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    Published on: January 24, 2007

    Notes & commentary from FMI Midwinter (Day Two)…by Kevin Coupe

    ORLANDO – To put it simply, Safeway CEO Steve Burd’s speech yesterday about solving the health care crisis that afflicts both the industry and the nation was one of the best presentations we’ve seen in two decades of covering the business. It laid out the problem and the solution with elegant simplicity, and gave attendees their marching orders if they want to create real and lasting change in this critical area. “If we don’t solve this crisis,” Burd told the audience, “it is going to hurt all of American business,” and the broader implications for the nation are dire. But, he said, “it is eminently solvable.”

    And even better, the timing of the presentation suggests that we’ll all know if Burd can do what he thinks he can do within about six weeks. But more on this later.

    At the annual Food Marketing Institute (FMI) Midwinter Executive Conference here, Burd defined the problem in stark terms:

    Health care inflation is running at about 10 percent annually, he said, and is growing at more than three times the consumer price index, costing companies an ever expanding percentage of their profits. The biggest contributor, he said, is the problem of the uninsured, who only cover between 10 and 20 percent of their health care costs, and the underinsured, who cover between 60 and 70 percent of their costs. The rest, he said, is covered by a kind of “hidden tax” paid by people and companies who are adequately insured. “It doesn’t really cost $3300 a night for a hospital room,” he said, noting that it only costs that much because health care providers are looking to recoup the money they’ve lost on the uninsured and the underinsured.

    Furthermore, Burd said, between 60 and 70 percent of the $2 trillion spent in the US on healthcare costs is spent on problems directly related to behavior, not genetics. That, he said, is the “Holy Grail,” because it defines the problem as something that can be fixed. More than three quarters of the nation’s health care costs can be linked to the “big four” conditions, he said – heart disease, cancer, diabetes, and obesity-related problems.

    To solve the problem, he said, the nation and the industry have to embrace a market driven model that encourages competition and drives down price (as opposed to a nationalized single payer system), and a system that is modeled on auto insurance – everybody simply will have to have it.

    Where companies can make a real difference is in creating programs that incentivize employees to pay attention to their health, and gives them some “skin in the game” by rewarding good health habits – all without reducing benefits.

    In the case of Safeway, the company already has seen some real progress. In certain cases, it has gotten nonunion employees to accept an increase in their deductibles from $750 a year to $2,000 by putting $1,000 into a Health Reimbursement Arrangement (HRA) that the employee can draw from to pay health expenses, but gets to keep if he or she stays healthy and uses the system wisely. That means not using emergency rooms for regular care, and using preventive measures that are 100 percent covered by Safeway.

    Burd noted that prevention is critically important both for reasons of health and cost. It is less expensive if one discovers a disease state early, he suggested, and more effective – if breast cancer is caught at stage one, the cure rate is in the 90 percentile, he said, while the cure rate for stage three breast cancer is roughly 50-50.

    As listed by Burd, the key features of the Safeway program include:

    • More individual responsibility for health care.
    • Preventive medicine covered 100 percent.
    • Use of a health risk baseline to establish each employee’s baseline.
    • Proactive care management based on individual needs.
    • Rewards for healthy behavior.
    • Use of continuing wellness programs to help employees stay healthy.

    While the program is new, Burd said, after just a year Safeway has been able to drive its total health care costs down by 11 percent, decrease the company’s portion of the total by four percent, and drive down the amount that employees pay overall by more than 20 percent.

    Burd, who has embraced the call by California Gov. Arnold Schwarzenegger to mandate universal health care in his state, said that for the moment, “states are leading the charge” in trying to find health care solutions. It will eventually require the federal government to get involved, but right now, “the stars are lined up” for making a real change in how health care is delivered in the US.

    We suggested above that “the timing of the presentation suggests that we’ll all know if Burd can do what he thinks he can do within about six weeks.”

    Here’s what we mean. Safeway, along with Albertsons and Kroger, is facing labor negotiations in Southern California on a contract that ends in early March. Obviously, health care costs will be a major subject for discussion…and if Burd can get the labor unions to buy into his vision of a health care future that is both more responsive to individual needs while being structured in a way that demands greater personal responsibility, then he will have worked a minor miracle. Maybe a major miracle. (And from our perspective, if the unions don’t “get it,” then the argument that unions are irrelevant and out of touch will have gotten a lot stronger.)

    And, we would guess, a success would mean that in addition to the union locals, both Kroger and Albertsons have bought into his vision. If that happens, it means the Burd health care gospel is going to start spreading. Which strikes us as a positive for everyone.

    A couple of random notes…

    • In explaining FMI’s new convention schedule that will in 2008 take the annual show to Las Vegas, and in 2009 move an education-only event to Dallas, FMI CEO Tim Hammonds noted that starting next year the show will run Monday to Wednesday, instead of the traditional Sunday to Tuesday. The reason for the move – the younger generation of food industry executives treasure their personal time, and don’t want to travel on weekends if they can avoid it.

    • Fareed Zakaria, editor of Newsweek International, said that one of the challenges facing the American government is to create a much more multicultural approach to foreign policy – using alliances and partnerships and diplomacy - than traditionally has been entertained. Zakaria noted that “corporate America has already done this,” but that it is much harder for politicians to do because it sometimes seems to run counter to the American character.
    KC's View:
    We’re going to make two predictions here. And one suggestion.

    One is that sometime before summer you’re going to see Steve Burd’s picture either on the cover or prominently displayed in either Newsweek or Time, along with a story that carries a headline that goes something like, “This Man May be Able To Fix The US Healthcare Crisis.”

    The other is that within the next three years, Burd will be drafted, by whoever is president at the time, to be America’s healthcare czar.

    Just watch.

    The suggestion is this: Safeway and/or FMI ought to make Burd’s presentation available online for everyone to see, listen to, or read.

    Published on: January 24, 2007

    The Toronto Globe and Mail reports that Loblaw Cos. plans to eliminate about 1,000 administrative jobs – roughly a 20 percent reduction, according to the paper – in an effort to make the company more streamlined and productive. The move will save hundreds of millions of dollars, the company says.

    “This change is about making sure we support our store team more effectively and about creating a leaner and more responsive organization that moves more quickly,” said CEO Galen Weston Jr.

    According to the paper, Loblaw also plans to roll out a new category management strategy that will centralize merchandising and product procurement and make it more responsive to local desires.

    Loblaw has been working overtime to develop an effective strategy that will allow it to be more effective in battling Wal-Mart, which is in the process of a major expansion in Canada.
    KC's View:
    One bit of unsolicited advice to Loblaw management (not that any of our advice on MNB is solicited)…

    You can’t save your way to prosperity. If leaner really means more responsive and more localized, that’s a good thing. But if leaner just means cheaper, then there almost certainly won’t be the kind of turnaround that is hoped for.

    Published on: January 24, 2007

    The Indianapolis Star reports that Crystal Flash, the Indianapolis-based family-owned convenience store chain, has hired David Marsh, the former president of Marsh Supermarkets, to be its new president.

    "We need to grow and we think he has the expertise we needed to do that," Debbie Baker, vice president of administration for Crystal Flash, tells the Star. Marsh reportedly was used as a consultant for the company, helping to “spruce up” its stores, before joining the company in late 2006 on a full-time basis.

    Marsh arrives at Crystal Flash with some baggage. Last December, the new owners of Marsh Supermarkets has charged that Marsh, a member of the family that founded the company 75 years ago but eventually had to sell it, spent about a half-million dollars of company money for personal use. Marsh reportedly spent the money on family trips to New Zealand and Africa – despite the fact that he was making an annual salary of $440,000 a year. The charges by the new owners were made after Marsh sued them, saying that they owed him $34,000 in severance pay. Marsh’s employment agreement called for annual severance payments of $738,000 for three years. The company is asking that he pay damages of $1.5 million, or three times the money he is alleged to have spent.

    The Marsh family sold the company for $88 million last May after the stores ran into trouble because of increased competition. In addition, analysts said that Marsh exacerbated its troubles when it went public and created a level of debt – more than $200 million by some reports - that crippled the company's operations. At the same time, company management was subject to considerable criticism for questionable business practices, including the creation of exorbitant pay and benefit packages for members of the family who worked for the chain.
    KC's View:
    We had to chuckle when we read a quote in the Star from Crystal Flash’s Debbie Baker, who said, "He understands our family culture, coming from the Marsh family.”

    Fill in your own “family” jokes here.

    Published on: January 24, 2007

    The Mintel Global New Products Database (GNPD) has released its annual report on new product introductions, showing that during 2006 close to 182,000 new SKUs were introduced on a global basis – almost 105,000 of them food and drink items, or about 300 a day.

    This pace of product introductions is about 17 percent higher than in 2005, and more than double the growth rate from 2004 to 2005.

    According to the study, “Food and drink product launches with an ethical positioning nearly doubled last year, with ethical labeling appearing in more diverse product categories. Ethical products are defined as those that include ingredients linked to Fair Trade or sustainability, also expanding to products that make ecological claims or link to charitable concerns. The ethical movement has spread through more countries globally within the past year, and doesn't show any signs of slowing in 2007. Non-food ethical claims tripled their growth in 2006, including significant gains by products with Fair Trade ingredients and cause-related focuses.

    “Organic is also continuing to see major developments. As a claim, organic has been a rising star in food for the last few years. However, in the non-food arena, products that are wholly or partly organic grew by about 30 percent.”

    The study also notes that pomegranate-related products were a big item during 2006, as were gluten-free products, while low-carb product introductions continue to dwindle.
    KC's View:
    We know that new product introductions are supposed to be “the lifeblood of the industry,” as we’ve heard over and over again in speeches and presentations. But isn’t this getting a little ridiculous?

    We see numbers like these and we start to think that manufacturers are throwing wet spaghetti against the wall to see if it sticks, as opposed to actually knowing how to cook and judge when the pasta is done.

    It’s good that most consumers never see or hear about these products…because then they’d really be confused.

    Published on: January 24, 2007

    United Press International reports on a new book, "The Serotonin Power Diet,” which argues that “if we want to lose weight we should include carbohydrates in our diet, not take them out. We need carbohydrate foods to help the brain make serotonin. Serotonin is key because it regulates mood and helps control appetite…. If you don't get enough carbohydrates, you won't be able to give your body the energy it needs. They are the only source of energy for your brain and nervous system.”

    In other words, carbs are good. At least some of them, and some of the time.

    “The carbohydrates you consume must be fat free or low in fat,” UPI writes. “Fat slows the serotonin-making process. Besides, it makes you feel lethargic, and the sofa and a bowl of potato chips will develop an irresistible appeal. Nor should they contain protein because it interferes with the brain's ability to make serotonin. You have to eat the right foods at the right times. This will be when your serotonin levels are naturally lower, which seems to be late afternoon or early evening, when people can tend to crave a quick boost from a gooey lemon bar, a hot chocolate or a sandwich.”
    KC's View:
    As the great Charles McCord once said, the reason there are so many new diet books on the best seller list is that the last ones didn’t work.

    That said, we like this one.

    Published on: January 24, 2007

    MSNBC reports that Superior Court Judge Craig Schwall has ruled that deposed Home Depot Robert Nardelli is entitled to his full $210 million severance package. Schwall denied a request filed by a shareholder group that would have at least temporarily stopped Nardelli from receiving any part of his severance package not already paid.

    However, Schwall also ruled that Nardelli and several current and former senior officers and directors of the company could be deposed by the plaintiffs, a process that could lead to further legal action and/or embarrassing revelations about the company’s operations.
    KC's View:
    More embarrassing than the fact that Home Depot’s board of directors clearly behaved in a way that didn’t serve the company’s best interests when it hired a guy who didn’t know much about retailing, and then gave him a severance agreement that almost defies belief?

    Published on: January 24, 2007

    In Toronto, the Globe and Mail reports that 32 countries - including the 25 members of the European Union as well as Argentina, Australia, Brazil, Guatemala, Nicaragua, Thailand and Uruguay – “have signed up to join Canada in a global challenge of trade-distorting U.S. farm subsidies, a coalition that may supply more ammunition to win the case and one that reflects broad anger at American agricultural aid.”

    The target of all this animosity is the US habit of handing out billions of dollars in farm subsidies, a habit that some believe the newly Democratic Congress will want to expand. The argument is that “US farm aid depresses the international prices for agricultural goods and consequently reduces their income,” according to the paper.

    The grievance has been filed with the World Trade Organization (WTO).
    KC's View:
    Let’s think about this. We suppose that a perfectly legitimate response to this complaint would be to suggest that other countries have no right to come into the US and try and force us to live by their rules. And yet, didn’t the US do almost the same thing in filing complaints to get the EU to go by our rules when it came to genetically modified products?

    If there’s a difference, someone explain it to us.

    Published on: January 24, 2007

    • Costco Wholesale reportedly has reached a tentative contract agreement with Teamsters representing 13,000 California workers after four months of negotiation. While details of the deal were not disclosed, the union said there were “significant gains” in wages and retirement benefits. Union members will vote on the package in the next two weeks.

    • Kraft Foods has reached a deal to sell the 114-year-old hot cereal brand Cream of Wheat to B&G Foods for $200 million, a move that Kraft says it is making so it can focus on core products such as cheese, snacks and beverages.

    Bloomberg News reports that beef and pork producer Swift is considering a possible buyout after receiving “unsolicited inquiries” during the last six months.

    JPMorgan Chase has been hired to help the company review its strategic and financial alternatives.
    KC's View:

    Published on: January 24, 2007

    MNB user Glen Terbeek had some thoughts prompted by our piece the Sears-Kmart debacle:

    I'm old enough to remember when Sears and then Kmart were the retailers that all others looked up to. They were big, profitable, and growing fast. They couldn't do anything wrong. They were the darlings of Wall Street.

    What happened? A look at history may tell the story. I believe that it's when a retailer gets too big. Too big is defined when a retailer losses its edge at each store's marketplace. And that is when it starts loosing its shoppers' and employees' loyalty, making room for others to attack. These attackers include such irritants as locally focused competitors, unions, suppliers, environmentalists, and city governments.

    It is impossible for big retailers to keep the local market edge because their organizations and measurements don't enable them to do so. And as they get bigger and more obvious, they spend more of their time defending their business model, not the local market. As a result, they manage to average, not to potential, losing their local edge. How can anyone in headquarters worry about one of 3000 stores? It's impossible. As example, can the laundry detergent category manager know the needs of a store 1500 miles away? Is this starting to happen to Wal-Mart? History will tell.

    Why don't big retailers organize in clusters of market modules, maybe 20 or so stores, with common market attributes? These modules would have responsibility and authority for maximizing market performance defined by shoppers and supported by employees. They would be big enough to develop marketing/merchandising skills, yet small enough to be local market effective. The module management would live and work in the area of the module. They would be enabled by centralized supply chain and other non demand services. Each module would be equivalent to a good local retailer, but not as bad as a big national chain. As they grow, they just add more modules. They could even use different store banners if necessary, helping them to stay under the radar screen of many attackers. The modules would drive the business, not the headquarters.

    Remember the shoppers don't shop the "big chain", they shop their local market, and the stores competing for their business.

    If you just skimmed over Terbeek’s email, go back and read it again. There’s a lot of wisdom in there.

    We had a piece yesterday about the US government suggesting that there should be voluntary guidelines covering the gluten-free segment, which prompted one MNB user to write:

    I was frankly surprised to read in your gluten-free article that Jane Andrews, a dietician at Wegmans, expressed "surprise" that the FDA would not allow the blurb "gluten-free" on any food product that was naturally gluten-free. There are firm guidelines to follow in what a food producer can claim on its packaging as a nutritional attribute. Foremost among them are not allowing food companies to claim positive attributes that they had nothing to do with--i.e. the food is naturally that way. If Wegmans is indeed claiming gluten-free on food that is naturally gluten-free, then they
    are guilty of misbranding…

    In other words, for Ms Andrew's Wegman's Spaghetti Sauce, if the label states "gluten-free", then it is misbranded as spaghetti sauce is inherently gluten-free, and their brand is no different from any others in this regard.

    To be in compliance, the sauce label would need to state something like "spaghetti sauce, a naturally gluten-free food"--i.e. all spaghetti sauce is gluten-free so our brand is not special in this regard. The only food item labels that can claim simply "gluten-free" are those foods which normally contain gluten, such as bread, but which have been reformulated to contain no gluten--i.e. we have reformulated the bread recipe to produce a gluten-free bread, which is different from other bread that still contains gluten. The FDA regulations are quite clear in this regard, but it is amazing how many people involved w/food labels either do not understand them or simply choose to ignore them as not being particularly good for aggressive label marketing.

    Another MNB user wrote:

    The FDA distinguishes between the statements "Gluten Free" and "A Gluten Free Food". They think the former is misleading because it implies that somehow this food has been made in a way to exclude or remove gluten and therefore differs from other foods of the same type, whereas the latter just informs the consumer that this food type is always free of gluten. That same distinction has been applied to claims of "cholesterol free" for over ten years. FDA believes it is misleading to state "Cholesterol Free" on the label for a vegetable oil because all vegetable oil is free of cholesterol. However they permit the statement "A cholesterol free food". Moreover, there is a Supreme Court decision of a few years ago that confirmed a 1st Amendment right of commercial free speech. FDA could not legally prohibit a truthful and non-misleading statement about the gluten content of a food.

    Now we’re really confused.

    MNB user Stanton J. Barrett wrote:

    What is really gluten-free? Different people suffering from celiac have different reactions to different amounts of gluten. This is up to research scientists to decide and even then, consumers will need to be cautious. As a parent of a celiac child (and I might have it, but not tested yet) I applaud Wegman’s efforts to label products that are naturally gluten-free as a way to cut through the clutter. If they sell rice, they should be able to label it gluten-free since it is naturally gluten-free! If their tomato sauce is naturally gluten-free, they should be able to label it as such. When we are shopping, we need more information, not less—our son’s long-term health and ability to deal with a life-long condition depend on it. If the folks at Wegman’s need someone to testify at the FDA, they should any one of the many celiac support groups.

    This is the right approach. FDA ought to be drafting regulations based on what works for the consumers who need these foods, not the manufacturers who are looking for marketing advantages.

    We wrote yesterday about Aldi considering the Dallas market, which led MNB user Glenn Cantor to write:

    Aldi is well known, and often dismissed, in our industry as a small, low-price format. The high quality of their private label products is never mentioned. Some of their grocery products surpass better known, branded products in taste and quality. Their salsa is better than anything on the shelves in traditional grocery stores. Also, their dry breakfast cereal is better than the branded equivalents.

    Following up on emails we had yesterday about the impact of hormones in foods, one MNB user wrote:

    There was a quick comment about some research done on children reaching puberty earlier and the possible links to the children consuming mild with hormones in it. I would like to say first hand that there are several people in my family that are elementary school teachers and I will never forget my sister who teaches 4th and 5th grade coming home and having to by feminine hygiene products for her girls, and not just a couple of them, but several of the girls had already began getting their periods!!!! Hmmmmmmmm.........makes you wonder how much milk and meat product with hormones they had consumed by this time.

    On the subject of retailers looking to exert greater control over labor practices in overseas factories, one MNB user wrote:

    Sometimes I think this is a Catch 22, lets speak hypothetically...............A factory in Cambodia makes shoes, all 14 kids from one family work in the factory for lets say a dollar day (and that is probably more than they would get paid). Now a group comes in and tells the factory that is can not employ these kids b/c it is inhumane so they get rid of the kids and fix everything up at a huge expense and they pay everyone more but now us Americans do not want to buy our shoes for the price they are now being sold at but they are humane shoes but wow are they expensive. The price of the shoes going up aids in us not buying them b/c they are too expensive and the factory closes down. Now the kids and everyone else in Cambodia are out of work, the family ends up starving to death b/c the only income that was coming in was the kids working at the factory bringing home money, and now they are not, b/c bless our hearts we just couldn't bare to see kids work. I'm not saying child labor is right and that in 3rd world countries it is okay to take advantage I'm just saying the issue is harder to fix than it seems. We seem to want everything both ways and that just isn't going to happen.

    This was the essence of what Newsweek editor and columnist Fareed Zakaria was talking about at FMI Midwinter yesterday. He suggested that America is in a tough place right now, because as a country we are used to riding into other nations where wrongs are being committed, fixing those wrongs, being appreciated, and then riding out of town triumphant. (There’s a reason the Western is such a prototypically American art form.) The problem is that in many cases around the world, countries don’t want out help, don’t perceive the US as improving their situations, and our country meets with hostility and resentment. Zakaria suggested that in a global environment where political realities and nationalistic attitudes often work against the US, the country and its leadership is going to have to find new ways to operate. To continue to operate under old premises would be suicidal, he said.

    Responding to yesterday’s piece about companies trying to better leverage their employees so that stores are more responsive to the needs and desires of consumers, one MNB user wrote:

    Do any of the senior executives actually shop at their own stores to see for themselves what should/needs to be done? Not as announced executives, but rather just an anonymous shoppers.

    Not often enough.

    We think that all food retailers should require every executive to do the main family grocery shopping at least once a month. Maybe more.

    Finally, we continue to get email in the Bill Belichick debate…which we launched by saying that we were glad to see him lose last weekend because he seems like the most miserable, misanthropic person in professional sports.

    MNB user Mark Monroe wrote:

    Totally agree. The guy is not only arrogant, he is a hypocrite. He has no problem discarding long-time Patriot players in a ruthless, cold-hearted fashion, but when an ex employee of his violates HIS rules for loyalty and competes for one of "his" players, he gets all pissed off and treats him with a complete lack of respect. You can debate whether this is misanthropic, but hypocritical is not up for debate and arrogant is pretty clear to anyone paying attention.

    MNB user Rob Allison wrote:

    I agree with (the) view that Bill Belichick is a good coach, but he will never be as good as Dick Vermeil was with the Rams. He has done a lot with the Pats in his tenure; however, there is one player that comes to mind when people say there are “no superstar ego’s on the Patriots.” Tom Brady. I believe the field was re-sodden one game for him because he did not like the way it felt after the in-climate weather. I would have taken the rough terrain and asked general management to add the 5 million dollars directly to my paycheck.

    And another MNB user wrote:

    I agree w/ you on Bellichick. The guy has proven that he is a sore loser in the past (See Eric Mangini snub). Knows what he is doing when it comes to coaching, but possesses no tact in any situation, and that includes winning.

    We also got an email reacting to our listing yesterday of the major Oscar nominations:

    Not quite sure why “Little Miss Sunshine” was nominated for all these Oscars. Yes, I enjoyed the movie very much. However, I did not think it was anything show-stopping or groundbreaking. I simply thought it was an amusing film about a dysfunctional clan of "misanthropes." But then again, I usually don't agree with the majority of these so-called
    expert nominations.

    I'll stick with “24.”

    Of the “best picture” nominees, we haven’t seen either “The Queen” or “Letters from Iwo Jima” yet, so we’ll reserve judgment on who we’d vote for.

    But we have to say that we loved “Little Miss Sunshine” – it was the best time in terms of pure entertainment that we had at the movies this year.

    Though there was one film generally overlooked by the Academy Awards this year that we found to be the most thought-provoking movie we’ve seen in years. (No, not “Borat.”) We’ll write about it in Friday’s “OffBeat”…
    KC's View: