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    Published on: April 11, 2005

    Another in a series of previews of the 2005 Food Marketing Institute (FMI) Show…

    A recent study by McKinsey & Co. suggests that most supermarket retailers, faced with enormous competition and increasingly long odds of survival, remain satisfied with nibbling around the edges of possible solutions rather than developing and executing strategies that clearly differentiate themselves to customers.

    Which is, of course, a perfect recipe for disaster.

    In a Super Session scheduled for Sunday, May 1, from 3:45 to 5 pm at the annual Food Marketing Institute (FMI) Show in Chicago, Kevin Sneader, a director with McKinsey & Co., will address these challenges and possible solutions head-on.

    In this exclusive e-interview, MNB chatted with Sneader to get a preview.

    MNB: At FMI’s Midwinter conference, you put up a map on the screen showing that in 2003, there were seven states where Wal-Mart had market share of more than 20 percent, and 12 states where Wal-Mart had a market share between 10 and 20 percent. Those are enormously daunting numbers...made worse when you estimate that by 2015, it is entirely probable that the only places where Wal-Mart will not have more than a 20 percent market share will be California, New York, Massachusetts, and Illinois. Faced with these numbers, is there a good argument for why opposing retailers shouldn’t just retire?

    Kevin Sneader: Rather than retire, we believe that there can be a place in a value driven world for retailers who have followed the four part program that we outlined at Midwinter. This entails: differentiating the brand; getting credit for value delivered; working customer back to take out cost; reshaping the organization to deliver in the face of new consumer demands for value. Together, this four-part approach should enable retailers to carve out a place in the market that is sustainable. But it will not be easy and there is no room to pick and choose: an integrated approach is required and anything less will result in failure.

    MNB: You talk about competing with value-oriented retailers, but most people hear that and think Wal-Mart. Are there other retailers that fit this description that you believe need to be focused on with a more competitive mindset?

    Kevin Sneader: Indeed, we think about value orientated retailers more broadly than Wal-Mart. Our definition encompasses not just supercenters, but also discount stores, warehouse clubs, dollar stores and limited assortment grocers. In fact our first speech on "The Value Driven World" at FMI Mid Winter 2003, forecast the strong growth of dollar stores. Now, the performance of the dollar and club stores' together with their improving customer propositions and push into perimeter categories make them formidable competitors to watch and challenge.

    MNB: Clearly the notion of competing with Wal-Mart on price is almost out of the question, given your additional premise that while shoppers who buy products at Wal-Mart perceive the discount they are getting to be between five and 10 percent, the actual discount is between 15 and 25 percent. How close does one have to come to keep Wal-Mart from having too much of a competitive advantage on price?

    Kevin Sneader: It all depends on the overall value delivered. The right answer to this critical question is therefore unique to each grocer and driven by local consumers and the extent to which the grocer is getting credit for value. That said, our research underscores that winners are well positioned on key value items and the overall basket - not necessarily across the whole store. This position reflects pricing investments focused on those categories that disproportionately drive consumers price perceptions of the store. And these categories can be identified and prioritized.

    MNB: There seem to be advantages and disadvantages for retailers of various sizes – small independents, regional operators, and national chains – in dealing with Wal-Mart. Can you speak to what each of these three categories bring to the table in this competition...and where, by and large, they need to improve.

    Kevin Sneader: The smaller more local players must deliver on their inherent advantage: the ability to know their local customer and serve the specific needs of the market. Conversely, they need to work hard to offset their lack of scale to compete on price or to achieve superior operating efficiencies . Regional operators have to exploit the local scale that they often enjoy and marry this with value and a proposition that makes the most of their local connections. For the national chains, the opportunity lies in capturing the advantages that come from having so many stores while also enjoying the scale needed to develop unique products and services.

    MNB: Okay, tomorrow we’re going to give you carte blanch to open the supermarket of your dreams, one that you feel can compete on value. What kind of store would it be, and how would you position it?

    Kevin Sneader: That’s an interesting question, and one that we often confront as grocers seek to redefine what they stand for.

    Many are experimenting with new concepts and formats, and I think the jury is still out on the final outcome. Having said that, let me share some top of mind perspectives: firstly, it's unlikely that it would be a single store, but rather a portfolio of formats ranging from convenience stores to hypermarkets, with traditional grocery stores in between; secondly, it would have destination perimeter categories, particularly in produce and meats; thirdly, a truly exciting and innovative center store to draw shoppers down the aisles to increase the basket; fourthly, it would offer unrivalled customer service from associates committed to the success of the company ... and lastly, be easy and quick to shop designed around customer 'shoppability' behaviours and utilizing new technologies to reduce operating costs.

    Now, you did say I could dream ....

    For more about FMI 2005, go to:
    KC's View:

    Published on: April 11, 2005

    Reuters reports that there seems to be a certain amount of skepticism amount Wall Street investors and analysts about whether sales improvements being posted by Safeway, Albertsons and Kroger add up to a long-term ability to compete with discounters such as Wal-Mart.

    Among the comments being made:

    • "Certainly, there's a trend change (in sales) but it's just not anything that you could at this juncture call robust. You could think of it more as an early sign of some potential recovery." -- Andrew Wolf, analyst, BB&T Capital Markets.

    • "In our opinion, the benefits of store remodels; new, more favorable labor contracts; and new merchandising and marketing efforts of the 'Big Three' will be offset by reinvestment in pricing and other actions to be more competitive.” - Jaison Blair, analyst, Rochdale Research.

    Reuters writes that “even with a growing list of initiatives to reposition themselves in an increasingly cutthroat industry, the stock prices of the three chains have hardly budged from their 52-week lows and analysts say their chains stand to lose more of their share of the $775 billion U.S. groceries industry.”
    KC's View:
    We hesitate to agree with the investment types, especially since we generally think that catering to Wall Street – and not the customers who walk through the front door – is what has landed so many retailers in hot water to begin with.

    But in this case, the analysts are right on.

    Published on: April 11, 2005

    • Sources are telling the Washington Post that former Wal-Mart vice chairman Thomas L. Coughlin indeed will argue that expense reimbursements that he received that are now being investigated by federal authorities actually were used to pay off people for keeping tabs on union organizers in the company.

      Sources told the Post that Coughlin believed he was acting in the Wal-Mart’s best interests, and that he was not stealing from the company where he worked for almost three decades.

      However, Wal-Mart officials continue to maintain that this was not the case, that there was no such anti-union fund.

      Both Coughlin’s attorneys and the United Food and Commercial Workers (UFCW) have called on Wal-Mart to release all relevant documents as soon as possible.

    • Down in Texas, the Star Telegram has a column from Mitchell Schnurman that seems to suggest that he, at least, is not impressed by Wal-Mart’s continuing defense of its wage/benefits policies and approach to labor relations.

      “Last week,” he writes, “its top executive told reporters that Wal-Mart couldn't be a trendsetter on pay and benefits, that it couldn't be like General Motors was after World War II, helping to usher in the great American middle class.

      “What a cop-out.

      “Wal-Mart already sets the pace on hourly pay -- driving it down sharply. Grocery workers in California had to take big cuts last year despite a strike, because Wal-Mart unveiled plans to open 40 supercenters in the state. Safeway and Albertsons had to reduce costs to compete.”

      While Schnurman concedes that “Wal-Mart has to do a balancing act” because “low prices are the key to its model, and labor costs are an important element,” he asks why other successful businesses have been able to avoid the rancor that Wal-Mart seems to be encountering.

      “Southwest Airlines is famous for its low costs and loyal work force,” Schnurman writes. “It's now the leader in what has become a commodity-like business with razor-thin margins, largely because its workers are so productive. Southwest is heavily unionized, and it has an innovative pay scale that keeps fixed costs low and generously shares profits. At the end of the day, Southwest employees usually make more than their counterparts at the legacy airlines.”

      And, he cites “Costco, whose wholesale warehouses outperform Wal-Mart's Sam's Club, pays its workers significantly more and provides some of the best benefits anywhere. Pay starts at $10 an hour, and after four years, Costco employees make more than $40,000 annually. More than eight of 10 workers have health benefits, and the company pays almost 93 percent of the costs.

      “Little wonder that turnover is less than half the rate at Wal-Mart.”

    • The Washington Post reports that the Maryland General Assembly has approved a bill that would require companies in the state with more than 10,000 employees to spend eight percent of their payroll on employee health care or be compelled to make a contribution to the state Medicaid program.

      There are just four firms in the state with that many employees, and only one reportedly does not meet the right percent threshold – Wal-Mart.

      Governor Robert L. Ehrlich Jr. has said he will veto the bill – though supporters of the legislation believe they may be able to override such a veto.

    • Reports in the Canadian media say that 67 people were arrested last week when demonstrators turned violent at a Wal-Mart in Montreal, threatening to use rocks and metal rods to prevent people from entering the sto0re.

      The demonstrators apparently were largely students upset over tax breaks given to Wal-Mart, arguing that the money the company would have paid could have been used to help support local universities.

    KC's View:
    Wal-Mart wanted to come out of last week with a better image in the media, with the Coughlin story put to bed, and with a sense that it was controlling the spin on all the stories that affects it.

    Zero for three, we think…at least based on the plethora of stories we read over the weekend.

    Published on: April 11, 2005

    The New York Times reports that it sponsored a series of tests last month on salmon sold as wild by eight New York City stores. The tests, according to the NYT, “showed that the fish at six of the eight were farm raised.”

    Wild salmon goes for as much as $29 a pound, while farmed salmon sells for $5 to $12 a pound in the city.

    Suspicions about the origin of the salmon were raised because it was believed that wild salmon would not be available from November to March, and yet 23 out of 25 stores checked by the NYT during that period said they had wild salmon.

    In addition to truth-in-labeling issues, there also is a food safety issue here. “In the last two years two scientific studies have reported that farmed salmon contain more PCB's and other contaminants than wild salmon, and numerous studies have called farming practices an environmental hazard,” the paper notes.

    And, the NYT writes, “When told of the results of the fresh salmon tests, Gretchen Dykstra, New York City's commissioner of consumer affairs, said, ‘Labeling any item to be something it's not is a classic deceptive practice.’ She added that her agency would ‘be investigating whether these stores are in fact improperly baiting their customers.’ Mislabeling food is against federal law.”
    KC's View:
    Somehow, this isn’t surprising at all.

    The question is, who is doing the deceiving?

    Not if someone is being deceived.

    And, while we’re asking good questions, how widespread is this problem?

    Published on: April 11, 2005

    The Associated Press reports that over the past eight months, some 14 truckloads of unsold Atkins Nutritionals bars, shakes and breakfast mixes have been put to good use feeding less fortunate souls in Appalachia.

    The donation of these foods to charity is held up by analysts as an illustration of just how much the market for Atkins Nutritionals products – manufactured for the commercial arm of the diet organization – has dried up.

    Rev. Brooks Kerrick, founder of Extended Hands Ministries, tells the AP, "The Atkins products have really been a lifesaver for us. They'll sure keep your belly button from rubbing your backbone."
    KC's View:
    Of course, that is exactly the opposite of what a lot of folks who went on the Atkins Diet actually hoped for, believing that you can’t ever be too rich or too thin.

    Published on: April 11, 2005

    Published reports say that Japanese authorities have found new case of mad cow disease on its shores, the 17th such case to have been found in Japan since September 2001.

    The discovery comes as Japan negotiates with the US to reopen its borders to US beef; Japan shut down the import of US beef after a single case of mad cow disease was found in the US in late 2003. Japanese officials have objected to the fact that while every cow in Japan is tested for the malady, relatively few cows in the US are tested.

    Meanwhile, there seems to be a move afoot in the US House of Representatives – opposed by the White House – to impose sanctions on Japan if it continues to keep its borders shut to US beef.

    We're encouraging the Japanese government to move expeditiously on this particular issue so that we do not get into a position where we have a broader trade dispute," House Agriculture Committee Chairman Bob Goodlatte (R-Virginia) told the Japan Times.
    KC's View:
    It seems entirely likely that this could delay the opening of Japanese borders to US cows. And quite frankly, this could make one think that maybe, just maybe the odds would seem to be that the US has more cases of mad cow that it simply isn’t finding.

    On the other hand, maybe not, Maybe what the Japanese ought to do is simply call the cows in Japan, and then only sell and eat beef from the US – because to this point it would seem that we don’t have the mad cow problem that Japan does.

    As for possible sanctions by Congress…in this case, it seems to us that Congress would be better off shutting up and butting out. Unilateral sanctions imposed by politicians looking to score points with the electorate back home would do nothing but exacerbate tensions.

    Published on: April 11, 2005

    The Associated Press reports that Ahold-owned Tops Markets will close three stores and eliminated as many as 450 jobs, in addition to the six stores and 390 jobs that were cut in January.

    The company said that some in-store meat and baking programs are likely to be eliminated in favor of outsourced products.
    KC's View:
    Maybe these cuts make sense.

    Or maybe, just maybe, Tops will end up cutting programs that differentiate it from other retailers, thus giving consumers less reason to go to its stores.

    Hard decision to make when times are tough and you think cost-cutting is the only way to compete.

    But sometimes efficiency isn’t really the problem. It’s effectiveness. And cost-cutting rarely is the answer to that problem.

    Published on: April 11, 2005

    The Cincinnati Post reports that Jungle Jim’s, the iconic and iconoclastic single store independent in Fairfield, Ohio, plans to open a second store in Oakley, Ohio – a 75,000 square foot unit that will “showcase the company's strengths in produce, perishables and international items.”

    The goal of the unit is to provide a kind of satellite shopping experience that will allow people to do their regular shopping there, and then visit the original store on occasion for bigger shopping trips.
    KC's View:
    In today’s market, you can’t just wait for the people to come to you. Sometimes, you have to go to the people.

    We suspect that Jungle Jim can make this work, and do it in a way that preserve the originality of his brand.

    By the way, what does it tell you when a company like Tops deals with current market conditions by cutting and then cutting some more, and Jungle Jim’s – a one-store independent – is doubling the size of his fleet?

    Just curious.

    Published on: April 11, 2005

    The New York Times reports that questions are being asked about the propriety of hiring public relations firm Porter Novelli for $2.5 million to help the US Department of Agriculture (USDA) market new dietary guidelines.

    The reason – Porter Novelli has a number of food industry clients, including M&Ms, McDonald’s, and the Snack Food association.

    “Government health officials say hiring a company like Porter Novelli is a smart choice,” the NYT writes. “Porter Novelli invented the pyramid graphic, which was released in 1992, and its experience with both food marketing and health-oriented social marketing campaigns just may be the right combination to persuade ever-fatter Americans to change how they eat.”

    However, the concern is that Porter Novelli will be able to shade the publicity its gets for the new dietary guidelines so that it benefits clients.
    KC's View:

    Published on: April 11, 2005

    • Senator Richard Durbin (D-Illinois) and Representative Rosa DeLauro (D-Connecticut) have introduced to the Senate and House of Representatives what is being called the Safe Food Act of 2005, which they say would consolidate all food safety programs into a single agency, replacing the current system that has these responsibilities fragmented among a number of departments.

    • The U.S. Court of Appeals for the Federal Circuit has rejected an appeal by the JM Smucker Co, which was looking to expand its patent on Uncrustables, frozen peanut-butter sandwiches with the crust trimmed off. At issue was whether the crustless bread can be patented, or whether it is a simple recreation of something that parents have been doing for children for decades.

      The US Patent and Trademark Office had twice rejected Smucker’s patent applications, forcing the company to turn to the courts.

    • The Detroit Free Press reports that Sears Holdings Corp. – the new company formed when Sears merged with Kmart – has announced that it plans to layoff at least 500 employees at its Chicago-area headquarters, twice the 250 that the company originally said it would eliminate post-merger.

    • Published reports say that A&P has decided to sell 70 of its Farmer Jack stores, as well as more than two dozen other units.

    • Ahold announced this morning that it has successfully completed the sale of its G. Barbosa operation in Brazil to ACON Investments, a US-based firm.

    KC's View:

    Published on: April 11, 2005

    • Ahold-owned Peapod, the online grocery service, announced that it has begun partnering with Rich Melman’s Lettuce Entertain You Enterprises in the Chicago and Milwaukee markets to sell products from the restaurant company and delivering them to customer’s homes and/or offices.

      Lettuce Entertain You Enterprises operates some 40 casual and upscale restaurants primarily in the Chicago area, and will be selling via Peapod gift cards, cookbooks, coffee, coffee cakes, wines, truffles, steaks, steak sauces, salad dressings and pasta sauces.

    • The city of Philadelphia has announced that the entire city – 135 square miles – will become an Internet “hot spot,” providing wireless high speed Internet access to any subscriber in the city paying about $20 a month. Commercial wi-fi plans generally cost about twice that.

      The goal is to give everyone in the city Internet access, though there is some debate as to whether this is the job of government.

    KC's View:

    Published on: April 11, 2005

    The Washington Post reports that merlot producing wineries are working to improve the image of the popular grape, damaged a bit by comments made by the lead character in the move “Sideways.”

    Early in the movie, Miles a neurotic wine snob of the first order, says about a dinner he’s going to, "If anyone orders merlot, I'm leaving. I am not drinking any [expletive] merlot."

    The filmmaker, Alexander Payne, says he was making a character point, not a wine point. Still, some winemakers are finding they have to do a little damage control.

    The upside, of course, is that Miles is a Pinot Noir fan…and sales of that wine have been skyrocketing.
    KC's View:
    We were driving through the Napa Valley on Saturday (more on this trip in Friday’s OffBeat), and we saw a sign that said:

    “Miles obviously never tried any Napa Valley Merlot.”

    We cracked up…turned the car around…and visited that winery. Good to have a sense of humor, we think.

    The huge popularity of “Sideways” offers retailers a great opportunity to promote all kinds of wine.

    They could do tastings of both Pinot Noir and Merlot with the tagline: “You decide.”

    We were talking to a retailer friend of ours the other day who mentioned that is selling sets of wine from the region toured in the movie along with the "Sideways" DVD, just out last week. We asked if he was doing the same thing, but he said no, his distributor hadn’t gotten him the DVDs yet. We told him he should do something semi-heretical: go up the street to Wal-Mart, but a few dozen of them, take them back to his store and package them together with bottles of Pinot Noir as a gift set.

    Which he did. (We hope he sells them out, because it will make us look semi-smart.)

    Can’t afford to wait around when this kind of phenomenon hits.

    Published on: April 11, 2005

    Get ready for longer days, if the US Congress passes a bill that would extend Daylight Savings Time for two months, having it begin on the first Sunday in March and end on the last Sunday in November. Daylight Time currently begins on the last Sunday in March and ends on the last Sunday in October.

    The goal of the move would be to save money on energy; some studies suggest that the change could save 10,000 barrels of oil a day out of the 20 million barrels of oil that the US uses on a daily basis.
    KC's View:

    Published on: April 11, 2005

    • Michele Buck, former senior vice president and general manager of Kraft Confections, has been named president of Hershey Foods’ new U.S. Snacks Group.

    KC's View:

    Published on: April 11, 2005

    • Rite Aid has posted annual revenues of $16.8 billion for the just-completed fiscal year, up 1.3 percent from $16.6 billion a year ago. Same-store sales were up 1.6 percent. Net income for the year was $302.5 million compared to a net income of $83.4 million for 2003.

    KC's View:

    Published on: April 11, 2005

    MNB had a story last week about a new study conducted by researchers at Yale University and Cornell University suggesting that while retailers, manufacturers, and regulators have long debated the controversial role of slotting allowances, they believe that slotting allowances do support efficiency in the marketplace.

    The study – entitled "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?" and written by K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell – offers data showing that “slotting allowances help balance the risk of new product failure between manufacturers and retailers; help manufacturers signal private information about potential success of new products; and serve to widen retail distribution for manufacturers by mitigating retail competition.”

    MNB user Glen Terbeek responded:

    The problem with the slotting study is that it assumes the old mass marketing model in today's over saturated marketplace.

    Of course, retailers will buy "sure hits" without seeking slotting allowances, they have to (although they will still take them if they can). And of course, manufacturers will be reluctant to offer slotting allowances for "duds" (you wonder why they offer them in the first place if they are duds.) These mass item decisions are no-brainers in my opinion. Wal-Mart understands and executes this very well.

    So that leaves us with "the unknown middle, when uncertainty about product success is greatest, that slotting allowances offer the maximum benefit to obtain retail shelf space" in the study's words. Wow! Is this backwards!?

    It seems to me, these are the very items that a retailer can/should manage to differentiate their local store offerings. They probably won't work for every retailer or for every store, but just might be very successful in some of them. They could be very good, but just not mass.

    Their uncertainty is due to the fact that the retailer, or should I say the category managers, just don't know if the item will perform or not. And this is because they don't have the local store market information/knowledge and confidence to use it to make the differentiating merchandising decisions for their local shoppers. This is exacerbated by the fact that they are not measured at the local store level, therefore they don't even have an interest in its performance. So even if an item might be dynamite for say ten percent of the stores or shoppers, it is a category performance risk. (Not to mention that the centralized, mass logistics systems don't support limited distribution items well).

    So you could say that the slotting allowances for these items is "insurance" to cover this "uncertainty risk" by the retailer/category manager. But what slotting allowances really represent is a material expenditure (inefficiency) to cover up the ineffectiveness of the mass system (that the industry continues to cling to, remember ECR) in getting desired targeted items to satisfy local shoppers' needs. They are false economics that will continue to encourage additional retailers to eat away at the current supermarket market share.

    Among the retailers who understand and manage the "unknown middle" to their local stores success are Whole Foods, Central Markets, Bristol Farms, plus many independents. In some cases they don't even carry sure shots.

    To correct the inefficiencies and ineffectiveness related to slotting allowances, the industry needs to organize and measure performance around the local market of each store. This will change the whole attitude and business practices re slotting allowances. Local marketing efficiency and effectives should be the objective, not mass distribution efficiency and effectiveness.

    Another MNB user added:

    Please let me know when Sudhir and Rao actually get real jobs in the grocery business. I'll think about paying attention to them then.
    KC's View:

    Published on: April 11, 2005

    Tiger Woods won his fourth Masters golf championship on Sunday.

    And the New York Mets finally won a baseball game…meaning that for the moment at least, the Mets have not been mathematically eliminated from the National League East.
    KC's View: