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    Published on: March 31, 2003

    The Wall Street Journal reports this morning that Ahold’s US Foodservice division, which already has had to declare that it overstated profits by a half-billion dollars, may have yet another accounting problem -- the failure to pass along millions of dollars in rebates to government customers.

    According to the WSJ, many government customers -- which include the military, school systems and prisons -- have what are known as “cost-plus” contracts, which have them paying the company’s costs plus a small premium. If the costs of products are lowered because of promotional allowances, then the costs to the government ought to be lowered as well.

    The newspaper quotes “current and former senior managers” as saying this may not have happened.

    However, for the record US Foodservice reportedly is saying that it complied with the terms of its government contracts, though it did need to study the matter more.

    In related news, Sara Lee Corp. said that it had not acted inappropriately in its relationship with US Foodservice. This statement followed Friday’s report that the US Securities and Exchange Commission (SEC) investigation into accounting irregularities at Ahold and its US Foodservice division could be expanded to include Sara Lee Corp. and ConAgra Foods,

    The company also said that it has not been in contact with investigators about the Ahold accounting scandal.

    The Wall Street Journal reported on Friday that federal investigators have been told that some representatives of major US food manufacturers colluded with executives of US Foodservice to inflate supplier rebates.

    A person familiar with the investigation told the WSJ that the expanded probe could have serious implications for the $500 billion American food industry that how retailers buy products from manufacturers.
    KC's View:
    We also reported on Friday that US Foodservice’s CEO, James Miller, was being clear that he does not intend to step down. "I intend to stay and run the company," Miller said. "I have been running this company for 30 years and don't see any reason to step down."

    Enough of these stories come out, and you begin to wonder if he really was running the company, and what kind of accountability there is.

    Because either Miller knew what was going on at US Foodservice, or he was asleep at the switch.

    Published on: March 31, 2003

    Content Guy’s Note: Each Monday, we are featuring an article previewing some aspect of the annual Food Marketing Institute (FMI) show, scheduled for May 4-6 in Chicago.

    The hyper-competitive world of food retailing requires that stores have to find ways to differentiate themselves on a non-price basis, to leverage their unique strengths to defend against competitive channel encroachment and grow profitable sales.

    On Tuesday, May 6, in an FMI Learning Lab entitled “Defending Against Competitive Channel Encroachment,” Christopher Hoyt and Nancy Swift of Hoyt & Company will focus on five key points on which supermarkets differ from other retail formats, creating the basis for a sustainable growth. And, they will look at fifteen categories where supermarkets should concentrate to rebuild traffic without going broke in the process.

    For a preview, MNB conducted an exclusive e-interview with Nancy Swift.

    MNB: You say that “differentiating your company on a non-price basis is key to attracting new customers and building loyalty,” and yet it would be my perception that it is the rare supermarket company that doesn’t advertise price and doesn’t focus more on efficiency than effective marketing and brand building. True? Has this always been the case historically, or is it more a result of the confluence of ECR and the age of Wal-Mart?

    Nancy Swift: Very true! Historically, supermarkets competed with other supermarkets. They had similar business models and could compete with each other by advertising hot prices on different items each week, creating a low price impression (the high-low strategy). With the advent of Value Discounters (Supercenters, Clubs and even Dollar Stores) supermarkets cannot compete on price. Value discounters have lower acquisition costs, operating efficiencies and a merchandise mix that the Supermarket business model cannot replicate. Despite this, most supermarkets continue to try to compete almost exclusively on price -- in effect, advertising a weakness. Ironically, many supermarkets have actually weakened their inherent strengths by their attempts to be efficient at the expense of being effective -- reducing assortment via Category Management is one example.

    MNB: Can you explain briefly the “five key points” that you’ll be focusing on in your session that supermarket retailers should be focusing on?

    Nancy Swift: Supermarkets may be disadvantaged on pricing but they absolutely have inherent strengths. Key among these, as we see them, are: 1) Household penetration and shopping frequency; 2) convenience (location/store size); 3) expertise in perishables; 4) assortment; 5) community ties/involvement.

    MNB: One of the comments I always run into is that people are concerned that by not focusing on cost and price, they inevitably will go broke. How do you overcome that concern?

    Nancy Swift: When you differentiate by price alone, you are a commodity. If you differentiate on price alone AND you cannot compete on price, you are doomed. Consumers buy value, not price. Value encompasses much more than price alone. In fact, price is usually a minor component of the whole value equation. Value includes many other things that appeal to the needs and aspirations of the consumer. Supermarkets see this in action every time a customer chooses a branded product over a private label -- which is about 80% of the time. That said, this does not mean that we don't feel price is important. Some categories have very strong reach -- the combination of household penetration and purchase frequency. These are categories where price awareness is very high and supermarkets can convey a low price impression by focusing their price-promotional efforts on these categories.

    MNB: Should suppliers be more than just a source of product and promotion money? And if so, how so?

    Nancy Swift: Absolutely. The opposite of a commodity is a brand. Brands command premium prices because they add value or perceived value beyond the physical aspect of the product. Supermarkets need to command premium prices -- to be a brand -- yet many supermarkets only know how to be a commodity. Supermarkets have 1500 suppliers who know how to create a brand and, based on the suppliers we know, they would be glad to help. This is the strategic part of co-marketing that has too often been overlooked.

    MNB: Can you give an example of a non-supermarket retailer that has effectively done what you are suggesting, and what the results have been?

    Nancy Swift: There are lots of examples of retailers who have built a brand: Nordstrom's, Neiman-Marcus, Costco, Best Buy, Target, Kohl's, Toys R Us, PETsMART, Sears' Great Indoors, Walgreen's, Saturn dealerships and Starbuck's are but a few examples. Branding has allowed Neiman-Marcus to sell its private label at retails higher than many of its suppliers' brands, allowed PETsMART to expand into veterinary services and pet boarding and allowed Starbuck's to sell their coffee on supermarket shelves all over the country. There is no question in our minds that a Kroger, Albertson's or Safeway as well as smaller chains and independents could differentiate themselves from the rest of the pack (profitably!) if they learned how to brand their stores.
    KC's View:

    Published on: March 31, 2003

    MSNBC reports that an “environmental scan” published by the American Dietetic Association (ADA) highlights how a variety of trends and circumstances create a complicated picture of how America eats -- which means that it can be tough for retailers and manufacturers to gauge the emphasis they should put on certain segments of the business.

    For example, the US population is aging, with people living longer than ever before and leading more active lives because of a great focus on healthful eating and physical exercise. However, there also are additional issues created by the trend, such as the rising rate of cancer and Alzheimer’s disease.

    Even as people strive to eat better so can be healthier into their older years, however, there also is the nation’s increased levels of obesity, which causes higher rates of diabetes, high blood pressure and certain forms of cancer. This is usually connected to the nation’s increased dependence on convenience foods, which is driven by highly pressurized and time-constrained lifestyles – and which, by their very nature, tend not to include the plant-based foods that many nutritionists believe are the basis of a healthy diet.
    KC's View:
    Life and business aren’t made any easier by the fact that there are so many conflicting messages going to consumers about what is important in terms of diet, exercise, and other lifestyle issues.

    Sorting through these issues and conflicts is a daunting task…and we don’t envy the folks who actually have to do it (as opposed to writing about it, which seems a much easier task).

    It seems to us, though, that perhaps the food industry makes a mistake if it only tries to track trends and deliver on them. Sometimes, it is leadership that is called for, not trend tracking. Trends, maybe, just are signposts…and it is when companies take real chances that innovation is achieved.

    Published on: March 31, 2003

    A perfect example of the kind of information that consumers have to deal with can be found this morning on SupermarketGuru.com

      There is a new survey out (and there’s ALWAYS another new survey on matters such as these) suggesting that when you eat too much comfort food, you’re actually frying your brain.

      The Franklin Institute, a research facility and science museum in Philadelphia, reports that when potatoes are deep-fried, the shape of fatty-acid molecules is changed into an unnatural shape. These transformed molecules, called trans fats, change the structural integrity of brain-cell membranes, setting the stage for cellular degeneration and diminished mental performance when you eat the fries.

      There even are implications for people who are using high-fat, low-carb diets to lose weight. This research suggests that while they may not be stupid for making such a choice, making the choice of such a diet could make them stupid in the long run.

      Janelle Walter, who teaches nutrition for the family and consumer sciences at Baylor University, told the Detroit Free-Press that “the brain is fueled by glucose, and glucose comes from carbohydrates. The proper diet consists of 55 percent carbohydrates, 15 percent protein, and 30 percent fats. The key, for the brain and the body, is to maintain the proper balance."

      In other words, complex carbs are good for the brain, and too much fat is not.
    KC's View:
    Everyone clear on this now? (At least until a contradictory survey or study comes out next week?)

    For more perspectives on the consumer issues that affect how people shop and eat, go to www.SupermarketGuru.com.

    Published on: March 31, 2003

    Forbes reports that while last year Citigroup became America’s first trillion-dollar company, that valuation was based on assets, not sales, and “financial institutions have always had outsized asset bases.”

    However, the magazine estimates that Wal-Mart will top the trillion-dollar mark in actual sales in just ten years, based on its recent annual growth rates.

    To put that in perspective, General Electric – based on its annual growth history – is expected to hit the trillion-dollar sales level in 2029. And, the magazine writes, “barring a huge acquisition, no other Forbes 500s company will hit even half a trillion in sales within the next 50 years.”
    KC's View:
    Of course, Wal-Mart’s ability to reach this milestone is dependent on a lot of things falling into place correctly. It has to not only maintain its ability to grow within existing markets, but also acquire new companies or expand into markets and countries into which it has not yet ventured.

    And, it has to be successful at getting into new lines of business. Forbes notes that the grocery business will be a prime engine of this growth – which isn’t exactly good news for anyone else who happens to be in the grocery business.

    In related news, by the way, Wal-Mart Stores reportedly has solidified its position atop the Fortune 500 list, with annual sales of $246.5 billion. The editors of that magazine are speculating that, based on the company’s growth strategy, it may be a very long time before it is supplanted.

    Published on: March 31, 2003

    The Chicago Tribune reports that as Kroger and Supervalu experience second thoughts about bidding for Safeway’s Dominick’s division in Chicago, leveraged buyout specialists Kohlberg Kravis Roberts & Co. (KKR) and Yucaipa Cos., the private equity vehicle of Ronald Burkle, are engaged in a contest for the division with Wisconsin-based Roundy’s. There also is said to be the possibility of a bid by Dominick’s current management team.

    The ironic thing about these bids is that they all involve companies that had a previous connection with the company. KKR has had a major stake in Safeway, which is selling the company. The Tribune notes that Yucaipa used to own Dominick’s, having acquired it from the founding DiMatteo family and taken it public in 1996. And Roundy’s is run by former Dominick’s CEO Bob Mariano.

    The Kroger and Supervalu hesitation apparently is linked to a preference to grow in the Windy City organically.

    Safeway decided to sell Dominick’s after a bitter labor battle last year, which only cemented its conviction that it would not be able to make the division profitable under its existing union contracts. A decision is expected by the end of June.
    KC's View:
    The criticism, of course, is that Safeway, in following conventional wisdom, alienated consumers by centralizing operations and eliminating the local products and touches that made the company special.

    Clearly someone thinks they can make Dominick’s work.

    Published on: March 31, 2003

    The Lakeland Ledger reports that Publix Super Markets remains pretty much on course to fulfill the commitment it made two years ago to build 340 new stores by 2006. There are 69 new stores planned for this year, down slightly from last year’s 76 new units and higher than the 51 opened in 2001.

    The company plans to spend about $600 million on new stores, renovations, and warehouse expenses, the Ledger reports.

    “The only challenge is the economy, the same as everyone else,” retailing analyst Andrew Wolf tells the paper. “The only chain adding more stores is Wal-Mart, which is adding about 200 stores a year.”

    Remarkably, roughly half of Publix’s growth is in its home state of Florida, even as it expands its operations in Georgia, South Carolina, Alabama, and Tennessee.
    KC's View:
    The next question seems to be, when will Publix move into North Carolina? It doesn’t seem to be in the cards at the moment, but we’d think that it would be an inevitable move if the company is going to continue to meet its growth targets through 2006 and beyond.

    Published on: March 31, 2003

    The Minneapolis Star-Tribune reports that a dueling lawsuits filed by Rainbow Foods and Cub Foods have been settled, with terms undisclosed but Cub reportedly receiving some sort of payment from Rainbow.

    This is the same case that resulted in an executive from Fleming, which owns Rainbow, challenging Cub president John Hooley to a charity wrestling match to determine which company was in the right. Holley and Cub refused the offer.

    Cub had charged that Rainbow was using illegally obtained advertising information to undercut Cub on price. Rainbow counter sued, saying that Cub had hired away Rainbow execs in order to obtain proprietary information about the company.
    KC's View:
    It’s almost too bad. We would have enjoyed that wrestling match, and would have volunteered to emcee…

    “Let’s get ready to ruuuuuuuumble…….”

    Published on: March 31, 2003

    Blaming a weak US economy, lessening demand for high-end wines, and a glut of grapes that has driven down prices, Robert Mondavi Corp. announced that it is going through a restructuring.

    The San Francisco Chronicle reports that Mondavi will lay off between 80 and 90 employees, and centralize its marketing and vineyard management functions to eliminate redundancies.

    The company also said that it will have a quarterly loss of between $1 million and $1.5 million – which will be only the third loss the company has had since going public almost a decade ago.
    KC's View:
    We were speaking with a retailer the other day who told us that his company had been trying to figure out what to do about declining wine sales. So, the company selected a specific period of time to compare to a year earlier – and discovered that while sales were off, the company had in fact sold one less bottle that during the same period a year earlier.

    For the record, we're trying to do our share to help the wine industry's efforts...

    Published on: March 31, 2003

    Bloomberg reports that the UK’s Office of Fair Trading (OFT) created a fine bit of confusion last week’s with its decision to refer bids from Tesco, Sainsbury, Wal-Mart and William Morrison Supermarkets to the nation’s Competition Commission for further investigation of monopoly-related issues.

    The OFT only allowed a potential bid from retail magnate Philip Green who does not own any supermarkets, to go unchallenged -- and now, according to various reports, Green is re-evaluating his bid before going forward.

    It came as some surprise that the Morrison bid was referred, since many analysts felt that it didn’t have the same issues as the other three larger companies. But while Morrison had been saying that it likely would have to sell just seven out of Safeway’s 479 stores to put antitrust issues to rest, the current thinking is that it might have to sell off as many as 70 -- in part because the OFT is defining “local competition” in broader terms than ever before.
    KC's View:
    One of the prevailing views among UK observers seems to be that the OFT decision was right in line with the strategy eschewed by Tesco and Wal-Mart, both of which just wanted Morrison to be lumped in with them.

    Now, especially with Green perhaps having second thoughts, it seems to be jump ball…

    Published on: March 31, 2003


    • Dole Food Company, Inc. ceased being a publicly traded company last Friday, and became, in a $2.5 billion merger transaction, a privately held company owned by David H. Murdock.

    KC's View:

    Published on: March 31, 2003


    • Sainsbury, Britain's second-biggest supermarket chain, reported like-for-like sales growth of 1.3 percent in its fourth quarter, compared with 2.8 percent growth in the third quarter. The company, which is engaged in a battle to acquire Safeway Plc in the UK, said the decline could be attributed to excessive cost cutting at the expense of sales efforts.

    KC's View:

    Published on: March 31, 2003

    Lots of mail to sort through on this busy Monday morning at MNB World Headquarters…

    Let’s start with a response that we got to our story Friday about the possibility that the investigation into Ahold’s alleged misdeeds could extend to major packaged goods manufacturer. We’ve said all along that this has all the earmarks of a drama that will unfold slowly and painfully; on Friday, we wrote that “the onion of Ahold’s misery continues to be peeled away.”

    One member of the MNB community wrote:

    “’The peeling back of the onion,’ as MNB puts it, is perhaps the single
    biggest opportunity for the grocery channel to get well.

    “When performance metrics require fictitious profit lines to be met on profit and loss statements, people will do whatever they need to do to meet their accountabilities. Some of today's practices would be deemed less than legal if we, as individuals, practiced the same things in our personal lives.

    “The billing of post audits that take extra days years after the event, the over billing that occurs in many a reclamation center, the so called logistics fees that warehouses somehow justify, the unilateral deducting for new store distribution allowances and such, just to name a few, simply are not justifiable in most cases. Imagine if you decided to pay $10 less on your electric bill for a month simply because you felt that you were out of the house for a week and that you were over billed as a result. Does anyone believe that you would not be turned off for not paying and a mark put on your credit history.

    “The accountability is on all participants in the industry. Retailers and wholesalers need to move towards recognizing that any profit that is earned is only earned on a consumer sale.

    “Manufacturers have to draw the line in the sand and strongly enforce their conditions of sale. Without that, their trading partners are going to push to the limit, their activities in regards to creative profits. Fear of customer re-actions have to go away.

    “This may seem overly simplistic and in some ways it is, the bottom line is that as a general statement, the grocery industry has become a mesh of creative income practices. As long as the so called ways of "making" money exist and are allowed, the eye is off of the ball that Wal-Mart is so clearly focused on...the consumer.”


    Another MNB user wrote:

    “It is painful to see a company as noble (perhaps a strong word but several months ago it seemed to fit) as Ahold struggling. But sometimes badly needed changes require a catalyst. Perhaps a revolution in the way the food industry does business would be painful but beneficial - for the survivors anyway.”

    Agreed.




    Last Friday, we noted that The New York Times was reporting that American retailers are having to depend on sales to bring people into the stores, even as new spring merchandise appears on store shelves. People are accustomed to bargains and don’t want to buy if they don’t see themselves as getting a value. We wrote that retailers have made the mistake of allowing “value” to be defined as the cheapest item on the shelf. This is particularly true of the supermarket industry, but it affects any segment that competes with Wal-Mart.

    One MNB user agreed with our evaluation:

    “Your comments about value formats and strategies perfectly described the problem with most food and drug retailers supposed "Wal-Mart" strategy. Instead of trying to beat WM at its own game, competitors big and small would do better by offering the consumer convenient alternatives and products that are either reasonably priced or of recognizably better quality.

    “Thanks for your level-headed views - I enjoy reading them everyday!”


    We’re blushing…and thank you.

    However, not everyone thought our story merited attention, as MNB user Denise Remark wrote:

    “Twenty years ago I worked for May Company. Even then, lots of my customers would tell me that they seldom if ever bought anything at regular price because within a couple of weeks, there would be a sale or promotion of some sort & they could get the new item off-price. And besides, who doesn't want a value (real or perceived)? So with all due respect, this isn't really news. (Well, maybe it is to the NYT...)”

    Fair enough.




    Writing in about the continuing saga of obesity in America, one MNB user wrote:

    “I think it's time the parents of obese children take the responsibility. Wanna bet the parents who filed suit are up to their (expletive deleted) and chinny chin chins in fat!”

    Maybe. But we also think compassion and education are called for as well. In our mind, that isn’t a sign of society’s weakness, but a sign of its strength.




    On the subject Of McDonald’s trying to get healthier in its meal offerings, we did get one dissenting opinion from MNB user Harry Yanushonis:

    “Being a father of three boys I really think that McDonalds is barking up the wrong tree trying to put fruit and veggies in the kids happy meal. I really do not think that my kids or any kids for that matter are going to be asking these items at a McDonalds. It's time that they stop trying be something they are clearly not and started focusing on the core product "fast food". “




    We had a story last week about retailers that were laying off people at the top, and suggested that it seemed like there might be a trend afoot. One MNB user responded:

    “Layoffs at the top? Long overdue in many, many businesses. It isn't a big secret that big business is just as capable of creating bloated bureaucracies as big government.

    “Here's a similar heretical idea. How about the folks in secondary and higher education adopting the same philosophy? The current budget crunches in state and city education are mandating huge cuts in those institutions. However, while we see them cutting out classes, teachers aids, whole programs, we don't see corresponding cuts in administration. Check out the various state universities where the administrators (not the faculty who do the most important work of education) give themselves the best salaries, the best parking places, free sports tickets, insist on spending tens of thousands of dollars on yearly flower planting and landscaping where it graces the view from their windows and more. The list of expendable administrative costs is huge.

    “Let's bring in a few serious bean counters and start paring down the wasted dollars.

    “Just a thought. Nobody's really holding their breath on this one, which is too bad. Maybe the institutions who teach tomorrow's leaders could do a little better role modeling as part of the process.”


    An important issue…but we always get a little nervous when bean-counters get called in anywhere.

    Just FYI…It so happens that in the town where we live, there’s a guy on the board of finance who could be called a bean-counter. He actually suggested in a public meeting that having a library in each of the five elementary schools in town was redundant and a waste of money…

    That’s right. School libraries are a waste of money.

    They have a word for guys like these. (Actually, they have several.)

    “Bozo” is the most charitable.




    We posted the results of a survey last week that revealed Americans gained weight during the first quarter of the year…which prompted the following email:

    “What the survey doesn't say is that a great share of Americans gain weight in the first quarter of EVERY year. The shortened days trigger a certain amount of lethargy (a photoperiodic response.). At one time it was a survival thing. The less you moved around in the winter, the less food you needed in the lean, mean days of winter. The extreme end of this is a condition known as SADS (Seasonal Adjustment Disorder Syndrome) where people go into a state of clinical depression. Some folks get a severe case, some get it so little that they barely notice.

    The treatment is to add lots of light to the rooms they spend the most time in.

    The first quarter is also pretty much devoid of so many of the activities that keep us so busy in the third quarter.

    Yup, the first quarter is darker and colder than the rest of the year and we tend to veg out. January also marks new episodes of our favorite shows. There's so many reasons were turn into couch potatoes it would take a couple of pages to list them all.

    People in the weight loss business tell me this happens every year. It's like talking to an economist. The figures are absolutely accurate and totally worthless.”


    Aren’t economists sort of like bean-counters except with better pedigrees?




    In one of our rants last week, we wondered about a story that said federal Air Marshalls were going to start flying coach, so as to free up first class seats for paying customers. While we were sort of outraged that they were flying first class, numerous people wrote in to point out that by being in first class, they also were the last line of defense between a terrorist and the cockpit.

    Which is a good point.
    KC's View: