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    Published on: April 23, 2007

    The Washington Post this morning reports in a front-page story that the US Food and Drug Administration (FDA) “has known for years about contamination problems at a Georgia peanut butter plant and on California spinach farms that led to disease outbreaks that killed three people, sickened hundreds, and forced one of the biggest product recalls in U.S. history.” However, “overwhelmed by huge growth in the number of food processors and imports…the agency took only limited steps to address the problems and relied on producers to police themselves.”

    According to the Post story, “FDA officials conceded that the agency's system needs to be overhauled to meet today's demands, but contended that the agency could not have done anything to prevent either contamination episode.”

    Consumer advocates, on the other hand, disagree – and say that this proves that as it presently is structured, staffed and empowered, the FDA is incapable of adequately protecting the food supply.

    Robert E. Brackett, director of the FDA's food-safety arm, tells the Post that manufacturers “have to build safety into their products rather than us chasing after them…We have to get out of the 1950s paradigm." He also tells the paper that FDA has been unable to keep up with the demands placed upon it by the up to 80,000 facilities that it is responsible for annually.

    Explanations and excuses may not be good enough for Congress, which is expected to hold hearings into the food safety lapses beginning this week and could consider legislation that would increase funding and oversight of FDA. Rep. John A. Dingell (D-Michigan) blames at least some of the problems on the Bush White House, saying, “This administration does not like regulation, this administration does not like spending money, and it has a hostility toward government. The poisonous result is that a program like the FDA is going to suffer at every turn of the road."

    In the case of the peanut butter-related salmonella outbreak, the Post reports, “an agency report shows that FDA inspectors checked into complaints about salmonella contamination in a ConAgra Foods factory in Georgia in 2005. But when company managers refused to provide documents the inspectors requested, the inspectors left and did not follow up. A salmonella outbreak that began last August and was traced to the plant's Peter Pan and Great Value peanut butter brands sickened more than 400 people in 44 states.”

    Brackett tells the Post that “if the FDA inspector had seen anything truly dangerous the agency would have taken further action. But, he said, the agency cannot force a disclosure, a recall or a plant closure except in extreme circumstances, such as finding a hazardous batch of product.”
    KC's View:
    Gee, more than 400 people ended up getting sick, and the FDA didn’t consider what it saw at the Georgia plant to be “truly dangerous.” Makes us wonder what exactly would qualify…

    Seems to us that the structure is broken and the priorities are out of whack. It is time for a change to the way that food safety is prioritized in this country, and that probably means some sort of complete revamp of the governmental systems on which we all depend.

    We believe that retailers should get behind this issue in full force. Because while the problems seem to be mostly related to manufacturers, every food item that sickens a consumer whittles away at the industry’s larger credibility and affects the total food business.

    Published on: April 23, 2007

    Business Week reports on what it calls “Wal-Mart’s mid-life crisis.”


    • “For nearly five decades, Wal-Mart's signature ‘everyday low prices’ and their enabler—low costs—defined not only its business model but also the distinctive personality of this proud, insular company that emerged from the Ozarks backwoods to dominate retailing. Over the past year and a half, though, Wal-Mart's growth formula has stopped working.”

    • “Wal-Mart's botched entry into cheap-chic apparel is emblematic of the quandary it faces. Is its alarming loss of momentum the temporary result of disruptions caused by transitory errors… and by overdue improvements such as the store remodeling program launched last year? Or is Wal-Mart doing lasting damage to its low-budget franchise by trying to compete with much hipper, nimbler rivals for the middle-income dollar? Should the retailer redouble its efforts to out-Target Target, or would it be better off going back to basics?”

    • “If Wal-Mart seems short of answers at the moment, it might well be because there aren't any good ones. Increasingly, it appears that America's largest corporation has steered itself into a slow-growth cul de sac from which there is no escape.”

    • “Simple mathematics suggest that a 45-year-old company in an industry growing no faster than the economy as a whole will struggle to sustain the speedy growth rates of its youth. In Wal-Mart's case, this difficulty is exacerbated by its great size and extreme dominance of large swaths of the U.S. retail market. Wal-Mart already controls 20% of dry grocery, 29% of nonfood grocery, 30% of health and beauty aids, and 45% of general merchandise sales, according to ACNielsen. However, the expansion impulse is as deeply embedded in Wal-Mart's DNA as its allegiance to cut-rate pricing.”

    • “The polite, self-deprecating (CEO Lee) Scott is no Robert L. Nardelli, whose ouster as Home Depot Inc.'s chief had as much to do with his abrasive personality as the chain's business problems. That said, Wal-Mart's stock has performed worse under Scott than Home Depot's did under Nardelli.”

    • “The odds are that Scott, or his successor, will have to choose between continuing to disappoint Wall Street or milking the U.S. operation for profits better reinvested overseas. Only by hitting the business development equivalent of the lottery in countries like China, India, or Brazil can the world's largest retailer hope to restore the robust growth that once seemed like a birthright."
    KC's View:
    Mid-life crises aren’t fun.

    That said, they can be an opportunity to change things up, to reinvigorate one’s existence.

    We still think that what Wal-Mart needs to do is focus on some alternative formats that might let it grow in new ways, like its Neighborhood Market format. Or maybe it should look at the convenience store or drug store channels for other opportunities.

    The ROI might not be the same, but the chance for expansive and pervasive growth might compensate for that.

    Published on: April 23, 2007

    Even as there is speculation in the media that some progress is being made in the Southern California labor talks between the United Food and Commercial Workers (UFCW) and the region’s three major supermarket chains, the Los Angeles Times this morning weighs in with a long piece analyzing how things have gotten this bad yet again – only three years after a strike/lockout roiled the marketplace.

    “How did we get here again, people on all sides of the dispute ask. The answers lie in the last strike and what has evolved since then.”

    The Times continues, “The grocery business in Southern California is more competitive than ever. Workers say that they got a bum deal in the last settlement and that wages are increasingly hard to live on. And rising healthcare costs are alarming both employers and workers.

    “All of these concerns have come together in the high-anxiety caldron of collective bargaining — a little more than three years after an acrimonious 141-day strike and lockout rattled workers, shoppers and retailers across the Southland.”

    The Times notes that things have not gone well for the big three since the last strike: “Five years ago, Ralphs, Vons and Albertsons controlled nearly 57% of supermarket shopping in Los Angeles County…Now the big three grocers have barely a 49% share of that spending….Meanwhile, business surged at rivals not part of the labor battle. They now have nearly 27% of the market, up more than 6 percentage points from before the strike. (Those figures do not include membership warehouse stores such as Costco Wholesale Corp. or the Sam's Club division of Wal-Mart Stores Inc.)”

    Since the last strike, competitors such as Trader Joe’s and Whole Foods have become even more formidable, and the Times notes that the entry of Tesco into the market later this year raises the stakes even more.
    KC's View:
    The interesting thing is that the workers, union representatives and supermarket executives interviewed by the Times all say that they don’t want a strike/lockout, and that if one happens, it will be far shorter than the one three years ago.

    And yet, they all seem to be at the precipice together.

    It seems to us that there needs to be another question asked, other than whether there will be a strike or lockout. And that is this: Will it be a meaningful settlement with positive long-term implications for all sides, or will it be a band-aid that will get them through another three years?

    Published on: April 23, 2007

    The Wall Street Journal reports that Wal-Mart CEO Lee Scott has written a letter to company shareholders denying charges that the corporation conducted surveillance operations against both its board of directors and dissident stockholder groups believed to be hostile to management’s plans.

    Those allegations originally were made in the Journal based on interviews with Bruce Gabbard, a security expert fired by the retailer after it was learned that he had been taping phone calls between a New York Times reporter and company executives without authorization.

    Now, not only is Scott denying the charges, but he says that Wal-Mart’s attorneys have obtained an affidavit from Gabbard saying that his previous statements were false. This despite the fact that, according to the Journal, “After the April 4 story ran, Mona Williams, a vice president for corporate communications, called Wall Street Journal Dallas Bureau Chief Neal Templin to say the story had been fairly handled though Wal-Mart wished the Journal hadn't run it.”

    Scott wrote in his letter that "some of the most disturbing assertions reported in The Wall Street Journal simply are not true" and that "no such surveillance occurred and that no information regarding any shareholder proponent was obtained improperly or through obtrusive means.”
    KC's View:
    One has to wonder if Scott and his consigliere made Gabbard an offer he couldn’t refuse…

    Also, we wonder why Wal-Mart pushed for a judge to grant a temporary restraining order barring Gabbard from disclosing confidential information if he wasn’t doing the kind of surveillance that would have given him access to confidential information.

    Curiouser and curiouser.

    The thing is, all the letters in the world from Lee Scott aren’t going to convince some people that he’s telling the truth. In fact, they will just serve to reinforce the notion that Wal-Mart is engaged in a cover-up because it has something to hide.

    Published on: April 23, 2007

    The San Jose Mercury News reports that federal and California state officials “warned the public Friday not to eat any pork processed at the American Hog Farm in Stanislaus County since April 3 and warned there may be contaminated pork products from other custom-slaughter plants.”

    The reason: “The warning came after officials traced animal feed tainted with melamine to the hog farm. Melamine, an industrial chemical detected in wheat gluten and rice protein imported from China, is the substance the U.S. Food and Drug Administration has linked to the deaths and illnesses of cats and dogs in the largest pet food recall in American history.”

    At the same time, FDA has launched a criminal investigation into the pet food contamination scandal, as it looks to determine how the toxic chemical melamine got into wheat gluten imported from China and used in more than 100 brands of pet food that now have been recalled. FDA doesn’t know how the melamine got into the pet food, whether it might have been deliberate, and has not been able to get invitations to the Chinese factories to allow its inspectors to investigate the facilities. And more than a dozen companies have found that they used melamine-contaminated ingredients from China in pet foods, with the result being than more than 60 million containers of cat and dog food have been recalled.
    KC's View:

    Published on: April 23, 2007

    The Arizona Republic reports on how Starbucks approaches the challenges implicit with enormous growth – with confidence in its ability to understand the consumer, tempered by the reality-check that comes from remembering that not everything the company has done has worked.

    “In the 90s, the company experimented with several strategies for capitalizing on its hot brand,” the Republic writes. “Among the bigger ventures were attempts to open separate food-and-drink outlets: a full-service, sit-down restaurant called Café Starbucks, and a computer-friendly bar under the name Circadia.

    “Starbucks also partnered with a few Web portals and pushed further into merchandise and media, including a periodical called Joe Magazine and a line of journals and desk supplies.”

    Some analysts see parallels to these failed efforts when they look at current ventures such as its entry into movie and music marketing, and suggest that Starbucks could be taking its eye off the ball – which is selling $4 lattes.
    KC's View:
    One of the things we like most about Starbucks is illustrated in another passage from the Republic:

    “Chairman Howard Schultz has long kept a rack of Joe Magazines in his office; workers poking around headquarters can still ferret out bottles of Mazagran, a discarded coffee and-soda drink that preceded today's bottled Frappuccinos.”

    There’s nothing wrong with trying new things, with testing the limits of how far a brand can take you. We think that Schultz, CEO Jim Donald and the rest of Starbucks’ management has been rigorous about self-examination, about keeping their collective eye on the company’s central mission, while still experimenting whenever it seems to make sense.

    Sure, to experiment is to risk defeat. But to do otherwise would be to risk stagnation.

    Published on: April 23, 2007

    Some 700 employees at a Kroger warehouse in Jefferson County, Kentucky, have gone back to work after they reached a contract agreement with the two companies managing the facility.

    The strike began last week when contract negotiations broke down. The distribution center’s management was transferred by Kroger to a pair of outsourcing companies – Transervice Logistics and Zenith Logistics – and that the transfer required a new labor contract.
    KC's View:

    Published on: April 23, 2007

    • The Associated Press reports that new diversity figures reported by Wal-Mart show that there was some small improvement in the retailer’s hiring practices.

    “Women made up 60.9 percent of Wal-Mart's employees last year, compared to 60.5 percent the year before,” the story says. “Minorities were 33.1 percent versus 31.8 percent, including blacks at 17.5 percent, up from 16.8 percent. Hispanics accounted for 11.4 percent, compared to 11.2 percent in 2005. The rate for Asians was 3.1 percent versus 2.7 percent in 2005. Native Americans were barely changed at 1.2 percent after 1.1 percent the year before.”

    Bloomberg reports that Wal-Mart has “lost a bid to halt a union at a Canadian store after the country's highest court declined to hear an appeal that would have delayed the process.” The Supreme Court of Canada refused to hear Wal-Mart’s appeal of a Saskatchewan lower court ruling that allowed the unionization process to go ahead.
    KC's View:
    If Wal-Mart runs true to form, those unionizing workers better get their resumes together…because that store is very likely to be closed down any day now.

    Published on: April 23, 2007

    • Published reports say that the board of directors at Alliance Boots has recommended to the company’s shareholders that they accept a bid for the company from private equity firm Kohlberg Kravis Roberts that is the equivalent of $20.6 billion (US).

    • There are reports that Carrefour, the world’s second largest retailer, is preparing a bid to acquire Brazilian retail chain Atacadao for an estimated price tag that would be the equivalent of $1.3 billion (US).
    KC's View:

    Published on: April 23, 2007

    • Pathmark Stores reported that its fourth quarter profit was $1.7 million, compared with a loss of $14.6 million during the same period a year ago. Sales rose 0.6 percent to $1,078.5 million, compared with $993.3 million a year ago. Same-store sales increased by 1.2 percent.
    KC's View:
    We accidentally used these numbers on Friday and attributed them to A&P, which is, of course, looking to acquire Pathmark. We regret the error, and can only think that we somehow got ahead of ourselves.

    Published on: April 23, 2007

    We got a number of emails about the line in one story noting that US government officials were awaiting an invitation from the Chinese government so they could inspect plants from which melamine-contaminated wheat gluten was shipped. MNB user Dan Onishuk wrote:

    The fact that our food inspectors are not allowed to visit foreign plants invited or unannounced needs to be addressed by this administration. The FD and USDA need to enforce a strict policy on plant inspections either overseas or in the US on all imported ingestible commodities in the event a situation that just arose can be addressed effectively-failure to comply results in restricting shipments immediately. This should be enough to institute better quality control at US plants that process food goods with foreign ingredients/additives. The cost should be shared by both entities, the exporter and importer and not the taxpayer. What a wake up call it would be if the FDA/USDA required additional label information to include source of ingredients in the process of the item.

    Another MNB user wrote:

    Did I miss something? The FDA has to wait for "invitations" to inspect the plants? Albeit pet food in this example, but this is our food supply folks! I'm sure that there are plants in China manufacturing ingredients that go into our "human food" as well and if something happens with that, the US manufacturer has to wait for an "invitation" to check on what's going into Americans' food????? Maybe I'm missing something but this seems like insanity to me!

    We probably have to wait for an invitation because we would expect the Chinese to wait for the same sort of invitation from us if the positions were reversed.

    MNB user Bob Vereen had a thought about what he sees as an inconsistency:

    With all the heat Wal-Mart is taking on many fronts, how come it is the only retailer (that we know about) which has collection boxes for plastic bags in its stores, to encourage recycling?

    As we tell our kids, life isn’t fair.

    Wal-Mart doesn’t take heat on the plastic bag issue, nor on its many environmental initiatives. It just takes heat on other issues where it is more vulnerable.

    Sounds about right to us.

    Regarding the acquisition of Scott’s by Kroger, one MNB user recalled:

    Sorry to see them go. I used to do work for Scotts about 20 years ago and they were king of Ft. Wayne. They ruled the Ft. Wayne supermarket business. Then Meijer came to town but they still held on strong while weaker competitors left. Then they got the one-two punch. Supervalu bought them and they no longer were the hometown chain. Instead of being run locally they were now operated by an out-of state sterile corporation that didn't really have a track record of successful retailing outside of Minneapolis. Then of course Wal-Mart Supercenters opened in nearly all of their markets and just clobbered them. Sales were basically cut in half from their peak in the 90s.

    We had a piece on Friday about analysts laying out various road maps for a Wal-Mart revitalization and commented:

    The question that Wal-Mart needs to answer – and perhaps it already has, since it hasn’t done any of these things – is whether such moves would have a short-term impact but hurt the company long-term. We are reminded of the Biblical passage: “For what does it profit a man to gain the whole world, and forfeit his soul?(Mark 8:36)

    One MNB user responded:

    Your quote from Mark 8:36 reminded me of an early lesson my father taught me. He said "God designed man for eternity, not businesses. We have it all backwards. We think people come and go, but the company lasts forever. The opposite is true." This was evidenced in his life in that he spent his career working for a company (Hughes Aircraft) and now receives his retirement check from a former competitor.

    Another MNB user observed:

    It seems everyone wants Wal-Mart to do this or that in order for the stock price to go up. Wal-Mart is still basically controlled by family members and unless they want the stock price to go up, then it probably isn't going anywhere. They have so much money they couldn't possibly spend it or give it away in their lifetimes. So do they really care if the stock goes up? Financial planners are always telling me I should do this or that with my money in order to make more money. My colleagues tell me I should raise my prices and my income will go up. But I don't care. I enjoy doing as I please and I think Wal-Mart is the same way. Most of the complainers are outsiders who are just tired of seeing the stock go nowhere. Why did they buy it in first place? My guess is they are just idiots who were going along with the crowd because Wal-Mart is just another big company on the stock exchange and that's all they needed to know. As far as I'm concerned Wal-Mart stock is about as exciting as buying stock in the local electric utility. These analysts need to wake up and realize that owning Wal-Mart stock is not an investment, it’s a novelty. Kind of like buying stock in a hockey team. Don't expect it to go up. Just own it for fun. A professional sports team should be focused on winning games and not impressing the odds makers in Las Vegas. Same for Wal-Mart. They need to focus on running a retail chain and not trying to impress stock analysts. When Wal-Mart starts dancing for Wall Street, that's when they will really be in trouble.

    That ship may have sailed. Which explains the various crises in which the company has become embroiled.

    MNB user Bob Anderson, prompted by our note about the passing of Helen Walton, the widow of Wal-Mart founder Sam Walton, wrote:

    Helen Walton, as her husband Mr. Sam, will truly be missed. She always cared about the associates and would always have them over to her home for lunch at shareholder time. Her love of community and education will live on through the Walton Art Center and the University of Arkansas. We all thank her for her generosity and big heart. She will always be the First Lady of Wal-Mart, God Bless her. Today I hope all will take a minute out of their day an pay their respect to a real classy Lady.
    KC's View: