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    Published on: May 12, 2003

    We got a fascinating email from a member of the MNB community last week about the decision by Wal-Mart to sell its McLane division to Berkshire Hathaway:

    "Curiosity led me to some information on the McLane acquisition that I thought would interest you. I wondered how much Wal-Mart paid for McLane in '90.

    "The annual report is vague; it refers to an issue of $275,000,000 in stock, assumed liabilities of $513,000,000 and some portion of the $1.4 billion capital expenses for the year. Let's assume, that the cash portion was small - even though' that seems like a stretch, and Wal-Mart paid at least $800,000,000 for a company with sales of $2.8 billion (of which $.6 billion was to Wal-Mart).

    "Thirteen years later, McLane has sales of $22 billion ($7 billion to Wal-Mart) and is sold for $1.5 billion, with no assumed debt.

    "In other words, the company is seven times bigger, but sold for less than twice as much. Just strikes me as odd."


    We got a number of emails like this one last week, and had several phone conversations that trod on similar territory. The general feeling seems to be that Wal-Mart wanted the money in order to fund its retailing expansion (especially outside the US, with further investment in Japan's Seiyu a major priority), and that it wanted to put some distance between it and the wholesaler economics that have driven companies like Fleming and US Foodservice to distraction.

    Of course, Wal-Mart isn’t addressing any of this specifically. But our experts on these issues are usually pretty well informed.




    We had a story last week about women feeling they are being given short-shrift by many retailers, which prompted an email from a male MNB user who pointed out that a majority of retailers bend over backwards to appeal to women.

    Needless to say, the discussion didn’t end there, as one MNB user wrote:

    "The degree to which your point went sailing over the head of your correspondent did not surprise me. Yes, the lion's share of retail is directed at women. Everybody wants to sell to women. A pitiful few seem to have taken the initiative to actually, y'know, TALK TO WOMEN or promote women high enough in their organizations to influence policy.

    "How else to explain the boneheadedness of those mini shopping carts for kids? I have to be the Bad Mean Mom and tell my 8-year-old daughter "no" every time she asks for one -- not because I'm afraid of her impulse purchases but because I'm afraid one of those Queen Mary shopping carts that seat 12 will come around a corner and squash her like a grape. Who came up with THOSE? Put a couple of preschoolers in there, plus a grocery order, and you're talking a big load for even a big peasant woman like me to push around.

    "How else to explain the many clothing stores that impose a limit of six items to try on? My time for personal shopping is limited to lunch hour. I want to make one pass through the store and then one pass through the dressing room, without having to get re-dressed in between. Ditto when buying clothes for my kids. I want to load up with the range of possible pants sizes, strip the kid down in the dressing room and have at it. While we're on the subject, why don't more stores do like Gap Kids and have unisex, oversized dressing rooms so that moms can supervise their sons? Am I ready to trust my 11-year-old to make his own clothing choices? Nope.

    "Why does Nordstrom make me remember what kind of clothes are in Encore, Point of View and their other ambiguously named departments? Is that why I only buy accessories there? Why play word-association games instead of just saying weekend wear, career wear, designer?

    "Kmart and Wal-Mart feel low-rent and depressing to me. Target, on the other hand, is a fun place to be, even if you're only buying Tylenol and underwear. And the fact that I always come out of there with lots more than the Tylenol and underwear I went in for tells me that the people in Minneapolis are spending a lot of time thinking about the kind of stylish yet inexpensive stuff that catches my eye. I don't feel overworked and underpaid at Target, whereas I often do at the supermarket, chain drug and other discounters."


    Excellent points. Catering to women is one thing. Listening to them and understanding them is something else entirely.




    Responding to our story last week about Fleming closing a general merchandise distribution center in King of Prussia, Pa. and grocery wholesale divisions in Phoenix; Salt Lake City; Warsaw, N.C.; and Northeast, Md., one MNB user wrote:

    "Fleming essentially is the only wholesaler serving the Phoenix market. Unified Grocers out of Los Angeles has a very small percent of the business but will now have to service the IGA group in Arizona. There is definitely an opportunity for a wholesaler to set up shop here but with a cost basis and operating costs that would allow it to profitably service the small group of independents in need of that service. Fleming's Phoenix Division was once the largest division in the company and as it's customer base shrank or disappeared, they did nothing significant to reduce their overhead accordingly. It proves once again that nothing in the food business is constant except change...."




    In response to our story about McCormick buying the Zatarain's brand, MNB user John Wynn wrote:

    "McCormick will restore focus and stability to this great brand."




    We wrote a bit last week about some new favorite wines we've tasted, and MNB user Brad Zemick responded:

    "With your recommendations of Australian wines today I have to suggest Yellowtail Merlot and Chardonnay for you. These retail for $5.00 and taste better than that. We were introduced to these in Washington D.C. and we drink these over "Two-Buck Chuck" with exponentially more taste.

    "Living in California we have lots of choices here but Yellowtail is a
    favorite everyday choice."





    Regarding some of Kmart's travails, we got the following email over the weekend:

    "Your reader who related his wife's experience at Kmart (from the perspective of an employee) reminded me of my experience years earlier in New England with (the now defunct) Bradlee's. I had just transferred to New England from the Western US (with a large consumer products company) and was appalled at the lack of service or caring on behalf of the Bradlee's employees. At that time, I decided it was only a matter of time when that chain would cease to exist, unless the management changed their approach and people skills. As evidenced by Wal-Mart, a retailer (or any company for that matter) is only as good as the people employed (at all levels) and, more importantly, their attitudes. It appears that Kmart may be headed in the same direction."

    Just what Kmart needs - to be compared with Bradlees.




    MNB user Bob Vereen wrote last week about comparisons between Home Depot and Lowes, which led us to bemoan the fact that so many independent hardware stores have bitten the dust over the past few years. Vereen wrote in to clarify:

    "You said there aren't many independents left to offer alternatives to Depot and Lowes.

    "Can I set the record straight?

    "Yes, there are fewer independents than there used to be. When I started my career in hardware retailing as an editor, there were about 50,000 hardware and lumber dealers. That's probably cut in half. (I have not kept up on the census.)

    "But let me make a couple of points:

    "Ace Hardware, owned by its member dealers, has about 5,000 retailers. Do It Best, owned by its member dealers, has about 3,000 TruServ, owned by its member dealers, has about 5,000. Many of these dealers own two or more stores, so the count among those alone is about 15,000 or more.

    "Emery-Waterhouse Co. of Portland, ME, Orgill Bros of Memphis, and
    several dozen other active wholesalers supply thousands of retailers who
    choose not to belong to the dealer-owned firms mentioned first.

    "Independents have suffered, but the patient isn't dead."


    Point taken.




    And finally, in response to our list of the ten best things we tasted at the Food Marketing Institute (FMI) show, MNB user Glen Terbeek wrote:

    "Maybe in stead of trying to list the top ten new items you thought likely to be innovative and successful in the consumers mind, maybe you should rank the top ten new items based on the allowance money supporting them. After all, isn't that how new item decisions are made in today's world?"

    True. Sad, but true.
    KC's View:

    Published on: May 12, 2003

    Mad cow disease often sounds to many people like this slightly exotic, somehow distant malady that affects cattle more than humans, that is more inconvenient than a consequential factor in people's lives.

    Yesterday's edition of The New York Times Magazine, however, put a remarkably human face on mad cow disease, telling the story of Jonathan Simms, who suffers from mad cow disease. He lies in a Belfast hospital, "thin and pale, and…jerking with involuntary spasms." Simms' condition, according to the NYT, "comes from eating the meat of animals that have been infected with the insidious disease, and it incubates in the human body for years, even decades, before attacking the brain suddenly and mercilessly."

    However, the article isn't just a scare story about mad cow disease. It also is a story of Simms' parents, who have worked tirelessly to get him access to radical treatments that might cure him, or at least arrest the development of the disease.

    The NYT reports: "Using the modern parent's avenue of appeal -- the Internet -- Don set out to save his son. Quitting his job and delving into this world of death full time, Don first found researchers with drugs that had shown promise in test tubes -- but that had never been tried in humans. Next, he found surgeons who knew nothing of those drugs but a great deal about the human brain. He introduced them to one another and knocked down the legal obstacles that prevented them from experimenting on his boy.

    "'They ask me how I can expose my son to something that might be dangerous,' he says of the ethicists and experts who disagree with his methods. 'Yes, this is an experimental treatment, but we are not experimenting for experiment's sake. We don't know if it will work. But if he dies, I will know I did everything I could. My wife and I will know in our hearts that we tried everything and that his death will not have been in vain.'"
    KC's View:
    This is a remarkable story. You can, and should, read the entire piece at:

    http://nytimes.com/2003/05/11/magazine/11MADCOW.html

    Published on: May 12, 2003


    • Longs Drug Stores Corp. said that preliminary sales for the four weeks ended May 1 increased 2.8 percent to $343.3 million from $334.1 million a year earlier.

      April non-pharmacy same-store sales rose 0.8 percent in April, while pharmacy same-store sales were off 0.2 percent.

    KC's View:

    Published on: May 12, 2003

    Reuters reports that Burger King Corp. will simplify its menu, focus its marketing message on how it grills its hamburgers, and move away from discounting as a strategic initiative.
    KC's View:
    Too little, too late? Maybe.

    But getting back to basics and creating a better tasting, healthier burger has to be considered a step in the right direction. The key for BK is to have a clear sense of direction, as opposed to, say, McDonald's.

    Published on: May 12, 2003

    Barron's reported over the weekend that one of the ways in which Costco Wholesale Corp. is benefiting from recent expansion efforts is through membership fees, which generated 56 percent of its profits during the last quarter.

    The theory is that the more stores Costco has, the more members it will have….specially in the current economic climate. And, the more members it has, the more money it makes from membership fees.
    KC's View:
    Key to this is the notion that Costco's consumer-oriented approach continues to generate more revenue, even in an economic downturn.

    Works for us.

    Published on: May 12, 2003

    USA Today notes this morning that as consumers are told that berries will do everything from fight cancer to make people smarter, packaged goods manufacturers are using berries in everything from cereal to liquor, water to snacks.

    Adding these freeze-dried berries and berry flavors do more than just allow manufacturers a new way to appeal to consumers. In fact, research shows that consumers will pay 10 percent more for a product when berries are included.
    KC's View:
    Which means the crack MNB research staff is now trying to figure out how to add berry flavoring to our morning dose of news and commentary…

    Published on: May 12, 2003

    The Associated Press reports this morning that Target Corp. has decided to eliminate vacation and health care benefits for employees who work 20 hours or less each week, though a spokesperson says it is not a cost-savings measure. It "is a way to remain competitive in the industry and to make sure we can cover people with our future growth," she said.

    While the benefits for these part-time employees will be eliminated, the company said that these staffers will be offered the option of increasing their weekly hours so they can qualify for health care, dental, vacation, and other benefits.
    KC's View:
    We're not sure what the difference is between "cutting costs" and "staying competitive." Sounds like pretty much the same thing to us…and a reflection of just how competitive this business is these days.

    That said, we were surprised to see how liberal Target's benefit program was. We've worked at places where we'd put in 60 hours a week and the employer would have preferred not to offer coverage or vacation…

    Published on: May 12, 2003

    MSNBC reports that British scientists have created a new biodegradable plastic screwtop for medicine bottles that will prevent people from opening the container once the medicine inside has passed its expiration date.
    KC's View:
    If this kind of technology can be created for medicine bottles, you have to figure that it won’t be long before it can be applied to milk bottles, egg cartons, and assorted other packaged goods.

    Published on: May 12, 2003

    E-Commerce Times reports that mobile commerce -- popularly known as m-commerce, using wireless transactions in the conduct of business -- has not lived up to the potential that was predicted for it just a few short years ago.

    Whereas in the year 2000 some six out of ten people believed they would be using wireless device to transact business, leading to $100 billion in m-commerce revenue by this year, the reality has been less impressive. However, the real questions seem to be not about how much revenue will be generated in the m-commerce realm, but how long it will take for these predictions to come to fruition.

    "Although some may think m-commerce is a spectacular failure, others in the industry believe it is a sleeping giant whose time has yet to come," E-Commerce Times writes.

    It also depends on how you define m-commerce. Is it using a wireless laptop to make an online purchase? Using a cell phone to buy a soft drink from a vending machine? Or creating an electronic wallet of sorts that can be accessed using a wireless device to make purchases?
    KC's View:
    Seems to us that the first thing to do when you hear predictions about the future is to discount any prognostication that includes the words "can't" or "won't." Because that kind of negative thinking just doesn't make any sense, at least not when you consider the dramatic changes that technology has wrought over the past dozen years or so.

    "When" is an appropriate word to use. "How" is another. "Could" seems like another word with plenty of applications in 2003 and beyond.

    M-commerce will be an inevitable development in the future. Retailers -- especially those fighting tooth and nail to maintain their piece of the consumer dollar -- ought to figuring out how to position themselves to take advantage of it, not thinking up reasons not to pay attention.

    Published on: May 12, 2003

    The Associated Press reports that Fleming Cos. will close a dozen Rainbow Foods units in Minnesota and Wisconsin by mid-June. The stores are not included in the 31 units that Roundy's has offered to buy from Fleming from $82.5 million.

    The federal bankruptcy court that is overseeing Fleming's operations will consider the Roundy's bid later this month.
    KC's View:
    There is speculation that Roundy's bid is low, and will invite other competing bids for Rainbow. It's hard to say, but it certainly seems that low bids for retail and wholesale properties are the flavor du jour…so we wouldn't count on any major competition for Rainbow Foods.

    Then again, we could be surprised.

    Published on: May 12, 2003

    Responding to angry former shareholders, Kmart Holding Corp. has posted an information page on its website explaining why people who held stock in the old Kmart had their shares wiped out last Tuesday when the company emerged from bankruptcy protection.

    The basic answer is that once Kmart paid off its creditors, there wasn't any money left to pay off shareholders. And then, conveniently enough, when the company got out of bankruptcy it became a new company with all new shareholders -- and the old shareholders were out of luck.

    It isn’t like this is a unique situation to Kmart; according to various reports, it is a procedure common to companies that go through bankruptcy.

    You can find the Q&A on Kmart's website at:

    http://www.kmartcorp.com/corp/investor/general/faq.stm
    KC's View:
    It might be easier for the former shareholders to accept the fact that they got the short end of the stick if the company had been the victim of outside forces that couldn't be dealt with, as opposed to the apparent plaything of some senior executives who saw the company as their own personal cash cow.

    There may not be any money, but they certainly can look on with a certain amount of pleasure as these former executives get their comeuppance in the courts. We wouldn't be surprised if some civil suits get filed against these guys to try and recover investments made in Kmart, investments that were lost to corporate jets, retention bonuses, forgiven real estate loans, and assorted other golden eggs that these executives laid for themselves.

    Published on: May 12, 2003

    Reuters reports that Royal Ahold is now saying that despite reports last week that only two executives at its US Foodservice division had been implicated in the accounting scandal that resulted in $880 million in overstated profits, it continues an internal forensic investigation that could reveal additional guilty parties.

    Last week, the company said that two executives, Mark P. Kaiser, chief marketing officer, and Timothy Lee, executive vice president for purchasing, had been fired, while CEO James Miller had been cleared of any wrongdoing or knowledge of other people's wrongdoing.

    However, external investigations into the company's accounting practices continue, with separate probes being conducted by the U.S. attorney's office in Manhattan and the Securities and Exchange Commission (SEC). According to The Washington Post, those investigations are specifically looking at executives who supervised Kaiser and Lee.
    KC's View:
    Perhaps the folks at Ahold realized how foolish it looked for the company to be blaming two executives for financial chicanery on this scale…especially when it seems likely that federal probes will reveal other guilty parties.

    Tomorrow ought to be an interesting day at Ahold, as its supervisory board gets together to discuss recent events, including a review of Miller's status with the company. Following that will be the company's annual shareholders' meeting, which should produce its own share of fireworks.

    As Bette Davis once said, "fasten your seat belts…it's going to be a bumpy night."

    Published on: May 12, 2003

    The Detroit News reports that a new investor, who has so far been unidentified, has bought into Kmart Holding Corp. as part of a partnership with the company's new chairman, Edward S. Lampert, of ESL Investment Inc.

    Together, ESL, Third Avenue Management LLC, and the unnamed investor own almost two-thirds of the company.

    Experts say that the investor will have to be named soon in order to comply with Securities and Exchange Commission (SEC) rules.

    According to the paper, the identity of the investor is know to Kmart's board, and may in fact be a board member.
    KC's View:
    This may be significant, and it may turn out to be nothing. But we have to be honest -- this just seems like the latest in a series of sleazy financial dealings by a company that doesn't seem to stand for anything other than moving money around, rewarding shareholders, and doing little to create incentive for store level personnel and shoppers.

    It'll be nice when Kmart actually does something that has resonance in the hearts and minds of consumers. But we're not holding our breath.

    Published on: May 12, 2003

    The Contra Costa Times reports that the Contra Costa County Planning Commission is considering legislation that would ban retailers from selling major nonfood products in the same store as groceries -- effectively banning retailers such as Wal-Mart and Target from opening supercenters there.

    The new law would prohibit any store larger than 90,000 square feet from devoting more than 5 percent of its sales space to groceries. Membership warehouses would be exempt.

    The rationale behind the law is to protect local merchants, as well as cut down on the amount of traffic that can impact communities. Similar pieces of legislation have been passed in other California communities.

    Ironically, no superstores have been proposed for the county, but supporters of the law say they are looking to make a pre-emptive strike.
    KC's View:
    While supporters of the law say that they believe there is "no socially redeeming value to this type of business model," the opposition says that "there is great value for the consumer in competition."

    We weren't aware that retail formats had to be "socially redeeming" to be in business.

    We're just not sure that this kind of legislation does anything but delay the inevitable competition that takes place in communities between big and small, between chain and independent. If independent retailers need laws like these in order to survive, then it suggests that they probably aren't as good as they need to be at marketing, at merchandising, and creating enduring and profitable relationships with their consumers.

    Protectionism of this sort, it seems to us, simply is a mistake. It doesn't protect anyone or anything except a retailer's ability to temporarily avoid the inevitable.

    Published on: May 12, 2003

    The New York Times reports this morning that a growing number of e-tailers are using auto-replenishment programs to allow consumers to sign up for regularly scheduled shipments of a wide range of consumer products.

    While vitamins and supplements were the first categories to be exploited in this way, as it was fairly easy to figure out how often a shopper's cabinet needed to be restocked, these days the initiative has been extended to items such as diapers, pet foods, razor blades, tanning lotions and even steaks.
    KC's View:
    The interesting thing about these programs is that they tend to be instituted by companies other than mainstream firms with brick-and-mortar presences…which means that by and large they probably are cutting into the regular dollars spent by consumers in grocery stores, drug stores, and other, similar formats.

    We have long thought that one of the ways that such retailers should reward top shoppers is through a regular auto-replenishment program for items such as, say, toilet paper, paper towels, laundry detergent, and the like -- items that are a pain in the neck to pick up, fairly bulky in size, and that don’t go bad when left in the garage or front porch for a time. Free deliveries of such items to top shoppers' homes would be a great way to establish greater connectivity to their lives and needs, and a way to ensure that they are not going to other outlets for those items.

    And, it would serve as a great foundation on which to build additional transactions.