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    Published on: May 20, 2004

    In a page one story this morning, the Washington Post reports that the US Department of Agriculture (USDA) allowed US meatpackers to import ground and processed meat from Canada from September 2003 to April 2004 – despite the fact that USDA was publicly saying that such imports had been banned because of the occurrence of mad cow disease north of the border.

    According to the Post, “a total of 33 million pounds of Canadian processed beef flowed to American consumers under a series of undisclosed permits the USDA issued to the meatpackers.”

    The only reason these permits were revoked was because a federal judge in Montana ruled that the USDA had improperly allowed an announced expansion of Canadian beef imports. When USDA reversed its position, it never disclosed that it had issued earlier permits.

    The USDA and Bush Administration have been under pressure both from large US meatpackers and the Canadian beef industry to loosen restrictions on imports, which have hurt profits in both countries.

    The Post notes that even as the imports were being allowed and not being publicized, Agriculture Secretary Ann M. Veneman was saying “that she was extending an earlier ban on many types of Canadian beef,” and was saying, according to the Post, that “the risk that ground beef might contain the mad cow infection was too great to allow it in. She and her top deputies said ground beef imports would resume only after the agency completed a formal rulemaking process, with public debate.

    No such formal debate has taken place, and yet the beef was allowed in.
    KC's View:
    This strikes is as the height of irresponsibility.

    It puts the consuming public potentially at risk. It could hurt the beef industry in the long-term by undermining consumer confidence. And it could hurt retailers who may have been selling this Canadian beef unawares.

    It doesn’t matter whether the Canadian beef is safe. It doesn’t even really matter whether the ban was reasonable.

    What matters is that USDA apparently ignored its own rules, violated the public trust, and pursued its own agenda.

    We are appalled. And if she knew that the rules were being violated, it is hard to imagine what reason might be given for Veneman not being fired.

    Published on: May 20, 2004

    In a presentation made at the Goldman Sachs' Global Consumer Products Conference in New York, General Mills CEO Stephen Sanger predicted that higher commodity costs are likely to create higher prices on some consumer packaged goods.

    "The food industry is facing significant inflation in its input costs and all of us will have the challenge of doing things to maintain our margins,” Sanger said, according to a report from Reuters. "That is likely going to be addressed through a combination of pricing and productivity.”

    However, Sanger did not address any specific price increases that may be coming on General Mills products.
    KC's View:
    Out of control gas prices aren’t likely to help, either. It’s gonna be an expensive summer…

    Published on: May 20, 2004

    A new study done in India links the increase in soft drink consumption to the increase in the occurrence of esophageal cancer, a usually fatal disease. According to the research, during the last half-century, as consumption of carbonated drinks has increased 450 percent, the incidence rates of esophageal cancer have risen by more than 570 percent in white American men alone.

    The American Cancer Society says that esophageal cancer affected 13,900 U.S. men and women in 2003, more than 10,000 of them being men.

    However, it isn’t just frequency that seems to link the two. There’s also chemistry - carbonated soft drinks cause the stomach to distend, which in turn causes the gastric reflux associated with esophageal cancer.

    The research is being presented at a meeting in New Orleans that is focusing on the linkage between what people eat and drink and the occurrence of a wide range of cancers.
    KC's View:
    Clearly, the general discussion about how the things we consume can lead to cancers needs to take place – not in an atmosphere of alarmist hysteria, but thoughtfully and carefully with a firm basis in science.

    The problem is that there are so many studies and so much speculation that it becomes tough to separate the legitimate stories from the nonsense.

    Just yesterday, we got an email from someone we barely know forwarding a long “news” story saying that people shouldn’t freeze water bottles because the process causes a chemical reaction to take place in the plastic that causes cancer. Now, much of the time we’ll just delete these emails and move on…but we were curious, so we Googled the subject…and found that this is an urban legend based on highly questionable science. It wasn’t even really a news story, just speculation crafted to look like one.

    We did what we probably should do more often – shot a letter back to the person who sent it to us, asking that she take us off her email list and maybe start checking the veracity of these stories before she circulates them. (She wasn’t amused.)

    But it points out how tough it is to figure out what is real and what isn’t.

    Published on: May 20, 2004

    Global notes & commentary from…

    North American grocery operation Great Atlantic & Pacific Tea Co (A&P), majority owned by German retailer Tengelmann, has announced its annual results for the 53 weeks ended 28 February 2004. Sales reached USD10.8 billion in the period, versus USD10.1 billion in the 52 weeks of fiscal 2002. However, sales increased by a modest 0.9% on a like-for-like basis during fiscal 2003, and the company continued to trade in the red. At least the net loss of USD146 million in fiscal 2003 was an improvement over the net loss of USD194 million reported in fiscal 2002.

    Mr. Christian Haub, chairman, president and CEO of the company in the US and Canada, made a relatively positive statement on the full year results for 2003: "Although we were unprofitable in the fourth quarter and full year, I am encouraged by the positive direction we have established. Our Canadian operations delivered another solid and profitable performance despite challenging economic circumstances in Ontario. And while our recovery in the US remains a work in progress, we are encouraged by the gradual operating improvement that built as the year progressed. In fiscal 2003, we took decisive actions to strengthen our financial position, halt the decline of our US business, and maintain our success in Canada." Mr. Haub also explained that the company is now in a position to implement growth strategies and further investment in 2004 will see improved profitability in the future.

    In contrast to the Canadian operations, which have continued to perform well, A&P had been performing badly in the US in recent years, with relatively few signs of improvement. Tengelmann's US division had mainly blamed the unfavourable macroeconomic conditions, such as a slow growing economy, weak consumer demand, rising labour costs and deflation, as well as an intensification in competition with its rivals, for this poor performance. Yet, the problems went deeper, as some of A&P's competitors have been posting strong growth in exactly the same environment.

    However, during 2003, Tengelmann managed to develop a new business plan for its US operations, and was partly able to compensate its internal weaknesses by reducing costs across the board. As part of this plan, in April 2003 the company disposed of eight A&P stores in northern New England to GU Family Markets. Furthermore, the retailer sold five A&P Superfood Mart superstores in Springfield, Massachusetts. Four more stores were sold to Big Y Foods and an additional one was sold to Belmont Avenue Markets. Another measure to improve results was the closing down of the Kohl's supermarkets in August 2003, followed by the sale of its Eight O'Clock coffee division in November 2003. In April 2004, A&P completed the conversion of 10 Farmer Jack supermarkets into the group's Food Basics discount stores. This promising format was imported into the US two years ago from its successful Canadian operation.

    In summary, it seems that A&P could be on the right track. If the company continues along its current strategy (sale of unprofitable banners and the rebranding of loss-making stores into more successful banners) and also turns its attention to other areas, such as potential joint ventures or outsourcing distribution, we believe that the group's US operations could continue to improve its results in the future, even matching those of its Canadian operations.
    KC's View:

    Published on: May 20, 2004

    The New York Times reports this morning that the high cost of biotechnology and agricultural genetic engineering makes it unlikely that these processes will be used for anything other than highly popular, mainstream crops. In fact, the NYT notes, “some 99 percent of the crops are grown in six countries - the United States, Argentina, Canada, Brazil, China and South Africa. And virtually all the worldwide acreage is devoted to only four crops: soybeans, corn, cotton and canola.”

    It doesn’t mean that the technology isn’t spreading. Despite some regulatory issues and consumer resistance, biotech is becoming more acceptable – even in the European Union, where just this week it was decided to allow the import of genetically modified sweet corn, ending a six-year moratorium on biotech food.

    But the evidence to this point seems to suggest that biotechnology is simply not living up to its potential.
    KC's View:
    This story is like a sequel to yesterday’s MNB piece about how the United Nations’ Food and Agriculture Organization says that while genetically engineered crops have tremendous potential for helping to feed the world’s poor, too little research is being focused on growing basic food groups in developing countries. The problem to date, according to the UN report, is that biotech has been developed largely by big companies that are focused on developed nations.

    And, it seems, on only mainstream products.

    It is simply a shame, it seems to us, that a technology that could have an enormous difference in reducing hunger on the planet is not being used to optimal effect.

    Published on: May 20, 2004

    • Belgium-based retailer Delhaize Group announced the launch of a new European brand, “365,” described as being “all year long, basic quality products at low prices.” A supplement to the company’s existing private label lines, 365 will be priced at levels equal to discount brands and lower than national brands.

      The 365 assortment will initially include grocery, frozen food, beverages, dairy, fruit & vegetables and wine, and will include as many as 300 SKUs by the end of the year.

    • In the UK, a coalition of activists has proposed a Children’s Food Bill, which would, if passed, would prevent the food industry from marketing “unhealthy” foods to children.

      The bill proposal also includes standards for school meals.

    KC's View:

    Published on: May 20, 2004

    • Smart & Final announced that its president and COO, Etienne Snollaerts, has been named CEO of the company. He succeeds Ross Roeder, who remains as chairman of the board.

      The succession plan was put into place last February.

    KC's View:

    Published on: May 20, 2004

    • Longs Drug Stores Corp. posted first quarter net income of $9.2 million, up 59 percent compared with $5.8 million in the year-ago period, which included an 8-cent per share after-tax charge. Total sales rose 5.1 percent to $1.16 billion. Same-store sales were up 2.7 percent.

    KC's View:

    Published on: May 20, 2004

    Jack Eckerd, who started the Florida-based drugstore chain that bears his name with three rundown stores, died yesterday at age 91. Eckerd also was known as a philanthropist who had given generously over the years to educational, arts, and child-related causes.
    KC's View:

    Published on: May 20, 2004

    Yesterday, the “Your Views” section featured an email from MNB user Dan Wallace on the subject of e-grocery. He wrote:

    There are two fundamental problems with e-grocery. First, it pretty much eliminates impulse purchases, a great source of margin for retailers. Second, it requires the retailer to pay for activities that traditionally are done for free by the consumer - order picking, loading, last mile delivery and unloading. In doing so, it replaces mostly fixed costs (stores) with mostly variable ones (delivery trucks). This means the profit picture won't improve as volume grows.

    These facts are pretty obvious - one would have thought that Webvan and other failed e-grocers would have understood how unlikely it was that they would ever become profitable. Their only hope was in achieving a very high share of households, translating into high route density, which might have made the economics of delivery viable. Maybe.

    The nature of on-line grocery limits its appeal to two specific segments. One is customers looking for high-margin, hard-to-find specialty items. The other, on which most e-grocery hopes are pinned, is customers who a) shop from a list and are not interested in impulse items and b) are willing to pay for the convenience of home delivery. The numbers in your story imply that after about 10 years of effort, Peapod has achieved perhaps a 1-3% share of households in its service area. This would seem to be the size of the latter segment.

    This email generated a number of responses.

    MNB user Glen Terbeek wrote:

    I would like to disagree with the comments about the "two fundamental problems with e-commerce."

    Regarding impulse selling: First of all, the opportunity for the presentation of products based on the logical thinking of the shoppers rather than based on the like item "picking slot" categories of the physical store is great. Products can be "placed" in many locations virtually. In addition, products can be presented starting with the shopper's own core item, which make up 50-60% of their annual purchases. Then based on historical shopping, lifestyle and demographic factors, items and solutions can be suggested to anticipate the needs and desires of the shopper, and eliminate the "clutter" of items not of interest to the shopper. After all, shoppers go to the store to replenish their pantries and to buy meals; either the ingredients, solutions ideas, or even prepared. And last, much easier comparisons of products can be made, such as nutritional attributes as well as price.

    Regarding "free" shopper labor: It is true that the industry shifted labor to the shopper; self service worked early in the industry but is most likely against the shopper's current stress of "not enough time." Let's face it, the store is a high priced distribution center, both in fixturing and location real estate costs. In addition, the labor to stock shelves in a presentable manner is expensive. The high cost front end space and labor is actually not appreciated by the shopper. But the highest cost of a store is that it serves as the "toll gate" that the retailers use to collect trade dollars from the manufacturer, estimated at about 16-18% of manufacturers' revenues, and 7.5% of retailers revenues, or about twice their pretax income.

    The mistake that WebVan made is that it didn't change the model. It should have started with a truly consumer direct model, connecting the shopper directly to the manufacturers producing the items they want and collecting a fee for that service. The trade dollars savings and marketing information advantages that the manufacturer would achieve would more than make consumer direct the cheaper and more pleasant shopping experience, and perhaps would have kept WebVan in business today. Conversely, using a store as a pick/pack center is the highest cost solution. However, it demonstrates that there is real consumer direct demand.

    We need to get the economic model corrected. Remember, the manufacturers have always followed the "Frictionless" or most direct route to the shopper. It is one reason they jumped on the Wal-Mart band wagon.

    I suggest that the industry looks at the eBay model for guidance. It may be the next manufacturer move!

    A provocative thought.

    MNB user Mike Spindler (who, it should be noted, is president of responded:

    Mr. Wallace is right in that online customers do "impulse buy" and in fact they value convenience much more than anything else (including price) and being "interrupted" by impulse opportunities is usually frowned upon.

    However, online customers usually spend considerably more of their total grocery expenditures with their online grocer then they did in-store with the same grocer, or than they did with their prior primary grocer. That loyalty/share of stomach MORE than makes up for any impulse purchases missed over time. Further, most online customers are incremental to the grocer, and the reason for their move to that grocer IS the ability of the grocer to provide the convenience of online shopping.

    Delivery can be expensive (unless the grocer already provides, as is the case in NYC). However, many of our grocer's offer at-store pickup, which generates as much if not more acceptance in markets where consumers are constantly on-the-go. Just don't make the shopper get out of their car!

    Finally, Mr. Wallace is almost correct in his current market estimates of 1-3%. Our numbers indicate between 1-5% but lets not quibble. However, when the bulk of the online folks are incremental, when 40% of those incremental customers are trading up (from price brands, including W*M), when the rate of growth is 35-50% per year and when you look at the online comfort of the emerging client base (including "boomers) ,then one might think that this channel deserves a serious, serious look.

    Another MNB user, however, thought that Wallace had it right:

    You have got to look at the economics. One cannot charge regular store retail for on line purchases and expect to make money as the costs are totally different. What does a stop on a truck cost? There were (and probably are) good figures available. $50 is not an unreasonable place to start. Therefore you need high density to make it work. But retail clerks earning $15 an hour cannot pick orders from store shelves, check them out and then have them delivered to the home for regular retail. There is no margin to support that. And even if you pick from a special distribution center with low cost people, the margin is still slim to cover the delivery cost. And a delivery charge of $5 or 10 will not cover the delivery cost. I know as I studied this and decided to not get into the e-grocery business.

    Perhaps the problem is that old-model economics were being applied, when a new model had to be invented.

    We had a story yesterday about how Best Buy CEO Brad Anderson decided to accept his $3.2 million salary but reject 200,000 stock options and instead give them to non-executive employees who work for the electronics retailer. The options have a potential price of better than $7 million.

    We applauded Anderson’s move, saying that he clearly realized that the success of a retailing company doesn’t emanate down from the executive suite but up from the sales floor.

    One MNB user responded:

    I think Best Buy is putting stores like Media Play and Circuit City out of business. The employees' attitude in general (toward the customer and toward their work) greatly improves when they are treated well and respected. I don't necessarily see any difference in customer service or in product selection regarding electronics, music and video/DVD selection or price between these three but something is happening to drive customers to Best Buy rather than the other two. Perhaps an unconscious positive vibe from the employees keep people going back to Best Buy.

    MNB user Marysia McFann wrote:

    Lead the way Mr. Anderson! Corporate America may think you're crazy, but the average working class citizen is bowing at your feet. This sounds like the type of leader that every company in America needs -- one who leads by example. If I wasn't already working for a top notch corporation, I would beat a path to Best Buy!

    And another member of the MNB community noted:

    I don't believe I've ever shopped at "Best Buy" - but you can believe I will from now on. Can't wait to see what this does to the bottom line.

    Kudos to this one Brad Anderson! Think of how many people this could impact - if all CEOs would follow his lead. The disparity between the least and top employee is so out of whack these days. How many jobs could $7 Million "potentially" save?

    I'm overjoyed for all the "non-executive" employees who work at Best Buy and Brad Anderson is my new "Hero"! Hopefully this will get a lot of press coverage - but I doubt it! After all "It's Great News".

    We had a piece yesterday about how Nash Finch will shutter both its Avanza and Buy n Save retail formats, saying that “prospects for improvement at these locations and formats within an acceptable time frame are not sufficient to justify continued investment.”

    According to a statement released by the company, “exiting these underperforming assets is consistent with the company’s commitment to continue to lower operating costs, improve its balance sheet, and focus investment and attention on core areas of its business that offer a better return to shareholders.”

    In addition to three highly touted Avanza units in Chicago and three in Colorado – which were designed to appeal to the fast-expanding Hispanic demographic – Nash Finch said it would shut down five Buy n Save units in Minnesota, one Sun Mart in Nebraska, and nine EconoFoods stores in Iowa, Minnesota and South Dakota.

    MNB user Bill White observed:

    It has really become a sad state of affairs in the grocery business, both wholesale and retail. I spent the majority of my career (at wholesale and retail) in this wonderful industry that "gets into your blood" easily. There has been much consolidation in the industry over the past 15 years or so, as we all know, some good and some bad, most of which recently has had a lot to do with attaining size to compete with Wal-Mart. They have turned this formerly wonderful, yet competitively friendly, industry upside down, and continue to add square footage daily in their unquenchable desire to "own" this industry that was built by "Mom and Pop." Meanwhile, a company such as Nash Finch, that is on the leading edge in developing their Avanza concept, is under so much pressure from Wall Street (due in large part to the items mentioned above) that they must close those stores, without adequate time to tweak the format and make it a profitable venture. The question should be asked: "Would they have such pressures if the Street wasn't worried about Wal-Mart's effect on the industry? In the old days, "Mom and Pop" didn't have those pressures, and were willing to take chances and try new formats, new departments, etc., which made this industry what it is today (or at least what it was pre-Wal-Mart). How low we have sunk - how did we as an industry allow this to happen? And where is it all ultimately heading? What has happened to old-fashioned "fair" competition?

    Another MNB user wrote:

    I just want to say, "That I told you so, when it came to the Avanza stores in Chicago!"

    I know some complained and said I was being too general when I said it wouldn't work and that the customers would rather shop at stores and businesses owned by other Hispanics.

    I was right!

    Just because you are a chain that caters to Hispanics, it does not mean that they will stop shopping and run to your "concept store."

    MNB user David J. Livingston wrote:

    The Avanza stores were an insult to everyone from day one. The only thing Hispanic about these stores was the name. Merchandising really was no different than most of the other Nash Finch stores - which are basically 20 years behind the times anyway. This is probably just the beginning of the problems Nash will be announcing over the next several months. After Nash bragged about how well they were doing, I don't think I can ever believe anything they say. Buy n Save suffered from the same thing that Avanza did. Both formats had no execution. It was like they had this great idea but only made minimal attempts to perfect it.

    Finally, we had a brief mention of Tony Randall’s passing yesterday…which prompted the following email from MNB user Glenn J. Rosati:

    About 30 years ago, my parents and I went to LaGuardia Airport to pick up my Grandaunt who was coming home from a six-month visit with cousins in Boston.

    There was no sight of Aunt Amelia after all the passengers had deplaned. We were curious because our cousin had called to confirm that she had boarded the plane and that it took off on time. After a few minutes Aunt Amelia came out in a wheelchair being pushed by one of the flight attendants.

    She immediately proceeded to tell us all about the very nice young man who sat next to her, talked with her, made sure she was comfortable and asked all about her family. She mentioned that the young man looked a lot like Tony Randall. We all chuckled thinking she was smitten with the attentions of a nice gentleman. As we gathered her bags out from the jet way comes Tony Randall who walks over to Aunt Amelia to say good-bye one last time.

    We just stood there speechless! Aunt Amelia sat there glowing. God bless Tony Randall.

    Great story.
    KC's View: