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    Published on: March 25, 2003

    Reporting In From Seattle, Washington…
    Costco’s “Home” store in the Kirkland, Washington, just east of Seattle, gained a lot of publicity when it was announced because it represented a new direction for the company -- a warehouse club store that focused on just one of the categories featured in its traditional stores.

    It was a fascinating notion: that Costco could fuel growth by stripping out specific categories for specialty stores. And the company added to the intrigue by announcing that it would also test a gourmet grocery warehouse -- an idea it abandoned a few months after it was announced, saying that it would give too much attention to a non-core part of the business.

    Having visited the Costco “Home” store here is Seattle, we have to say that we think the company probably made the right decision – because we have to say that we just weren’t as impressed by the new format as we expected to be.

    It carries bedding, carpeting/area rugs, fine furniture, lighting, office furniture, silk arrangements, wall décor, and window fashions -- and while there are some nice items included, largely the selection seemed to be pretty tacky. Now, we recognize that this is a matter of taste -- that was is “tacky” to us might be a treasure to someone else. But the selection was just underwhelming, and not at all the treasure trove that we’ve found traditional Costco stores to be.

    If the company had followed this path in a gourmet grocery warehouse, we fear that the result would have been mediocre, not inspiring -- we were sort of hoping for Costco’s version of the fabulous Jungle Jim’s International Market. But that doesn’t seem to be the plan.

    That said, it probably isn’t fair to criticize a format Costco hasn’t even opened yet. But the “Home” store -- which compounds its problems by being in a remote office park that is very difficult to find -- clearly is just step one in a longer journey that Costco may be planning to take.
    KC's View:

    Published on: March 25, 2003

    Kmart Corp. posted a loss of $3.22 billion for last fiscal year, saying the loss was fueled by restructuring and store-closing costs as it tries to emerge from bankruptcy by the end of next month.

    However, it said the preliminary results for the first month of this fiscal year in the aftermath of its bankruptcy filing suggest to it that things are improving.

    "Although this company has a long way to go, we are encouraged by February's results, which demonstrate signs of progress," said Julian Day, Kmart's CEO, noting that the company hopes to be profitable again sometime next year.

    Sales for the year ended Jan. 29 dropped to $30.76 billion from $36.15 billion in 2001.
    KC's View:
    In our view, while Kmart certainly has a long way to go, what it doesn’t realize is that it is heading in the wrong direction. It’s spending so much time stripping out expenses, closing stores, and laying off employees that it doesn’t seem to be paying attention to the idea that it needs to create better, more engaging stores and hire people who can create a differential advantage at store-level.

    It talks about redesigned formats, but that doesn’t seem to get at the fundamental problems that Kmart has in its stores.

    Until it does that, it’s all much ado about nothing.

    Published on: March 25, 2003

    Dow Jones reports that U.S. Foodservice CEO James Miller has told a convention of vendors, customers and top salespeople in Las Vegas that the company’s outlook is “very bright,” and that "in the last month alone we have signed contracts worth hundreds of millions of dollars" and have "some very exciting things in the pipeline that we hope to announce very soon."

    Miller continued his standard line of blaming “a few trusted employees working outside our accepted accounting procedures" for the companies troubles -- which generally are described as consisting of $500 million in overstated profits that has helped create an accounting scandal for US Foodservice and its parent company, Ahold.
    KC's View:
    Las Vegas seems like the right venue for such a speech, since Miller seems to keep rolling the dice that he’s going to be able to avoid being tarred for his company’s problems.

    Miller certainly seems to placing his bets in a big way. The Washington Post reports this morning said that he has shuffled his managers in a way that will solidify his control of the company.

    This is, of course, the same guy who said that his company had nothing to do with the forced resignations of Ahold’s CEO and CFO -- a statement that the company’s board quickly distanced itself from.

    Published on: March 25, 2003

    In the UK, it is reported that retailing entrepreneur Philip Green wants to reconsider his desire to bid for Safeway Plc in the light of the volatile stock markets and the war in Iraq. Green also reportedly wants to see the company’s next quarterly report, due in a few weeks, before making his next move.

    Remarkably, Green at present is the only one interested in Safeway Plc that can actually buy the company. Competing bids from the likes of Tesco, Sainsbury, Wal-Mart and William Morrison Supermarkets have been referred to the Competition Commission because of concerns about the impact of their acquisition of the company.

    Yesterday, things got even more dicey when the government said it was reconsidering its definition of a ‘competitive local environment” is. At present, it is defined as when there are three different supermarkets within a 15 minute drive of each other, but regulators are considering a change to “four stores within 20 minutes of each other,” which would force almost anyone other than Green acquiring Safeway to divest a number of stores.

    In addition, The Observer reports that Green will not be allowed to break up and sell off huge chunks of Safeway if he buys the company.
    KC's View:
    Jeez, it was going to be a nice, simple little acquisition of Safeway when William Morrison first proposed it several weeks ago. And now….well, now it has turned into the proverbial hairball.

    Published on: March 25, 2003

    Reuters reports that despite rumors to the contrary, British shoppers have not begun stockpiling food and water because of fears that the UK will be the victim of terror attacks because of its support of the US in the war with Iraq.

    Tesco said that business had remained steady, while Sainsbury said that it had noted a “very slight” increase, but nothing approaching panic buying.

    Unilever said that the war was having” no significant effect” on sales.

    In the US, there also has not been panic buying. In fact, the opposite has occurred, as retailers blame what they call the “CNN effect” for slowing sales and customer traffic since the war began six days ago.
    KC's View:
    Sure, blame the media.

    Besides, here in the US we did all our binge buying a few weeks ago. How much more water, duct tape and plastic sheeting can we buy?

    Published on: March 25, 2003

    Royal Ahold announced that it is “stripping out the value” of its supermarket operations in Paraguay and Peru, which will allow its Santa Isabel chain in Chile to sell those assets. The Chilean group itself is being sold off to local retail group Cencosud, which is not interested in the stores in Paraguay and Peru.

    The company is divesting what it sees are “non-core” or underperforming assets in the wake of an accounting scandal that revealed that it had overstated profits by $500 million and that precipitated investigations by numerous Dutch and US authorities, plus a rash of lawsuits by investors and investor groups.
    KC's View:

    Published on: March 25, 2003

    Canadian convenience store chain Alimentation Couche-Tard Inc. has acquired 92 more Dairy Mart stores in the Midwestern United States for $3.2-million (US).

    Last August, it bought Dairy Mart, which gave it ownership of 287 stores and a management contract to run another 169. Since then, Couche-Tard has closed or sold 50 stores and acquired another 27. And now, with another 92 acquired, it has just over 350 of the stores in the US.
    KC's View:

    Published on: March 25, 2003

    The Kroger Co. has announced that in 2003 it plans to build, relocate or expand between 100 and 110 stores, remodel between 160 and 200, and open between 100 and 110 new fuel centers -- all of which should cost it $2 billion, not including potential acquisitions.

    Last year, the company spent a bit less and opened or acquired 151 stores and remodeled 138.
    KC's View:

    Published on: March 25, 2003

    • Aldi reportedly is looking for a location in Atlanta on which it can build a 400,000-square-foot distribution facility. The company currently has six stores in Georgia and plans more expansion there.

    • Tesco reportedly will expand its nonfoods offerings to include musical instruments such as drums, guitar, and keyboard. In the beginning the instruments will be sold via the company’s website, but there are plans to build it onto the company’s brick-and-mortar stores.

    • Reuters reports that analysts are questioning whether McDonald’s current strategy of investing heavily in its existing restaurants is a matter of “throwing good money after bad.” Rather, the analysts believe that McDonald’s ought to be providing dividends to its shareholders or buying back stock and rising earnings per share.

    KC's View:

    Published on: March 25, 2003

    • Walgreen Co. posted net income of $370.9 million in the fiscal second quarter ended Feb. 28, compared with $326.6 million a year earlier. Sales rose 12.8 percent to $8.45 billion, boosted by sales of prescription drugs and convenience foods. Same-store sales rose 7.7 percent.

    KC's View:

    Published on: March 25, 2003

    • Winn-Dixie Stores announced that Mark W. Matta has joined the Company as Senior Vice President, Human Resources.

      Matta has worked in Human Resources for companies that include PepsiCo and Sherwin Williams.

    KC's View:

    Published on: March 25, 2003

    In a story yesterday about loyalty marketing card programs, we pointed out that people who don’t like or trust them don’t have to use them, that retailers are more often accused of not using the data than misusing the data, and that they aren’t loyalty marketing programs anyway -- just technology-driven discount programs that have almost nothing to do with loyalty.

    These comments generated some email.

    One MNB user wrote:

    “Amen! While there are those who would say you are being picky about nomenclature, I say you are sooooo right. They are not loyalty cards. They are databases which get fed in return for discounts on merchandise. Calling them loyalty cards puts too much onus on the card, to produce loyalty and too little on the organization to utilize the data to HELP foment loyalty (by better serving the customer on multiple fronts).”

    And MNB user Judi Harris added:

    “It always amazes me that people are so concerned about privacy when it comes to what they purchase at the grocery store, yet I really don't hear people complaining that mortgage information and information about the birth of a child are readily available.”

    Another MNB user wrote:

    “I think one thing that's missed with these blasted cards is the fact that they're NOT being used to retain customers. Dominick's has a card program, but Safeway pretty much decided to stock the stores how THEY saw fit, and if they'd even bothered to look at the data they were generating, they'd have seen exactly where they were going wrong. Instead, they went in, stripped the stores of stuff they actually sold and replaced it with Safeway brand stuff.

    “Safeway is proof they're not using the data to retain loyal customers, because most of their business has gone elsewhere (read Jewel/Albertsons). These card programs are little more than a way for grocery chains to raise prices and they don't accomplish the objective of retaining customers.”

    Seems like Safeway can’t catch a break. Either it is accused of misusing the data, or not using the data and ruining the stores.

    To defend Safeway for a moment (and we don’t do that a lot), the company has been doing pretty much what a lot of companies have done -- it’s just that problems at companies like Dominick’s and Genuardi’s have gotten a lot of publicity and highlighted what are industry-wide issues regarding consolidation and local marketing approaches.

    Yesterday, we relayed up a great quote from Jay Fitzsimmons, senior vp and treasurer of Wal-Mart. “The misconception is that we're in the retail business," he told an investor conference. “We're in the distribution business.” Furthermore, Fitzsimmons added, while it is generally believed that Wal-Mart buys and sells at the lowest price, in fact Wal-Mart sells at the lowest price because it has the lowest distribution costs.

    MNB user Frederic Arnal responded:

    “I was pleased to see Jay Fitzsimmons' statement re Wal-Mart's business model. It validates a position I have held for years... that most supermarkets are in the distribution business, acting as a link in the chain from manufacturer to the consumer rather than as a merchant. The difference between these supermarkets and Wal-Mart is one of intent. Wal-Mart has chosen that model and created a format that enables the optimum execution of their business model. That's the key. Formats should enable and support a brand/market position. Other successful examples are limited assortment formats like Aldi, Trader Joe's, dollar stores, etc.

    “Most supermarkets mistakenly think that they can and should compete on price and thus concentrate on managing the "buy" side. Unfortunately, they have the wrong format. Full service stores targeting all consumers with the
    widest assortments possible, little supply side control while relying on manufacturers to determine marketing and promotional activity combine to create an inherent conflict. It would be far better for these large chains to differentiate themselves from their competition by becoming merchants. Compete on the "sell" side by more effectively identifying and meeting needs of target consumers with focused product offerings and strategic marketing.”

    Finally, we reported yesterday that the US Food and Drug Administration (FDA) is cracking down on the practice of buying prescription drugs from Canadian sources and having them shipped to the US. While the imported drugs often are less than half the cost that they would be if bought at US prices, the FDA is cautioning that they aren’t necessarily the same drugs as those sold in the US, even if they carry the same name and are for sale in the US.

    One MNB user responded:

    “I am both a pharmacist and an attorney with expertise in FDA law. From what I know, the drugs obtained in Canada are identical to the drugs in the United States. Personally, I would have no qualms about using those drugs from Canada. Nevertheless, U.S. law as it is now written does forbid the importation of these drugs from Canada, and the U.S. drug companies are using that law to enforce their segmented pricing arrangements. I predict that FDA enforcement of the present law will ultimately result in Congress changing that law. Any victory by the drug makers will be short lived.”
    KC's View: