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    Published on: August 24, 2005

    Former Kmart CEO Charles Conaway and CFO John McDonald have been charged by the US Securities and Exchange Commission (SEC) with securities fraud and aiding and abetting securities fraud. They are accused of making “materially false” statements and misleading investors about the company’s pre-bankruptcy finances.

    Conaway and McDonald are said to have not disclosed to shareholders why the company made a “massive inventory overbuy” to the tune of $850 million in 2001 and how those purchases affected its liquidity. The company had falsely said that the raised inventory levels were because of seasonal fluctuations, according to the SEC.

    The SEC also says that Conaway and McDonald spearheaded the company’s decision to slow down payments to vendors, and then lie about why those payments were being reduced or withheld.

    Conaway and McDonald left the company after it declared bankruptcy in 2002. The new management had no comment on the charges. Attorneys for both men said they expect to be cleared of all charges.

    The SEC charges came just a week after the Detroit News reported that Conaway was cleared by arbitrators of charges made by former shareholders that he was guilty of negligence, mismanagement and essentially looting the company for his own benefit.

    Those charges were made by the Kmart Creditors Trust, representing in part the shareholders who lost $4.5 billion when the company became the largest retailer ever to file for bankruptcy in January 2002. In addition to clearing Conaway, the ruling also made it possible for him to recover his legal expenses from the trust.

    This is not a case of fraud, deliberate mismanagement or corporate looting," wrote the panel. "The evidence shows that Conaway acted at all times in good faith and in what he believed to be the best interests of Kmart. He made a determined, albeit unsuccessful, attempt to accomplish what he was hired to do -- stop Kmart's long decline ... turn the company around ... and restore it to its former position as one of the nation's preemiminent retailers."
    KC's View:
    We said it back when Kmart declared bankruptcy, and we repeated it even in the face of the decision by the arbitrators to absolve Conaway of all culpability. The previous management there seemed far more concerned about covering its own flanks and protecting its own financial interests than it was with the investors and employees to whom they were responsible.

    St. Thomas Aquinas said it best.

    “Justice is a certain rectitude of mind whereby a man does what he ought to do in the circumstances confronting him.”

    While little will help the investors who lost phenomenal amounts of money and employees who lost their jobs as Kmart imploded, we hope that some measure of justice is done here.

    Published on: August 24, 2005

    Apparently, real beauty can be skin deep. And more and more, it can be bought over-the-counter.

    The Boston Globe reports that “doctor-branded lines of ‘cosmeceuticals,’ as they have been come to be known in the industry, are rapidly moving from spas and physicians' offices into retail markets, and have become the fastest-growing segment of the $2.1 billion cosmetics market at prestige department stores, according to market research firm NPD Group. Now they are heading for even greater growth by infiltrating mid-level department stores and chain drugstores.”

    However, the Globe also notes that this new category “is pushing the boundaries of medical ethics, according to some doctors and academics who worry about dermatologists using their prestige to profit by selling glorified makeup to a trusting audience” – especially because cosmetics are not subject to review by the US Food and Drug Administration, which doesn’t even recognize the term “cosmeceutical.”
    KC's View:
    Mark Twain, we think, once said that the natural result of great wealth is pride, vanity, arrogance and tyranny.

    We would think that this whole area is pretty silly. On the other hand, if rich folks want to spend money on cosmeceuticals before they make the natural next move to Botox and plastic surgery, let ‘em.

    They’d probably be better off washing with Dove and caring more about really important things.

    Published on: August 24, 2005

    The Chicago Tribune has just completed a fascinating three-part profile of the Oreo, using the popular cookie as both metaphor and illustration of changing trends in American foods, the evolving tastes of the American consumer, and the continuing challenges to companies making money in the snack food business.

    While the Oreo is the world’s best selling cookie, the Tribune writes, “it also has become a symbol of another sort. To some it is a nutritional time bomb, emblematic of the junk food fueling America's obesity crisis, particularly among children. It is the kind of sugary snack that research suggests can trigger the same brain impulses as addictive narcotics.”

    And, the Tribune reports, “the Oreo's primary ingredients--sugar, flour and fat--are at the center of current dietary debates. And the company's quandary is one most foodmakers face: How can Kraft serve shareholders and employees, ensuring that its more fattening brands thrive while still responding to consumer concerns that it is feeding the obesity epidemic?”

    While Kraft was one of the first companies in the food industry to stop advertising to children – a decision that can be seen as a logical precursor to last week’s decision by the soft drink industry to voluntarily cut back on selling to children in public schools – there is no evidence that the debate – some would call it persecution – is going to end any time soon. And even if Kraft were to take steps even more drastic to address the obesity issue, the Tribune accurately notes another reality: “Americans express worries about their health but still want to indulge their guilty pleasures.” And there may be no more everyday, available – and quite possibly, addictive - pleasure than the simple Oreo.

    Indeed, Kraft has consistently tried to walk a delicate line – working to appear or actually be sympathetic to consumers concerns about obesity while at the same time offering as broad a range of choices as possible to sate consumer desires – offering, according to David S. Johnson, Kraft's North America chief, products “ranging from better-for-you options like Oreo 100 Calorie Packs to more indulgent treats like the chocolate-covered Oreo.” Now, the paper notes, the Oreo now comes in 40 different flavors, colors and package sizes

    It is, of course, a tricky and changeable landscape that Kraft has to navigate. The Tribune writes, “Oreo's makers added trans fat a decade ago, in a race to address worries that lard in the cookie could lead to heart problems. Later, research showed that trans fat was even worse for the heart than lard.”

    So now, Kraft is embarked on trying to develop a trans fat-free Oreo – a tough job because consumers don’t like an Oreo that doesn’t taste like an Oreo. At one point the company believed it would have one on the market by this month…but now, it is predicting the end of the year.
    KC's View:
    Great piece by the Tribune.

    Maybe it is just because we like Oreos so much – does this make us an addict? – but we have to say that whatever its motivations, Kraft seems to have done the right and proper thing by providing a broad range of Oreo-type items with different levels of fat. Forty versions should be enough – and certainly give people plenty of room within which to make personal decisions.

    One of those decisions, of course, is not to buy them and eat them.

    Published on: August 24, 2005

    The Detroit News reports that the United Food and Commercial Workers (UFCW) has been in talks with both A&P-owned Farmer Jack and several companies interested in acquiring the division.

    Subject of the discussions, which are termed “exploratory” and preliminary”: hammering out some sort of agreement between the union and whatever company ends up owning Farmer Jack’s.

    A&P announced its intention to sell the division earlier this year. While potential buyers have not been identified formally, Spartan Stores has been named in the media as a likely suitor.

    Negotiations are described as being both “fragile” and “confidential.”
    KC's View:

    Published on: August 24, 2005

    Food Lion’s Bloom stores in the Charlotte, NC, market reportedly are going through a series of charges that the company hopes will make them more responsive to consumer needs.

    "For more than a year, Bloom has sought customer feedback, and we've listened," said Robin Johnson, director of brand development and marketing for Bloom. "These five Bloom stores have truly been learning labs, and with our customers' input, we have worked to refine the Bloom concept." Starting Aug. 31, Bloom customers will find remodeled stores, a greater variety of fresh fruits and vegetables, more cuts of fresh meat, new fresh seafood counters, more fresh-baked breads, a broader selection of wines, and greater variety throughout the grocery aisles.

    "Even though we are making some changes and will continue to make enhancements, the Bloom concept remains true; to provide a thoughtful, straightforward, hassle-free shopping experience customers will enjoy," Johnson said.

    More specifically, the changes include 1) 60 percent more items in produce; 2) a wide assortment of Angus, dry-aged and all-natural beef, as well as natural pork and poultry; 3) in the bakery, more than 25 kinds of artisan and whole grain breads; 4) expanded selection of specialty cheeses; 5) new "Wine-in-Motion" displays with rotated, select wines often available on a while-supplies-last basis; and 6) the introduction of more than 1,000 gourmet and specialty food items.
    KC's View:
    We continue to be extremely impressed by all of the US retailers owned by Delhaize – their willingness to try new things, stretch themselves, play offense in the battle for sales and market share.

    We love it when they describe Bloom as “a thoughtful, straightforward, hassle-free shopping experience customers will enjoy.”

    Because they mean it.

    And not many supermarkets can claim to be trying to achieve the same thing, much less accomplishing it.

    Published on: August 24, 2005

    • While Wal-Mart continues to grow its sales, reigning as the world’s largest company by revenues, there are suggestions that when Fortune publishes its annual list of top companies next year, it may fall to number two.

      And it can blame gas prices.

      Published reports note that because of high fuel costs, ExxonMobil has reported first half sales of $170 billion, $22 billion more than Wal-Mart reported for the first half of the year.

    • While much of the discussion has been about Target becoming the sole advertiser in the current edition of The New Yorker, now comes word that Wal-Mart also plans to do something a little different in the advertising area.

      Take out eight pages of ads in the September issue of Vogue.

      “It's not an image makeover we're after," Julie Lyle, vice president for corporate marketing, advertising and administration, told the International Herald Tribune. "We're very confident that our customers understand that we own the price/value equation. Many times we have what these affluent customers are looking for, but they don't know it's there."

      According to the paper, “the Vogue ads feature shoppers showing how they put together outfits at Wal-Mart. The women describe the items and give the location of the Wal-Mart store near where they live.”

    KC's View:

    Published on: August 24, 2005

    • The United Fresh Fruit & Vegetable Association (UFFVA) has established a new Business Development Council that it says is “designed to help United members develop more efficient and profitable businesses by taking a more comprehensive, industry-wide approach to professional training and education.”

      The Business Development Council reportedly will focus on member programs including educational and training workshops for all segments of the industry, retail- and foodservice-specific programs, executive management and leadership certification programs, publications, international marketing activities, and other programs and activities that build the overall strength and profitability of the produce industry.

      Members of the council will be both retailers and suppliers, and will serve a two-year term.

    • PepsiCo reportedly plans to introduce a new energy drink - Mountain Dew MDX – that will build on the popular Mountain Dew brand. The line, said to be on line to be introduced later this year, will be available in regular and diet versions.

    • Workers at a Penn Traffic HBC/GM warehouse in Jamestown, NY, reportedly have voted to end a strike that began August 8, ratifying a contract offer that will give them pay raises and increased pension contributions by the company.

    KC's View:

    Published on: August 24, 2005

    • Canada-based c-store chain Couche-Tard reported that its first quarter net earnings that were up 12.5 percent to $54.1 million (US) compared to $48.1 million (US). Sales for the period were up 19 percent to almost $2.2 billion compared to a year ago.

    KC's View:

    Published on: August 24, 2005

    • Ezequiel Gómez Berard has been named by Wal-Mart Argentina to succeed the departing Antonio Barbero as the company’s managing director.

    KC's View:

    Published on: August 24, 2005

    We read a press release yesterday that demands to be reprinted:

      Energy drinks get all the hype these days, but a healthier alternative with an enormous potential is hitting the shelves in the sizzling nutraceutical beverage market. The growth in nutraceutical beverages has been truly amazing, with formulation from Steven Seagal, who can now can add "Energy Drink formulator" to a list of talents that already includes veteran actor, singer/songwriter, guitarist, Aikido black belt and master herbalogist.

      Maintaining an unrelenting schedule that would tire younger entrepreneurs, the 54-year-old Seagal has just completed two movies, "Into the Sun" and "Submerged." His album, "Songs from the Crystal Cave," released earlier this year, has already hit the pop charts in Europe. Lightning Bolt Energy Drink(TM) is the result of Seagal's travels in Asia in search of the botanicals believed to keep many locals disease-free for life. Seagal says he discovered the benefits of Asian Cordyceps (one of the most rare and treasured botanicals used in Chinese and Tibetan medicine for thousands of years) while researching immune builders in Asia. It promotes energy, vitality and longevity. Other unique ingredients of the drink include the Tibetan Goji Berry, a powerful anti-oxidant and a juice concentrate with a patented process that contains naturally occurring policosanols. Policosanols have been shown in clinical studies to lower cholesterol.

      Lightning Bolt is the first energy drink made from 100% natural juice. It is all natural with no sugar added and also contains vitamins B3, B6, B12 and B5. "I have traveled the world creating this drink; there is none better that I know," says Seagal, who frequented Tibet and Japan in the 1960s and 1970s while learning Buddhism, martial arts and herbalogy. "I have included in this drink everything I could to strengthen the body."
    KC's View:
    We had no idea that Steven Seagal was a master herbalogist.

    We knew that he was a lousy actor with a dead career.

    But a master herbalogist? Go figure.

    We would have bet that he couldn’t even spell “policosanols” and “Asian Cordyceps,” much less find them and turn them into energy drinks.

    Wonder if we can get “Songs From The Crystal cave” from iTunes?

    Published on: August 24, 2005

    We continue to get email about the trend toward using “real women” in advertisements by companies such as Dove and Nike.

    One MNB user wrote:

    I read your views almost every day (sometimes I'm just too busy), and I'd like to respond about the Dove ads.

    I am a size six marathon runner, but when I look at my body in the mirror, you can be sure that I identify more with those women in the Dove ads than I do with any other face gracing the magazines and billboards around me. When I look in the mirror, I see every skin imperfection, every thigh-dimple, every scar from the years before I realized I should work to be healthy and in shape. I'm happy that Dove recognizes this in women and shows it off in their ads. I am very loyal to Dove soap, and because of this loyalty and their general brand identity, I try almost every product of their on the market. I may not stick with the product, but I do try it. So, it may not work for some consumers out there, but it does work for enough of us.

    MNB user Amy Haefele wrote:

    I've been a few days behind on reading my MorningNewsBeat, so I didn't know about the Dove ads until today. I can't believe the jerks who sent in the comments about the "fat women" that are "25-35 pounds overweight." They looked completely normal and beautiful to me, and it's nice to have ads that don't make me hate myself when I look in the mirror. I'd wager that those guys don't exactly look like Chippendale dancers either, and they'd better pray that women don't look at them the same way that they expect women to appear. Get real.

    By the way, we need to correct something we wrote yesterday. We said in our commentary that we couldn’t find any Garth Brooks albums on iMusic…when, of course, we meant iTunes – the Apple service that ties in with our iPod.

    On the subject of non-compliance with some federal mad cow-related regulations, one MNB user wanted to comment on the statement by Jim Hodges, president of the American Meat Institute Foundation, that the low number of infractions “demonstrate a remarkable level of compliance with federal regulations exceeding 99.9 percent.”

    Somebody once said to me that 99.9% is not acceptable when it comes to safety. It was stated in the context of a light switch as follows:

    Would you feel comfortable if 1 out of 1000 times you flipped a light switch you’d be electrocuted?

    When it comes to Mad Cow disease, 99.9% compliance is simply not good enough.

    We also thing there is a difference between infractions committed and infractions identified.

    MNB reported yesterday that Montana Gov. Brian Schweitzer has accused the US Department of Agriculture (USDA) of acting in the best interests of the meat industry, not consumers, and called for individual states to supervise the federal inspectors who oversee the import of Canadian beef into the United States.

    We commented that while Schweitzer may be right, he seems overly concerned about the price of beef and the welfare of his state’s beef producers…which means that he has something in common with the USDA, which seems more focused on economic matters than food safety.

    One MNB user responded:

    The beef farmers are just jealous of the generous economic benefits Congress has provided for dairy farmers such as price supports, import restrictions, and a federal milk order system that adds a premium to milk used for beverage purposes. To be fair, Congress should pass laws to set a minimum support the price for beef, limit beef imports to about 6% of domestic production, and mandate a higher price for beef sold fresh as opposed to beef that is sold in frozen or canned form, or used in other foods such as frozen dinners.

    MNB user Rebecca Brown wrote:

    The Montana Governor and the USDA must be related - the old adage that the apple doesn't fall far from the tree comes to mind.

    Thank you, Kevin, for continuing to give clarity to the real issue here which is the health of the consumer, not the thickness of the cattlemen's wallets.

    And, on the subject of 11,000 people showing up to apply for 400 jobs at a new Oakland, California, Wal-Mart (which some people said spoke to the area’s five percent unemployment rate). MNB user David Livingston wrote:

    I really doubt that a 5% unemployment rate had anything to do with 11,000 people applying for 400 jobs at Wal-Mart. I think 5% unemployment is in reality full employment because 5% of the people generally do not want to work anyway. While Wal-Mart might not be a good place to support a family, it is great place for teenagers, bored housewives, and the elderly. It is also a great place for the spouses of the self-employed to obtain cheap affordable health insurance.

    On the other hand, some analysts say that the local unemployment rate is a lot worse than five percent, and that a lot of people without jobs since the dot-com collapse have just fallen off the radar.

    Writing about a list of “mega trends” that are believed to be critical to the success of any new food product, we noted that the trends are largely about speaking to people’s aspirations, and rarely about settling: “Which makes you wonder why so many retailers settle for a lowest common denominator approach to retailing when a ‘raise the bar’ approach might actually create a differentiated offering.

    One MNB user responded:

    It's simple - today's mass marketers continue to work under the assumption that not selling everything to everyone all the time is a sign of failure and inability to be promoted. Differentiation means selling some things to some people some of the time. When done well it generates loyalty (greater number of transactions) and word of mouth marketing (free advertising!). Doing it well means being passionate about your products and consumers, but most marketing training is focused on dispassionate, quantitative thinking.

    As an example, I was at a meeting once discussing methods for new idea generating. Once speaker, an engineer turned marketer for a large food company, said he finally stopped sitting behind the glass at focus groups and started going in the room to talk with the participants directly so he could get a 'feel' for their interests, concerns and expectations. When he said that the room visibly tensed, as if talking directly to potential consumers was heresy of some sort. They couldn't fault him, though, since his presentation was about a new product that most of the people in the room could relate to and probably had in their homes.

    I shop Whole Foods and Trader Joe's because they differentiate, sometimes toward my interests and sometimes away, but it is always interesting to shop there and I frequently pick up something I hadn't planned to buy just because it looks interesting.
    KC's View: