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    Published on: June 12, 2006

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    KC's View:

    Published on: June 12, 2006

    There were numerous published reports over the weekend that a number of hedge funds are building up their holdings in Ahold, the world’s fourth biggest retailer with sales last year of $52 billion. The funds’ goal: a possible break-up of the company, which could have an impact on its US chains, which include Stop & Shop, Giant Food, and Tops.

    Two of the hedge funds mentioned prominently are Centaurus Capital in the UK and Paulson Partners in the US. According to reports, these funds are working with other investors to keep their individual positions in Ahold below five percent, which Dutch rules say do not have to be disclosed. While the strategy is said to be its preliminary stages, the goal is to amass a large enough stake in the company that it can catalyze management to try and maximize shareholders’ investments.

    Among the options are selling off the company, and splitting its three businesses – US retail, US foodservice, and European retail – into three separate companies. Reports are that the hedge funds believe that the three businesses have few if any synergies and would be more effective and profitable if separated. One of the central complaints has been that while Ahold CEO Anders Moberg said 2006 would be the company’s “year of recovery” after the 2003 accounting scandal that roiled the company and forced the resignation of numerous senior executives, not to mention their prosecution on both sides of the Atlantic, the company recently abandoned its financial targets this year as being unreachable.

    The hedge funds reportedly have been in touch with John Rishton, the Ahold CFO who joined the company just six months ago. And there are even reports that the hedge funds may already have started looking actively for potential buyers.

    Ahold has not commented on the reports.
    KC's View:
    This could be the inevitable end for a company that has been undermined by what essentially was a culture of corruption and greed, and senior executives who took their eyes off the ball for too long. Instead of the customer being the focus of attention at the highest levels of the company, the plaudits of investors and stock analysts became the barometer for success. Which meant that the wrong dollar was being pursued, and seemingly at all costs.

    Even as management tries to rebound from the scandal that almost wrecked the company, it seems ironic that the investor class would now consider the breakup of the company. After all, for years Ahold was held up as a model of how to acquire regional chains and let them operate successfully and profitably. Now, it seems, the company could well end up being a model for something else, something far less praiseworthy.

    Published on: June 12, 2006

    The Idaho Statesman reports that Larry Johnston, the former CEO of now-defunct Albertsons Inc., and that company’s former board of directors has been hit with a new lawsuit charging that they breached their responsibilities to the company’s shareholders.

    It was just 10 days ago that Albertsons was broken up and sold in parts to Supervalu, CVS and an investment group headed by Cerberus Capital Management for a total of $9.8 billion in cash, plus assumption of debt. (While Supervalu and CVS plan to invest in their newly acquired stores, Cerberus already has announced its plans to close some 100 units.) The sale of Albertsons has raised a lot of criticism in certain quarters because of the more than $100 million being paid to Johnston as part of his severance package.

    The new lawsuit, according to the Statesman, contends the board and Johnston “did not act in shareholders' best interest when they accepted the lesser of two buyout bids for the entire company and agreed to pay a multimillion-dollar golden parachute to Johnston.” The suit asks that company shareholders be paid as if the higher bid – which the board dismissed as too risky – had been accepted.

    It is actually the second lawsuit filed in this matter by Frank Nordby, an Albertsons shareholder and grocery clerk with the company. The first suit charged that the board breached their duty to shareholders by giving Johnston an $8 million raise last year that boosted his golden parachute.
    KC's View:
    The only thing that surprises us is that Nordby seems to be b y himself out there, tilting at the Albertsons windmill like some sort of Don Quixote in a grocery clerk’s apron. Whether or not Johnston and the Albertsons board are guilty of a legal malfeasance is beyond our ability to interpret the law, but their behavior certainly seems self-serving and unethical – and worthy of challenge in the courts.

    Published on: June 12, 2006

    CNN reports that a new study by the University of Portsmouth published by the Journal of Allergy and Clinical Immunology says that infants are probably not as allergic to foods as they think they are.

    The study says that more than half of children scrutinized by researchers were avoiding some foods because their parents believed they were sensitive to them. However, only between two and six percent of infants actually have clinical food allergies.

    The findings "emphasize the need for accurate diagnosis to prevent infants being on unnecessarily restricted diets, which may be associated with inadequate nutrition in this important period of growth and development," the researchers conclude.
    KC's View:
    So much for relying on “Dr. Mom”…

    Actually, we found this interesting because a friend of ours was telling us how he was suffering from a consistent lack of energy, and at the urging of his doctor, had a series of tests performed – and found out that he was allergic to an astounding number of foods that he was eating on a regular basis. He wasn’t aware of any food allergies to that point…

    Still, we’ve often wondered about all the kids who seem to have food allergies these days, requiring separate tables in the cafeteria and a ban on certain foods in specific classrooms. It seems almost epidemic…and yet, we don’t remember, for example, any peanut allergies when we were growing up.

    If this is evolution, there seems to be something wrong somewhere.

    Published on: June 12, 2006

    The Boston Globe reports that management of Dunkin’ Donuts plans “to rely on multiple formats to rapidly expand to nearly 15,000 US locations by 2020, up from about 5,000 today. That can range from gas stations to carts to Dunkin' stores inside supermarkets and other retailers.” Some 650 new stores are expected to be opened in the United States in just the next fiscal year.”

    The workhorse of this expansion plan, however, is likely to be a new prototype store opened in Rhode Island that has “a smaller footprint and a warmer color scheme, that includes tans and browns, as well as the brand's signature pink and orange.” It also, according to the Globe, “features a more open design to better showcase newer products -- such as breakfast pizza, and gourmet cookies and brownies. Cookies and brownies are supposed to give a jolt to Dunkin' Donuts' afternoon business.”

    While much has been written about the company’s desire to compete more effectively with the Starbucks juggernaut, Joe Scafido, chief creative and innovation officer of Dunkin' Brands, tells the Globe that there are limitations to how far they will go: “No fireplaces, no couches, or WiFi connections.”
    KC's View:
    We understand the desire to avoid couches and fireplaces, but not having WiFi is a mistake.

    Actually, if the company really wants to compete with Starbucks, Dunkin’ Donuts should offer free WiFi.

    Published on: June 12, 2006

    • The annual study of online retail satisfaction conducted by ForeSee Results and FGI Research indicates that for the second year in a row, Netflix and Amazon have outperformed brick-and-mortar multi-channel merchants.

    However, the news is not all good for online retailers. There also is a suggestion that while online revenue grows, customer satisfaction with the online experience is largely stagnant – which means that opportunities for additional sales likely are being lost.

    According to the report, “High customer satisfaction is linked to higher likelihood to purchase and to recommend. Online shoppers for retailers in the top 10 percent of the Index were 33 percent more likely to purchase online than the bottom-performing 10 percent. Also, online shoppers were 16 percent more likely to recommend the retailers' site if it was one of the Index leaders, allowing these top-performing retailers to capitalize on the word-of-mouth marketing potential of highly satisfying retail websites.”

    In addition, “Three of the top-performing companies are web-only merchants. Netflix and Amazon scored 85 and 83 respectively on a 100-point scale. Newegg.com, an online retailer of computer and electronics products, scored 82 as did QVC. Multi-channel retailer Chadwicks.com showed the biggest gain from the holiday season, up 6.8 percent to 78, while BananaRepublic.com suffered the biggest drop, down 8.2 percent to 67, to become the lowest scoring site on the Index.”

    Larry Freed, CEO of ForeSee Results, says that contrary to expectations, online shopping is not tied to discounting. “Given the Internet's unrivaled convenience for comparing prices, one would think that price competition is a key driver of satisfaction in the online channel,” he says. “But on the whole, other elements of the online shopping experience are more of a determining factor for satisfaction, loyalty and future behaviors, such as the likelihood to return, recommend, or purchase. Since price is rarely the primary driver of customer satisfaction among the Top 40 retailers, then companies must compete on other drivers, like merchandise selection (or) site experience…”
    KC's View:
    The lack of emphasis on price is intriguing…and seems to play into the “long tail” business theory that we’ve been talking about a lot lately – that the Internet’s real value to consumers is how it makes so much available to them, getting people to try and buy products that they might not have even considered before.

    Amazon.com and Netflix are the poster children for “long tail” business theory.

    Published on: June 12, 2006

    The Chicago Sun Times reports that, following up on a city ban on the sale of foie gras because of concerns about cruelty to animals during the manufacture of this products, at least one Chicago alderman is suggesting that the city also ban meat treated with carbon monoxide, a process criticized because it keeps meat looking fresh even as it approaches and passes it expiration date.

    However, Alderman Edward M. Burke may not stop there. He’s also considering the introduction of legislation that would ban the use of trans fats and other artery-clogging fats when frying foods.
    KC's View:
    Of course, the Chicago City Council also is considering legislation that would force horses pulling carriages in public places to wear diapers.

    It may be the Windy City, but it also seems to have its share of hot air.

    Published on: June 12, 2006

    PepsiCo reportedly will distribute Ethos Water, owned by Starbucks, to more than 100,000 stores in the US and Canada. Terms of the deal were not disclosed.

    Starbucks has pledged to donate five cents for each bottle of Ethos Water sold to the cause of promoting safe drinking water around the globe, and expects to donate at least $10 million over the next five years to non-profit organizations that pursue this cause.

    The deal extends the partnership that Starbucks and PepsiCo established more than a decade ago to make and distribute Frappuccino, DoubleShot espresso and Starbucks Iced Coffee.
    KC's View:

    Published on: June 12, 2006

    The Chicago Tribune reports that the American Medical Association (AMA) is recommending to its membership that the organization push for rules that would require greater physician involvement with the operation of in-store medical clinics.

    “Some AMA members say the clinics should not be a substitute for the doctor-patient relationship and need more uniform state rules requiring closer physician involvement,” the Tribune writes, and that this new health care model should be greeted with “a healthy dose of skepticism.”

    Texas-based Minyard Food Stores reportedly plans to install 25 in-store medical clinics over the next three years, with five planned to be opened this year. MedXpress is the company that will operate the clinics, which will have nurse practitioners or physician’s assistants on staff to offer routine medical services.
    KC's View:
    Cheaper and more accessible…just the elements of the new health care model that would make one skeptical about it.

    Published on: June 12, 2006

    The Baltimore Business Journal reports that former US Foodservice CFO Michael Resnick, indicted on criminal fraud charges related to the artificial inflation of the company’s earnings, has sued his former employer for bonuses, vacation pay and other benefits that he claims are owed him – plus $1 million in damages.

    According to the Journal story, “Resnick claims that after the fraud was discovered, Anders Moberg, head of U.S. Foodservice parent Ahold, told him Ahold would hire a new U.S. Foodservice CFO. Moberg told Resnick that he would be transferred to a senior operations position with U.S. Foodservice in the western United States because of his good work for the company, the suit says. But soon after, U.S. Foodservice told Resnick it had decided to terminate his employment instead of transferring him, the suit claims. U.S. Foodservice allegedly agreed to pay Resnick's salary through September 2003, pay him any bonuses he was entitled to for 2002 and 2003 and give him other benefits including four weeks' vacation pay. Resnick agreed to resign as CFO, according to the suit.

    “Resnick claims U.S. Foodservice paid him his salary as agreed, but did not pay him any of the other benefits he was owed under the agreement.”
    KC's View:
    We know Resnick is indicted, not convicted…but we all certainly know what happened at US Foodservice on his watch, and as CFO, Resnick certainly seems to bear a certain responsibility.

    So launching a lawsuit to get benefits that would have been earned even while he was behaving in a questionable fashion takes a certain kind of gall.

    Maybe it would have made more sense to wait until, say, he was exonerated in the court system…?

    Published on: June 12, 2006

    • Starbucks reportedly will expand its presence in New Zealand from 44 stores to as many as 100 – though the strategy could take as long as eight years to implement. It also will require expanding beyond large cities to so-called “second tier” locations.
    KC's View:

    Published on: June 12, 2006

    • Fendi, an Italian fashion group, has sued Wal-Mart, accusing the company of selling counterfeit handbags, wallets and keychains in its Sam’s Club stores and trying to pass them off as actual Fendi merchandise. The company says that Wal-Mart has never purchased any products from Fendi and never asked if the items in question were real.

    Wal-Mart has not commented on the suit, which asks that Fendi be paid unspecified damages and that all remaining, unsold products be destroyed.

    • The Washington Post reports that Wal-Mart is considering sourcing what is called “fair trade” coffee beans from Brazil, a move that would be a “radical undertaking” for the retailer.

    Because the hallmark of so-called “fair trade” products is that the producers – generally in third word nations - receive a fair wage, such a move by Wal-Mart “would be a novel arrangement for a company infamous for squeezing pennies out of its suppliers -- and a test of how deep its makeover will really go.” The Post writes that “supporting fair trade presents a paradox for Wal-Mart. It is a tacit admission that there is a point at which no more efficiencies can be squeezed out of the system without harming the people who make it work.”

    The plan being considered would, in fact, be part of CEO Lee Scott’s effort to give the company a public relations makeover, stressing that it can do well by doing good.” But because Wal-Mart attracts considerable attention and criticism, there already are concerns not just about how sincere the company’s commitment to fair trade is, but what its business could mean – positively and negatively – to the farmers with whom it does business. Part of the concern is that if Wal-Mart were to pull its business from one of these farmers after a period of time during which it bought considerable product from the coffee producer, the impact could be devastating.

    KC's View:

    Published on: June 12, 2006

    MNB had a story last week about a new study done by Yankelovich Inc. that looked at attitudinal differences between “new moms” and “non-new moms,” and we commented that the essential conclusion was that new moms can best be described as women young and energetic enough that they haven’t had their idealism beaten out of them by ingrate children. (Not that Yankelovich put it quite that bluntly.)

    MNB user Catherine Lanna responded:

    I don't think idealism is only beaten out by ingrate children but also by other moms, with too much free time on their hands, that feel they have an obligation to offer unsolicited and uneducated comments to your own situation. That's not cynical, just realistic.

    We sense a voice of experience here…

    Another member of the MNB community wrote:

    I busted out laughing (at the office in the middle of the cube farm) when I read your response to "Not All Moms Are Created Equal," specifically your statement that "New Moms can best be described as women young and energetic enough that they haven’t had their idealism beaten out of them by ingrate children."

    I recently bought a button for a friend of mine that is the mother of three. It says "I Used To Have A Brain - Now I Have Small Children."

    But the best part (the part I didn't laugh about) was when you said that "the older you get, the more you realize that life is complicated, that life requires compromise, and that aspirations sometimes have to give way to reality, even if just a bit." Ouch! Truth hurts so early in the morning...

    Then again, I miss my idealistic youth.


    Skepticism, even cynicism, often are byproducts of age. It’s inevitable, since as we all see and learn more, it can’t help but affect our attitudes. We’ve long felt that it’s critical to leaven cynicism with some kind of idealism, to which we should cling desperately like a life raft.




    We got a bunch of emails last week responding to our story about Disney licensing its name for labels to be used on fresh produce as well as other products. One of the items already being sold is “Old Yeller” dog food…and we commented that since Old Yeller died at the end of the movie, it might not be the best image to conjure up.

    One MNB user wrote:

    Your memory is correct, but Old Yeller doesn't just die in the end of the movie. He gets bitten by a wild animal, goes rabid, and the little boy who owns him has to shoot him! I know I'm not the only person with a lingering childhood trauma about this movie. Of all the dogs in Disney's catalog, I was really surprised that THIS was the dog the chose. What about Pluto and Goofy?! Lady and the Tramp? 101 Dalmatians? Using that monkey from Aladdin would have made more sense...

    And another MNB user chimed in:

    Let’s not forget that Old Yeller was put down after turning rabid. Now there’s an appealing image for your brand. You’d think Pluto or Lady & the Tramp would’ve been better choices — or is Disney hoping to steal some of category leader Old Roy’s equity?

    Another MNB user wrote:

    I read your column almost daily. I love your style and you make points that many of us wish we could make to our upper management. Regarding your piece on Disney’s decision to get into pet merchandise, all I can say is “It’s about time!”

    Though I, too find it odd that they used the name of “Ol’ Yeller” on the pet food; that film is forbidden in our home.

    My family spent a wonderful weekend in the Magic Kingdom, I was amazed to see that they have a kennel on site for those who like to travel with their four-legged children. Of course, our kids ended up with souvenirs, but when it came to our Lab, we really had to work to find him a toy. While we did find something for our pooch (a little baby Pluto plush toy intended for toddlers and not nearly as drool resistant as items designed to be chewed!), Disney could have gotten a while lot more out of us if they had offered some leashes, collars, real chew toys, etc. If memory serves, Pluto has a house in Toontown that can be used as a retail store. We were amazed that the marketing wizards at Disney could miss such an obvious opportunity.


    Another MNB user wrote:

    First and foremost there is a cost issue here - someone will have to pay for putting stickers on all those pieces of fruit. Guess who? Secondly there is the handling itself - yet more processing for a simple (and dare I say healthy?) item that does not actually need any additional handling. Thirdly, a question of packaging. Will putting the sticker on also mean selling the fruit in bags, which cost even more and require yet more processing to the fruit to maintain its freshness? About the only good thing in this is that kids will want their parents to buy it but it will be interesting to see whether they also eat it or just collect the stickers and ditch the fruit.

    But most people seemed to disagree with us.

    One MNB user wrote:

    Is Sam Walton's Ol' Roy still living? Customers seem to buy that brand.

    True.

    Another MNB user wrote:

    You may be surprised at how well the Disney produce program is put together. The depth of program is strong. The company behind this, Imagination Farms, is the only company solely focused on increasing consumption of produce among children. Their program is building to give parents choices for children in every major produce category.

    Maybe our opinion is influenced by a memory of our mother trying to get us to eat spinach as a kid by buying “Popeye’s Spinach.” We weren’t buying into it even then…

    MNB user Marty Nicholson wrote:

    While Disney may have forgotten its heritage regarding “Old Yeller”, it certainly is making some very good moves in other areas. Ending its long time relationship with McDonald’s due to the perceived unhealthy connection between some of their products and kids (obesity), and positioning their brand and characters with a new line of fresh fruits and vegetables distributed by Imagination Farms under the Disney Garden label. They have also rolled out branded produce items in Europe (Tesco, of course!) already.

    As the U.S. growing seasons begin, consumers will soon see dozens of produce items under the Disney Garden label. Imagination Farms is targeting kids by packaging small fruits and vegetables and ones easy to eat out-of-hand, like cherries, blueberries and fresh-cut apples. Their mission is to increase consumption of fresh fruits and vegetables among children! A very worthy goal indeed!


    And another MNB user wrote:

    You forget that it is not the way Old Yeller died in the movie, it was the way he lived.




    On the subject of new competition for Starbucks, one MNB user wrote:

    I believe the timing is perfect for Dunkin Donuts, Burger King and McDonald's to undertake a major effort to challenge Starbucks. As a fairly consistent patron of Starbucks, I am starting to wonder whether the company's commitment to the "Starbucks ambience, lifestyle, attitude" has detracted from its commitment to a high quality product. It seems to me that more and more of my visits prove to be disappointing as the product quality is lackluster --- improperly made beverages, cups filled with &frac; foam and 1/4 liquid. All in all, I find that companies such as Dunkin Donuts provide a more consistent product than does Starbucks and I believe they will be able to capitalize upon this key point of difference as they challenge for more revenue.

    The acts of lounging at Starbucks and enjoying a quality beverage are not mutually exclusive -- as the product quality starts to decline so too will the number of folks lounging in the stores. Frankly, five years from now, I believe we will be talking about the over-expansion of Starbucks and how it diminished the value of the brand.





    We covered the Senate’s inability to pass a permanent estate tax ban last week, which also resulted in some email.

    One MNB user wrote:

    You can argue forever on what the correct answer is but the fact that the money has already has been taxed as income once seems pretty clear to me that this tax needs to go away. It also often hurts families at a time when most could probably use some help. As far as the deficit; although it is out of control currently fiscal responsibility is the key (Clinton had a cash surplus when he left office). As everyone knows the key to financial success is not how much you make (Taxes) but how much you save (Financial responsibility).

    Another MNB user wrote:

    It ain’t a death tax, no matter how you look at it. The dead aren’t being taxed. The beneficiaries of the estate are being taxed. Inheritance is income not a birthright.

    MNB user Ray England had a recommendation:

    In my opinion, the estate tax is just another example of the US Government imposing its power into the everyday lives of ordinary and not so ordinary families. It is another example of an effort to redistribute wealth. No different than our income tax code and the multiple entitlement programs our tax money supports. This type of government strong handedness impacts every individual and business.

    Think about a thriving family business that looses the head of the family and the company in a tragic accident resulting in a tax bill for that company of forty or fifty million in estate taxes to the government. All because of a tragic accident that robbed the company of its leadership and now it’s operating capital. What is the impact on that business and the people that work for it? Why should a company or any individual family have to pay taxes on money that has already been taxed multiple times; regardless of the U.S. deficit? Congress is responsible for creating the deficit. Not individual families or businesses. Ultimately, this is nothing but class warfare at its worst.

    Now there is a tax solution out there that I believe provides a solution to both sides of the political isle; liberal or conservative. It satisfies those that want a smaller, more efficient government that has less power over individuals and businesses, and those that are jealous with the success of others and believe that those with the most should pay the most where taxes are concerned. This system of taxation is called the Fair Tax, or House Bill 25 (HR 25).

    The Fair Tax does away with all federal income taxes, Social Security taxes, Medicare taxes, interest income taxes, capital gains taxes, dividend taxes and the inheritance tax for business and individuals. All of these taxes are replaced with a national sales tax of 23%...

    …Who is against this bill? Politicians and lobbyists are. Why? Because politicians enjoy the power to tax or not to tax and lobbyists make a living gaming the system. Check out your Congressman’s web site to look at their current legislation and count how many have to do with amending the Federal Income Tax code of 1986. A tax code amended some 10,000 times in the last 16 years.

    You may choose not to post my response on your site and that’s cool but perhaps you will take the time to do some research on the Fair Tax and judge its merits for yourself. If you do choose to post it, I hope that those not familiar with the Fair Tax take the time to check it out. It could be the best thing ever for our economy and business success of all types.





    Finally, we had a piece last week about all the speculation surrounding a 125,000 square foot building in Jane, Missouri, that is located behind a Wal-Mart Supercenter. The building is owned by Wal-Mart, but not open to the public; in fact, even the county assessor had to sign a nondisclosure agreement just to get in for an inspection. And nobody seems to know what’s in there, though some feel it is where Wal-Mart does all its data analysis.

    But one MNB user seems sure of another possibility:

    I think that is where all the union people are held and the FBI should take a look for Jimmy Hoffa there as well. I’m just kidding, sort of…

    Hey, Hoffa was a union organizer, and Wal-Mart is assiduously anti-union.

    Coincidence? We think not…
    KC's View: