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    Published on: September 10, 2004

    Saturday, September 11 marks the expiration of the current contract between 30,000 unionized San Francisco Bay Area grocery workers and the major supermarket chains in the area, including Albertsons, Safeway and Kroger.

    Labor and management reportedly are meeting to try and hash out a new contract. The issues largely are benefits and health care-related, with management looking to create a two-tier system that offers lower salaries and benefits to new employees, similar to concessions won in the four-month Southern California strike/lockout. The chains say these kinds of concessions are necessary to be competitive.

    Labor, on the other hand, is saying that Northern California workers traditionally have had better pay and benefits than Southern California workers, and that it has no intention of accepting any less. The United Food and Commercial Workers (UFCW) union has said it is prepared to call for a strike.

    Stay tuned.
    KC's View:
    Just based on timing, we’d have to guess that an extension of the current contract will be the first order of business. But that’s just a guess.

    The news reports all say that much of the negotiating this point has been about logistical issues, not substantive issues. Can’t imagine why they’d be in any hurry; after all, they have a whole day or so to talk.

    But the willingness to go down to wire simply makes this too hard to call.

    Published on: September 10, 2004

    The Associated Press reports that US Senate Majority Leader Bill Frist (R-Tennessee) wants to delay any vote that would allow the reimportation of less expensive prescription medicines from nations such as Canada into the US.

    Frist, a medical doctor who has been an outspoken opponent of reimportation because of concerns about safety, says that there is too little time left in the legislative schedule to consider the legislation before the presidential election. The Bush administration has generally opposed reimportation, though it has been backing off this stance of late. At the same time, a number of states and municipalities have been acting on their own to source less expensive drugs from Canada.

    Some Senate Democrats say that they would like to push for a vote before the election. “This has been debated over and over and over again. With the broad bipartisan consensus, we must act. And we intend to see the Senate take a position and have a vote," said Senate Minority Leader Tom Daschle (D-South Dakota).
    KC's View:
    Have the vote before the election, and people will be casting their votes in order to position their political parties before the presidential election. Have the vote after the election, and you’ll find out what people really think about the issue…but it’s too late to influence the electorate.

    Seems to us that either way the voters lose. So what else it new?

    Published on: September 10, 2004

    Bloomberg reports that there is speculation that Carrefour, the world’s second largest retailer, may decide to bail out of its Mexican and Japanese operations, feeling that the competition in both markets is too tough and the revenue potential from a sale too large to turn down.

    Carrefour, which has more than 10,000 stores around the world, has said that it would like to raise $1.2 billion (US) by getting rid of underperforming units and divisions – a phrase that pretty much describes its Mexico and Japan divisions. And tough competition from Wal-Mart in Mexico – and an expected expansion of Wal-Mart’s operations in Japan – are said to be prompting Carrefour’s consideration of such a divestiture.
    KC's View:
    If Carrefour cuts and runs in the face of Wal-Mart, what hope is there for other companies?

    We can only hope that this is idle speculation and that the French retailer isn’t making any such plans. Not that we favor one over the other, but we do like a good fight.

    Published on: September 10, 2004

    Democrats in the US House of Representatives, joined by enough Republicans to get a majority vote, yesterday voted to overturn new Labor Department overtime regulations that went into effect on August 23.

    Democrats in the Congress, joined by enough Republicans to get a majority vote, have described the new regulations as anti-worker and pro-big business…a position designed to help the Democratic cause in the upcoming presidential election. President Bush has threatened to veto any bill changing the new overtime rules if such a piece of legislation gets to his desk.

    The regulations are laid out in a complicated 154-page document and say that workers who earn less than $23,660 annually will become automatically eligible for overtime pay, a boost from the current threshold of $8,060, which was established in the 1970s.

    However, salaried workers who fall between $23,660 and $100,000 a year might lose overtime based on a duties test, which describes the tasks that determine whether a worker can, for example, be classified as a professional ineligible for overtime. Those making more than $100,000 will lose their overtime rights unless they do not regularly perform professional, administrative or executive duties.

    Organized labor believes that ultimately the number of people who qualify for overtime pay will be significantly reduced, a conclusion shared, generally speaking, by the Democratic Party. Big business – and the Bush administration – maintains that this is not the case, and that relatively few people will feel the impact in the form of reduced pay.

    The vote against the new overtime regulations actually was on an amendment to an education and health spending bill that has not yet been taken up by the US Senate.
    KC's View:

    Published on: September 10, 2004

    It was reported yesterday that Procter & Gamble’s Crest toothpaste is going to be playing a supporting role on NBC’s hit show The Apprentice, as contestants design a new marketing plan for the venerable brand.

    The Cincinnati Enquirer reports that P&G paid millions for the product placement and advertising time, hoping to have an impact on the estimated 25 million viewers who watch the Donald Trump-hosted show.

    Last night, both Toys R Us and Mattel got plus, as the contestants were challenged to design a new toy for the manufacturing company.
    KC's View:
    As always, last night’s edition of The Apprentice was an over-the-top, compelling celebration of excess, ego and extraordinary narcissism. It was ironic, somehow, to see Trump – who has been suffering his own financial setbacks lately – applauding Toys R Us as an impressive US corporation at a time when the company is thinking of getting out of the toy business.

    The biggest problem with designing a toy for Mattel was that virtually none of the contestants seemed to have any feel for kids or toy stores. It’ll be interesting to see how these overachievers do with Crest…they may not know much about consumer packaged goods, but they almost certainly all have sharp teeth.

    Published on: September 10, 2004

    The Adams Wine Handbook reports that US wine consumption is at the highest point in 15 years, with the average American drinking 5.2 percent more wine in 2003 than in 2002.

    The big beneficiary of this thirst: Australia. Consumption of wines from down under was up 34.6 percent in 2003, while consumption of French wines was down 11.1 percent.

    Analysts say that cost was a main driver of the popularity of Australian wines; in addition, there is a likelihood that continuing enmity towards France on the part of some US citizens because of that nation’s lack of support for US foreign policy in Iraq could well be a factor.
    KC's View:
    We’ve been doing our best to hold up our end of the bargain…and we’ve been fairly ecumenical about the countries from which the wines have come.

    Published on: September 10, 2004

    • The Wall Street Journal reports this morning that Wal-Mart may get help from Goldman Sachs Group in its quest to acquire the struggling Japanese retailer Daiei.

      Goldman Sachs already is advising Wal-Mart in its bid, but could step forward to actually invest in the venture.

      Daiei is Japan’s third largest supermarket chain, but it has accumulated debt of more than $9 billion (US). Wal-Mart is not alone in its interest in the company, but there are questions about how much foreign investment Japan’s Industrial Revitalization Corp. will allow.

      Wal-Mart already is a part owner of Seiyu, another Japanese retailer.

    KC's View:

    Published on: September 10, 2004

    • Published reports suggest that the proposed merger of Canada’s Molson Inc. and the Adolph Coors Co. may be in trouble because of diminishing shareholder support. The problem apparently is that there is an expectation that another, higher offer for the Canadian company could come from he company’s former vice chairman, Ian Molson.

      If the merger is abandoned, according to reports, there could be additional problems because Coors and Molson already have a partnership in place that allows each company to brew each other’s beers, and speculation is that a collapse of the merger deal could wreck the partnership.

    • The CBC reports that Canadian grocery chain Sobeys plans to launch a new premium private label – dubbed “First Compliments” – to replace its old “Smart Choice” and “Our Compliments” lines. In addition, Sobeys reportedly plans to cut prices in order to better compete against discounters.

    • Canadian convenience store chain Alimentation Couche-Tard reportedly is looking to acquire other c-store chains in each of the five US markets that it serves. Company CEO Alain Bouchard said that his company is in ongoing negotiations in each of the markets.

      The initiative is part of a broader growth strategy adopted by Couche-Tard, which is looking not just at US markets, but also in other international locations.

    KC's View:

    Published on: September 10, 2004

    • Pathmark Stores posted a second quarter loss of $1.6 million, compared with a profit of $6.2 million during the same period a year ago. Total sales for the period actually were up two percent to $1.01 billion from $995.6 million last year, with same-store sales up 1.3 percent.

      However, the company said that profits were hurt even as sales were improved by higher promotional spending. Pathmark executives also said that if the company is not able to refinance its debt and get a new $250 line of credit, it could end up defaulting on existing financing covenants.

    • Sobeys reported first quarter net earnings that were the equivalent of $36.1 million (US), up 11.5 percent from the same period a year ago. Sales for the period were up 9.1 percent to $2.33 billion (US).

    KC's View:

    Published on: September 10, 2004

    • Kroger announced that Mark Prestidgem formerly of Randall’s and Safeway, has joined the company as vice president of operations for Kroger's Southwest Division, based in Houston.

      Kroger also announced that Robert E. Zincke, the company’s executive vice president of merchandising, will retire next month after four decades with the company.

      Zincke will be replaced in that position by Donald Becker, a senior vice president overseeing six Kroger retail divisions.

      Paul Scutt has been promoted from Kroger’s group vice president of retail operations to senior vice president in charge of operating efficiency, productivity, shrink and worker safety.

      John Burgon, the president of Kroger’s Ralphs chain, has been named senior vice president, with responsibility for five retail divisions.

      Dave Hirz, president of Food 4 Less, has been named president of Ralphs.

      And Mike Ellis was promoted by Kroger to be group vice president of grocery, drug/general merchandise and pharmacy merchandising, procurement and advertising.

    • David Alan Coia, former editor of FMI’s defunct Advantage magazine and the former director of communications for Food Distributors International (FDI), has been named by the National Grocers Association (NGA) to be vice president of communications.

    KC's View:
    A quick personal note on David Coia. We worked for him as a columnist at Advantage, and he’s a good guy who is a strong addition for NGA. Good luck to them both.

    Published on: September 10, 2004

    We had a piece yesterday that addressed Safeway’s desire to move to a net cost way of buying, but not everyone agreed that this was a good idea.

    MNB user Ron Lunde wrote:

    Retail history's dustbin is full of those who have tried a net/buy and EDLP approach ... failures.

    Safeway collects and spends around $2.5 billion in vendor allowances. Going to net pricing is not without risks to the retailer. 75% of that number is allowances. The other 25% is essentially performance funds. Safeway management must have an extraordinarily clear understanding of what those risks are to both the revenue and cost of goods sold line are.

    There are new accounting issues which Safeway adopted in 2003 ... as well as all other retailers whose impact on reporting lines and market strategies is still not clear and the overall impact is not yet felt. Although these Issues do not affect the bottom line ... they can affect the revenue and margin lines.

    Actually, the issues do provide a better way for both Safeway and their suppliers to manage promotions.

    Unintended consequences: If Safeway does go net/net ... then what will CPG's do about trade promotion funds? These funds, historically, are used to 'manage the brand'. Virtually all trade promotion funds are now classified as a reduction of revenue to the brand. If they do not produce a yield of increased movement to the brand ... then it is better not to spend the money. Funds that are not ‘spent’ on trade promotion actually increase a CPG's reported top line revenue.

    What happens to the industry if CPG's drop the marketing spend from a reported 20 to 25% to 10% and that is all on consumer advertising?

    Of course, such a move would change the fundamentals of brand marketing thinking and strategies ... so the impact could be huge on both sides.

    Look at Safeway's P&L and it is not hard to figure out what the impact will be.

    Assuming that you have a level procurement playing field ... how you receive the $2.5 billion is not the issue. Whether from net pricing or promotion allowances is basically irrelevant under Burd's current thinking. However, there are potentially beneficial options ... but they require vendor and retailer cooperation.

    Safeway's real target needs to be the ability to attract and hold customers. Customer satisfaction with the shopping experience is the key. Price is only one element and diminishes in importance if you are close to your competition.

    We had a story yesterday about the US Food and Drug Administration (FDA) saying that health claims can be made for foods that contain omega-3 fatty acids, though manufacturers cannot add omega-3 acids to unhealthy foods and then make health claims.

    Which struck one MNB user as a shame:

    Darn. What a health claim that would be: "NEW! Krispy Kreme Donuts with omega-3! Reduce your risk to heart disease!"

    Talk about opportunity squandered…
    KC's View:

    Published on: September 10, 2004

    …will return next week.

    We’re afraid that the last weeks of summer have been pretty busy with work and kids, and we simply haven’t had the time to read any books or go to any movies. So there’s nothing for us to recommend.

    As for wines…well, we went on the wagon for a couple of weeks as we upped our training for the Marine Corps Marathon…but we’re settling in now and should be able to imbibe a bit in the coming days. Hopefully, we’ll have some good stuff to recommend next week…

    Have a good weekend! Sláinte!!
    KC's View: