 50 somethings and I bet the opinion is stronger.

    “This is an interesting question and dilemma and one that will be debated for some time to come I am certain.”


    We agree. Acceptance of these kinds of technologies will be largely generational. Manufacturers and retailers will have to do a good job of explaining to consumers why these initiatives make sense and why they should be trusted.




    On the subject of a Spanish language television commercial that Procter & Gamble aired on national television in the US, one MNB user wrote:

    “P&G may have a backfire from some of the English speaking people in this country. There are a few who believe that if you come to a country to live and work & benefit from there laws that you should be willing to learn to speak the language of that country. “



    On the subject of Target cutting prices to get more competitive with Wal-Mart, one MNB user wrote:

    “Target has a great niche in being able to market to a more affluent as well as specific age group. The worst thing they could do is allow themselves to be drawn into the price game with Wal-Mart. They have done a great job establishing value in their customers minds, and competing head to head with Wal-Mart on price will in my opinion devalue their image as well as their shopping experience.”




    Yesterday, we reported on the US Environmental Protection Agency (EPA) approving a specific kind of genetically modified corn, prompting the following email:

    “Three cheers for the EPA! By approving a GM corn resistant to rootworm they may be leading the way to help the agriculture industry lessen its dependence on petrochemical based pesticides. It seems to me that the trade-off between GM and toxic pesticides is simple and clear. We'll just sell all of those pesticides to the EU!”




    On the subject of new products being introduced by Coke and Pepsi:

    “Coke looks like they're hitting the "new flavor" notes successfully by using familiar flavors such as vanilla and tropical flavors. Vanilla Coke existed here long before it was bottled. And since Coke was there first, Pepsi has to try a different and apparently less successful tack or look very "me too!" in the market. Also, Coke is also keeping their brand identity very consistent even as they innovate.

    “True, this is a tale of two titans. But if one giant can gain an advantage through 'familiarity in innovation' and consistent creative brand identity over another, smaller competitors in any industry would be wise to put the same ideas to work for them.”





    One MNB user wrote in about our story that reported how United Airlines CEO Glen Tilton wants to make his company the Wal-Mart of airlines:

    “Maybe there's more to Tilton's ideas than readily meets the eye.

    “From Sam's Piper Cub, which I believe he flew himself, to today's fleet of 20 jets, there may be a message for UAL and their problems.

    “Maybe "Just In Time, Always" as a slogan to start with.”


    We like that slogan…




    On the subject of supermarket competition in general, especially seen through the prism of investigations of accounting practices, one member of the MNB community observed:

    “I have called on "The Big Four" supermarket chains in some capacity for over ten years, and while I consider many at these chains friends, tragically their demise is coming. They collectively refuse to change their business model to emulate Wal-Mart's consumer approach of guaranteeing low prices.

    “Their antiquated system of holding vendors hostage to prop up an artificial bottom line grossly neglects the importance of driving the top line effectively: give consumers only the brands they want at the lowest possible price. The continued use of slotting and ad fees to force brands down people's throats just does not work, and the current sustained weak economy exposes this shell game in a glaring way.”



    And, responding specifically to our coverage of the Ahold situation, MNB user Bob Schuller wrote:

    “No speculation or innuendo just pretty specific reporting of the facts. Would the article have been different had you not been so complimentary of Ahold in the past?”

    Good question. We don’t know the answer…though we have to admit that we’ve been surprised by the allegations coming out about Ahold this week.

    If anything, though, our past respect for the company fuels our outrage at what appears to have happened. Though we think you’d agree that we have a fairly low tolerance level for any of this nonsense. Whether it is a gazillion dollar global conglomerate that lies to its employees, customers and shareholders, or a small dot-com startup that does essentially the same thing, we find that lack of honor and integrity to be distressing.

    We’re not perfect. We make mistakes. And we try to be careful about climbing up on a high horse because it is so easy to fall off.

    But we keep wondering, what the hell were these people thinking? At what point did their ethical compasses stop working? Or when did they decide that they were going to ignore what their consciences were telling them?
    KC's View:

    Published on: February 27, 2003

    Just FYI…in case you didn't see it on the news.

    Fred Rogers, who for more than three decades invited millions of children to be his neighbor as host of "Mister Rogers' Neighborhood,” died of cancer this morning. He was 74.
    KC's View:

    Published on: February 27, 2003

    The New York Times reports this morning that office supply superstore chain Staples is abandoning its traditional advertising campaign built around selection, Instead of saying, “Yeah, we’ve got that” in its ads, Staples now will stress convenient shopping for time constrained customers, saying “That was easy” in a series of humorous commercials.

    This shift comes during the same week that Home Depot, the uber-hardware store, announced that it was shifting its advertising approach away from price and value, and toward do-it-yourself educational clinics.
    KC's View:
    As in the case with Home Depot, Staples faces a crowded and competitive field, and clearly sees that the needs of its customers have shifted.

    And, as with Home Depot, we would suggest that more than slogans have to change. We don’t have the same kind of strong negative reaction to Staples that we do to Home Depot, but it isn’t exactly an endearing shopping experience, either. We go to Home Depot because it is closer than any of its competitors. That’s it. If the competition opens so much as a half-block closer, we’d go there.

    If that’s typical of many of Staples’ customers’ attitudes, the chain has a lot of work to do.

    Published on: February 27, 2003

    Fleming Companies announced that William May has been promoted to Executive Vice President and President, Wholesale, succeeding Steve Davis, who will retire from the company after 43 years of service.

    May has served as Senior Vice President of Operations for Fleming since 2002. He joined Fleming from The Gap where he was the Vice President of Gap Global Distribution.
    KC's View:

    Published on: February 27, 2003


    • Wild Oats Markets posted $919.1 million in sales for 2002, a 2.9 percent increase over 2001; and net income of $6.9 million, compared with net loss of $43.9 million in 2001. Same store sales were up better than five percent.
      .
      For the fourth quarter, Wild Oats generated $221.8 million in net sales, down slightly from $222.1 million in last year's fourth quarter.



    • Longs Drug Stores posted said fourth quarter profits of $6.4 million, down from $21.8 million a year ago. Quarterly sales fell 3.3 percent to $1.17 billion from $1.21 billion, while same-store sales were up 1.2 percent.

      The company said it would eliminate 170 jobs in an effort to cut costs.

    KC's View:

    Published on: February 27, 2003

    The February 2003 Retail Executive Opinion Index (RSPI), from the National Retail Federation (NRF) and the Bank of Tokyo-Mitsubishi, jumped to a reading of 42.9 percent, up from 31.9 percent in January. In evaluating retail executives’ evaluations of monthly sales, customer traffic, the average transaction per customer, employment, inventories, and a six-month-ahead sales outlook expectation.

    The RSPI is based on a scale of 0% – 100% with 50% equaling normal.

    The most encouraging reading, according to the NRF, comes with the Demand Outlook, which improved to 45.8 percent from 29.7 percent for the prior month, representing strong expectations for the next six months.
    KC's View:

    Published on: February 27, 2003


    • Food Lion reportedly plans to renovate 54 of its 65 stores in the area this year, hoping the move will help it differentiate itself in a crowded grocery market, one that is only expected to get more competitive as Wal-Mart brings more stores to the region. The cost of the initiative has not been revealed.



    • Wal-Mart de Mexico (Walmex) said that it will invest more than a half-billion dollars expanding its store base by 61 this year, building on the strength that the company has shown even in a tough economic climate.

      Walmex currently operates close to 600 stores in Mexico.



    • The Panera Bread Co. reportedly is testing the meal delivery and take-out business, looking for ways to deliver meals to people’s homes, officers and even their cars. The program is called “Via Panera,” and is driven by the company’s successful bulk bagel business.

    KC's View:

    Published on: February 27, 2003

    Analysis & commentary from PlanetRetail.net:
    Content Guy’s Note: Our friends at PlanetRetail.net, because of their strong understanding of the European markets, are in a unique position to evaluate the ongoing travails at Royal Ahold.

    The resignation of Ahold CEO Cees van der Hoeven comes as the result of a year full of bad news culminating this week with the highly destabilizing revelations of accounting irregularities. Following a disappointing and disaster-ridden year, the latest episode has effectively demolished confidence in the company‚s financial performance.

    There is now a stark contrast between the operational strength of Ahold’s
    international store network and its credibility in financial circles. It seems likely that Ahold will be forced into selling some of its assets to repay its debts (especially if lenders are pressured into demanding early repayment), and there will be no shortage of rivals such as Tesco, Carrefour and Wal-Mart willing to take advantage. More flamboyant speculators have suggested that buy-out specialists such as Kohlberg Kravis Roberts – itself now free of the Safeway saga in the UK - might be interested in picking up Ahold in its entirety. The fall in its stock price so far values the business at a bargain basement EUR3 billion. Despite this, we would be remarkably surprised if the entire business changes hands.

    Ahold‚s ambitions to strengthen and expand its global empire are in effect frozen. The company has reiterated that it will follow its debt reduction program that focuses on organic growth and the divestment of non-core assets to free capital. After this week, however, Ahold might be forced to sell off far more precious assets than intended under the original program. In the event of lenders demanding early payback of loans, Ahold might find itself eyeing up the family silver.

    Cees van der Hoeven‚s successor will be faced immediately with a very tall order. No names have been mentioned yet, but we expect Ahold to appoint someone from the outside who can give the company a renewed sense of credibility.

    With the benefit of hindsight, it seems fair to say that the amount of acquisitions carried out under the reign of Cees van der Hoeven has given Ahold a severe case of indigestion. In its race to keep up with international development of the likes of Wal-Mart, Tesco, Carrefour, Delhaize etc, the business has bitten off more than it can chew. Ahold‚s ambition is beyond reproach, its execution obviously leaves something to be desired.

    The moral of the story? Ahold has acquired around 50 businesses over the
    last decade. If you buy that many closets, you inherit a couple of
    skeletons.
    KC's View:

    Published on: February 27, 2003

    The story you are about to read is true. No names have been changed to protect the innocent…because the more you find out, the more it starts to appear that nobody is innocent.

    Criminal indictments filed Wednesday by the federal government charged two former Kmart executives with accounting fraud related to a $42.3 million slotting allowance paid by American Greetings Corp.

    The former executives, who were dismissed by Kmart last May, are Enio Montini, who was senior vice president and general merchandise manager for the retailer's drugstore business, and Joseph Hofmeister, a vice president in the same division.

    The indictment says that Montini and Hofmeister conspired to improperly book the $42.3 million payment even though it was repayable under certain circumstances and therefore should not have been fully booked in that period. The US Securities and Exchange Commission (SEC) says that the executives lied to Kmart accountants about the deal, which resulted in a 2001 second quarterly report that was $42.3 million higher than it should have been.

    These charges are the first to emerge from the federal government’s probe into the Kmart accounting practices that led to the company’s bankruptcy filing in January 2002.

    One legal analyst told Reuters that in all likelihood, these charges are “stalking horse indictments” designed to squeeze lower level executives into testifying against their former superiors. In this case, one of the likely targets is former Kmart CEO Charles Conaway, who was accused this week by Kmart of malfeasance in his leadership of the company. Kmart is attempting to recover $5 million in retention loans and $4 million in severance that he was granted by the board of directors.

    Conaway maintains he acted honorably and in the best interests of the company.

    The bankruptcy court judge yesterday tossed out Conaway’s request to get early access Kmart's insurance policies so that he could cover his legal expenses; the judge said Conaway should be treated just like other execs in the case.

    Reuters reports that American Greetings management says that it has been cooperating with the investigation, and that it believes it has no exposure in the matter. For at least one of the indicted executives, however, there already appears to be some fallout. Montini, who became a senior vice president with Rite Aid Corp. last fall, resigned from the drug chain yesterday.

    If convicted, Montini and Hofmeister face a maximum of 10 years imprisonment and $1 million in fines for the securities fraud, and five years in prison and a $250,000 fine for the conspiracy charges,
    KC's View:
    It isn’t hard to imagine that the lawyers for Montini and Hofmeister sitting down with government attorneys and suggesting that they’ll testify against Conaway and maybe a few other senior executives if the charges against them get dropped or lessened.

    This all will get uglier before it gets resolved. We still think that members of the board of directors, who presided over all this nonsense, are as culpable as anyone else for the Kmart debacle.

    What’s really amazing -- and somehow not at all surprising -- is that with all this legal wrangling, Kmart isn’t any closer to developing a compelling retail format that will help it survive long-term. Sure, it may emerge from bankruptcy in April…but as far as we can tell, it isn’t even close to emerging from its creative bankruptcy.

    The company’s ethical bankruptcy is now exposed for the world to see.

    And speaking about different kinds of bankruptcy…

    What can you say about a retailing system, not limited to Kmart, that requires a manufacturer to pay tens of millions of dollars in slotting allowances just to get on the shelves of a store? What can you say about a system in which retailers make more money on the buy than the sell?

    We think that a lot of daylight is going to be shed on systems and practices that legislators and consumers alike will find somewhat distasteful. It’ll be interesting to see if there is a backlash against a system that seems so out of synch with how retailers ought to be making money.

    Published on: February 27, 2003

    There are continuing developments in the accounting scandal that has enveloped Ahold, the world’s second largest food retailer. As reported earlier this week, the Netherlands-based retailer revealed accounting irregularities that consisted of an overstatement of revenues in the neighborhood of a half-billion dollars. Its CEO and CFO were forced to resign, and the company is dealing with a myriad of legal issues:

    • In addition to the investigation being conducted by the US Securities and Exchange Commission (SEC), the US Attorney’s office in New York has begun a probe into the affair, looking at both Ahold and its US Foodservice subsidiary.


    • The Washington Post reports this morning that the “criminal and regulatory investigations are likely to go beyond the specific accounting irregularity that led to the restatement -- how U.S. Foodservice booked rebates from suppliers -- to a broader look at the company's finances.”


    • Securities regulators in the Netherlands also have begun an informal inquiry into allegations that there may have been insider trading conducted by executives of the firm.


    • The Washington Post also reports this morning that while US Foodservice has suspended Mark P. Kaiser, chief marketing officer, and Tim Lee, a purchasing executive, the subsidiary’s CEO, James L. Miller and CFO, Michael Resnick, have not been suspended.


    • Dow Jones reports this morning that a pension fund based in New York has filed a lawsuit against Ahold. It is seeking class action status for the suit.


    • The Wall Street Journal reports that regulators in the US are trying to ascertain whether US Foodservice executives deliberately inflated supplier rebates and promotional allowances to the company.


    • Dow Jones also reports this morning that the Dutch Foundation for the Investigation of Corporate Information has filed a suit against Cees van der Hoeven, the ousted Ahold CEO, alleging that he may have been an accomplice to embezzlement.


    • The New York Times reports this morning that in the Netherlands, skittish Dutch shoppers have been rushing in to Ahold’s Albert Heijn stores to trade in promotional stamps, apparently concerned that the clock is ticking on Ahold’s existence.


    • The New York Times also reports this morning that under the terms of an agreement, Ahold may be required to buy out its partners in ICA, the Scandinavian supermarket chain, sometime in 2004, which could cost it the equivalent of close to another half-billion dollars – money it may not have. This raises yet again the specter that Ahold may have to start selling off assets for cash.


    • If Ahold does have to sell off assets, there will be no dearth of companies willing to help it out. The Financial Times reports that Tesco executives have said that they would be interested in a number of Ahold units, and Sainsbury also is reported by FT to be a likely bidder.

      In addition, FT reports that Kohlberg Kravis Roberts, the US buyout firm that dropped out of the bidding for Safeway Plc in the UK, would be interested in getting in on the Ahold action.


    • Finally, Ahold reportedly is looking internally for a new CEO to replace van der Hoeven, though it may go outside the company if an appropriate candidate cannot be identified.
    KC's View:
    Pardon us while we catch our breath…

    We want to make sure that amid all the legal and financial issues, the human element in all this is not lost. We remain aghast about the story we had yesterday, saying that because Ahold had created a program that encouraged its employees to buy stock in the company and to borrow money from the company to make those purchases, the freefall being experienced in its stock price means that many of them are now in debt to the company for amounts far less than the value of their shares; in some cases, employees owe Ahold millions of dollars, at least on paper. The loans apparently don’t have to be paid back until 2008, unless the person leaves the company, in which case they have to be repaid immediately.

    Think about the Ahold employee, whether in the store or at headquarters, who came to work on Monday morning thinking that he or she had a good, solid job at one of the world’s most respected retailers, and that the future looked good.

    First, they found that the leadership had to quit because of “accounting irregularities.” Then they found out that there would be a plethora of legal investigations into virtually every action taken by the company. Then they saw that the stock price was in free fall, and that suddenly they owed the company a small fortune because of a stock purchase that was now almost worthless.

    And what does the future hold? Well, conceivably, if this shell-shocked employee gets laid off because Ahold has to cut costs, during the exit interview not only won’t the person be handed a severance check, but he or she could be asked to write one to cover the stock purchase loan.

    Whatever happens to Ahold, we hope that regulators keep their eye on these kinds of people. Ultimately, it really isn’t about money. It is about trust betrayed, and the very human cost.

    Except, of course, it’s also about money.