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    Published on: August 16, 2007

    To hear Kevin Coupe’s weekly radio commentary, click on the “MNB Radio” icon on the left hand side of the home page, or just go to:

    Or, to simply read the commentary in text form, continue below…

    Hi, I’m Kevin Coupe and this is MorningNewsBeat Radio, brought to you by Webstop, experts in the art of retail website design.

    So there was an interesting piece in the New York Times the other day about some of the best places in the country to buy local food. This was of some interest to me, because as I’m traveling around the country, one of my goals is always to eat the local cuisine and drink the local beer and wine…it simply is one of the best ways to get a sense of a region and a people.

    But it ends up that local brands are finding an unusual place to offer their wares – the local airport.

    That’s right. According to the Times, “as the travel industry grows and airports strive to distinguish themselves, food and beverage courts are diversifying, too. For local brands, that can mean landing a tiny space in a big terminal and attracting lots of customers.”

    This means that airports, looking to create for themselves differential advantages, are looking to attract tenants who can sell things – especially food and beverages – that people can’t get elsewhere. And it means that these retailers are looking to create differential advantages for themselves by going where the consumers are, as opposed to waiting for consumers to find them.

    Some examples – Balducci’s, the famed New York gourmet grocer, has a store at Kennedy Airport. At San Francisco International, eighty percent of the vendors are said to be local, and it has one of the best food courts of any airport in the country. Heck, I was changing planes in Charlotte, North Carolina, the other day and I noticed that there is a wine bar there serving only local vintages.

    Now, this isn’t to suggest that national brands and chains are going away – just that local brand names are stepping up to compete with them, and are doing so by offering products the big guys cannot replicate.

    I’m intrigued for two reasons. One is that I like it when local retailers are actively and aggressively competitive. It’s good for consumers, it’s good for the food business. I wish that more retailers would approach business this way – instead of just building their boxes and hoping that people will come, they ought to be going to the customer, looking for unorthodox locations where they can make a difference.

    But I’m also fascinated by this trend because so many mainstream retailers will have stores in one region of the country that won’t look all that different from stores in an entirely different area. There is little that shouts out “local” about their design, décor or product selection. It is lowest common denominator retailing…and it’s a shame. Because as airports are demonstrating – and I think we’d all agree that none of us would have expected this level of innovation from US airports – there are always new ways to attract, entice and keep the customer.

    For MorningNewsBeat Radio, I’m Kevin Coupe.
    KC's View:

    Published on: August 16, 2007

    Whole Foods said yesterday that it as extended its offer to buy all of Wild Oats’ outstanding shares of stock through August 20, presumably believing that by that time a federal judge will have ruled on the request by the Federal Trade Commission (FTC) that the proposed $565 million acquisition be blocked on competitive grounds.

    Whole Foods said yesterday that “69.4% of the shares of Wild Oats common stock that were outstanding in late July have been tendered,” up from 57.1 percent as month ago.
    KC's View:
    Incidentally, I was reading a piece in the Arizona Republic the other day about how Whole Food is planning to upgrade and expand its stores in the Phoenix area, and it included this curious sentence:

    “In the Valley, Whole Foods faces competition from Wild Oats Marketplace, Sprouts Farmers Market, Trader Joe's and Sunflower Farmers Market among natural and organic markets. It also competes with the mainstream supermarkets.”

    Stop the presses. Alert the FTC!

    Published on: August 16, 2007

    Interesting piece in the New York Times about how Netflix, the DVD rental business that pioneered the use of the Internet by consumers but that is now under attack by Blockbuster, has created a call center in Oregon with 200 customer service representatives “as a strategic weapon” in its competitive battles.

    Netflix chose Oregon, according to the story, “avoiding other lower-cost places in the United States and overseas, because it believed that the Oregonians would present a friendlier voice to its customers. Then last month, Netflix took an unusual step for a Web-based company: it eliminated e-mail based customer service inquiries.

    “Now all questions, complaints and suggestions go to the call center, which is open 24 hours every day of the week. The company's toll-free number, previously buried on the Web site, is now prominently displayed on the ‘help’ page.

    “The decision to invest heavily in its telephone customer service was an expensive one for Netflix, but it may be one of the advantages that the company with the red envelopes so familiar to American consumers has over its rival with the blue ones, according to analysts.”

    The Times also notes that Netflix “has tried to give the service representatives more discretion in deciding when to assuage disgruntled callers with bonus discs and account credits - and they are allowed to err on the side of generosity. More often than not, a month's credit will be issued, or a missing disc marked simply as lost, and the customer not charged. Netflix places no particular requirements on call duration, preferring that customer service representatives take the time they need to keep a customer happy and loyal.”
    KC's View:
    I’ve been a Netflix customer for years, but I had to go to the site and check this out when I read the Times story – because I’ve had so few problems with Netflix over the years that I haven’t had a lot of reason to go to its “help” page.

    Now, I’m not sure that I would have eliminated the email functionality entirely; Blockbuster still has it, though it only opens its call center for prime business hours. But you have to give Netflix credit for what it believes is a critical consumer insight – that even in the e-commerce wars, the greatest differential advantage will be people.

    I tend to agree with that. I think that Netflix can get a lot of traction from the fact that its call center is in Oregon and not overseas. I think that the right customer service representatives can do the business a lot of good during a time of heightened competition (especially because I’ve never met any workers at a Blockbuster store who seemed to know anything about anything other than when their next break is).

    This is an important fundamental lesson for all retailers, I think. At a time when so many stress efficiency over effectiveness, and when everybody is looking for ways to cut costs (and so often these ways result in the elimination of personnel), it is important to keep in mind that such cuts can also undermine a business’s ability to accomplish its mission. And there’s another lesson here, as well – you have to hire the right people, and put a premium on their importance to the business.

    Published on: August 16, 2007

    The San Jose Mercury News reports on how, “in today's global economy, more food items are being produced in this country with some ingredients from other lands.”

    Examples cited by the story: “That loaf of Sara Lee bread on the grocery shelf in California was made with flour from U.S. wheat. But the Illinois-based food giant uses honey and vitamin supplements from China. While Paul Newman's daughter uses California figs in cookies made by her Aptos, Calif., organic food company, she turns to Mexico and Austria for other ingredients. And even though a Procter & Gamble spokeswoman described Crest toothpaste ‘as a truly American product,’ it uses additives from China and Finland. ”

    The story notes that ultimately, consumers are going to hold manufacturers responsible for the safety of the products they sell. This actually makes sense, analysts say, because private companies tend to be far more rigorous about inspections that the US government, which examines less than one percent of all food imports. But where this gets tricky, the story suggests, is when companies don’t disclose where these ingredients come from – which allows questions to be raised, doubts to be sown, and proposals to be made about things like mandated Country of Origin Labeling (COOL).
    KC's View:
    I’ve argued here before that mandated COOL for virtually everything is going to be a fact of life, and that retailers and manufacturers that oppose it will find themselves looking like the generals and politicians who insist on fighting the last war as opposed to the one they’ve got. With every new headline about problems with products coming out of China, the drumbeat for greater transparency will get louder and louder. Companies will resist at their own risk.

    Published on: August 16, 2007

    The Wall Street Journal reports this morning that the U.S. Meat Export Federation has hired former major league pitcher Nolan Ryan to help convince Japanese consumers that American beef is safe to eat. The sale of US beef was banned in 2003 after a discovery of mad cow disease in the US; while the ban has been partially lifted, sales have only improved marginally.

    “As part of a summerlong campaign, the Hall of Fame pitcher has his picture in the meat aisles at major grocery stores under the slogan ‘Beef makes you strong!’ Mr. Ryan threw out a ceremonial first pitch during a baseball game in Chiba, a Tokyo suburb, last month. A concession stand called the ‘American Meat Booth’ sold bento boxes filled with American beef and featuring Mr. Ryan's photo.”
    KC's View:
    I’ve been to Chiba. I’ve spoken with Japanese supermarket executives. And no matter how many pitches Ryan throws, it isn’t going to matter, because Japanese consumers aren’t going to trust US beef until the American meat industry and the US government embrace the level of transparency they have in Japan.

    In Japan, they test 100 percent of their cows for mad cow disease. In America, not so much. In Japan, consumers can actually see the ‘BSE-free” certificates for the beef they are eating online. In the US, I think, the government is in an ongoing state of denial, claiming that there could only be nine or so cows in the entire nation that have mad cow disease.

    I’ve got a better shot at hitting a Nolan Ryan fastball than he does at getting a lot of Japanese consumers to eat US beef.

    Published on: August 16, 2007

    A study in Finland has revealed that children who are taught how to eat well at an early age tend to carry those habits with them into their teenage years, and hence will be more likely to have lower cholesterol levels than peers not provided with such early guidance.
    KC's View:
    Yikes! A study suggests that responsible parents can actually have some influence over their children’s long-term behavior and habits!

    Maybe kids pay more attention to their parents in Finland? Y’think?

    (I actually think that we can file this story along with other stories from the land of the painfully obvious. But it raises issues that need to be addressed in a broader context.)

    Listen, I’ve said all along that in creating better nutrition education programs in this country, parents and families have to be the first line of defense. I’m not entirely sure they can do it without help – our kids live in a highly integrated communications-driven world, and have access to so much more information and product than we ever did, that maybe society has to behave in a generally responsible way as well.

    I’m not arguing for legislation, though I’m not entirely convinced that some sort of legislation that governs what can be show to kids is the worst idea in the world. But I do think that companies – which are, by and large, run by people who are parents – need to behave in a responsible manner. For example, Nickelodeon, the children’s cable channel, has just announced that it will stop licensing out its animated characters for use on “junk food” packaging. That seems sensible and responsible to me.

    Of course, there is another problem with the “parental responsibility” argument. How many parents really understand nutritional issues in such a way that they can pass along their knowledge to their kids? Not as many as we’d like, I’d suggest – and you can see that just in the burgeoning adult obesity rate.

    Meanwhile, MSNBC reports that only one if five patients diagnosed with obesity in this country actually has their condition formally documented and receives a formal weight management program from their doctors. While patients who are morbidly or severely obese tend to get better treatment, the lack of focus on lesser cases of obesity is seen as being a significant problem.

    These are complicated issues, and I’m pretty sure that simplistic answers aren’t always sufficient to resolve them.

    Published on: August 16, 2007

    • A new study by the Online Publishers Association (OPA) says that when consumers go on the Internet, they are spending 47 percent of their time with “content,” as opposed to 34 percent of their time just four years ago. The balance of consumers’ time on the Internet, according to the study, is being spent either using search engines or communicating with each other via a variety of venues.
    KC's View:
    If you are in my business, there is only one word appropriate for any sort of response to this study:


    But I actually think that beyond the fact that this is good news for any business using vital, animated and ever-changing content to attract and retain customers – and I would hope that most smart retailers are trying to do just this – there is a broader issue here that perhaps the OPA is not considering.

    I’m not sure that while we in the business might segregate “content” from “search” and “communication,” the next generation of consumers may not think this way. They may not view the online world in such silos, and so we have to be careful not to fall into the trap of imposing old-world boundaries on a new-world digital landscape.

    Published on: August 16, 2007

    • According to a story in the Wall Street Journal, “Wal-Mart Stores Inc. has bolstered the number of loss-prevention workers in its stores and enlisted forensic accountants to help it determine the causes of its increases in theft and lost merchandise.” However, figuring out exactly what is causing Wal-Mart’s shrink problem – which is having a deleterious effect on its gross margins – and how to solve it is “taking a little longer than we expected," according to the company’s CFO, Tom Schoewe. "So, my guess is by the end of the third quarter we'll have better visibility."

    • Wal-Mart has released its 2006 Ethical Sourcing report, which says that, in 2006, “Wal-Mart conducted more factory audits than any other company in the world, at 8,873 factories producing goods for Wal-Mart, 15 percent more than in 2005. Unannounced audits made up 26 percent of the audits undertaken, a six percent increase over 2005. High risk violations of the Wal-Mart Standards for Suppliers code decreased 23.5 percent in 2006, mainly due to educational outreach.”

    • The New York Times reports this morning that, the union-backed advocacy group that has targeted the world’s biggest retailer for its wage, benefits and labor practices, has hired a group of Democratic consultants as its new leadership.

    Meghan Scott, who worked on John Edwards’ 2004 presidential campaign, is expected to become the group’s deputy campaign manager with day-to-day control of the organization. She reportedly will be advised by a trio of consultants - Nick Baldick, Jeremy Van Ess and Richie Ross – that has worked on both national and statewide races on behalf of Democratic candidates.
    KC's View:

    Published on: August 16, 2007

    • The Arkansas Democrat-Gazette reports that “a former executive for RJR Nabisco and two principals at an advertising agency have been convicted of … conspiring to defraud the Internal Revenue Service.” Douglas J. Haase, former director for customer marketing for Nabisco’s account with Wal-Mart Stores, and Michael Cragan and Michelle Cragan, of Cragan, Campellone and Associates, conspired to have the Cragans create fake invoices for personal expenses incurred by Haase; the result was that Haase failed to pay taxes on more than $1.5 million in income between 1999 and 2003. Sentencing for the three convicted felons has not been determined.
    KC's View:

    Published on: August 16, 2007

    • Rite Aid Corp. announced that it has hired Robert J. Easley, the former chief marketing officer at HE Butt Grocery Co., to be its new COO. The current COO, James P. Mastrain, reportedly will become a special adviser to Rite Aid on corporate strategy.
    KC's View:

    Published on: August 16, 2007

    • Sara Lee Corp. reported that its Q4 net income was $117 million, up from the year-earlier $8 million. Revenues rose 8 percent to $3.20 billion from the year-earlier $2.97 billion.

    • Longs Drug Stores said that its second quarter profit rose 40 percent to $26.6 million, from $19 million, during the same period last year. Revenue rose three percent to $1.27 billion from $1.24 billion a year ago.
    KC's View:

    Published on: August 16, 2007

    On the subject of the FTC’s objections to Whole Foods’ acquisition of Wild Oats, MNB user Phil Censky wrote:

    I’m currently living in a market with both Whole Foods and Wild Oats presence (Phoenix). I would not be at all surprised if the Wild Oats near me was closed (by Whole Foods or heck, anyone else who ends up buying them). Would it lead to higher prices? I doubt it: not with Trader Joes, Sprouts, and Sunflower Markets currently open and Tesco on the way. Wild Oats was already the highest priced retailer in the area. If Whole Foods raised prices, they’d get killed by the competition.

    Currently, I can probably travel 15 minutes and find over a dozen stores (traditional and specialty) that sell organic products. Any guess how many different options I have for cable or telephone service? Where are those “Consumer Interest” groups during the mega-mergers within the telecom and media industries? Certainly consolidation of media is much more dangerous than a couple “granola stores” getting hitched?

    Another MNB user wrote:

    Funny how the oil companies can merge and / or acquire other oil companies with no problems but other business have to jump thru hoops!

    Maybe Whole Foods needs more lobbyists throwing money around Washington DC to get the acquisition completed!

    I’m not sure that the world needs more lobbyists, but I agree with your point.

    I find it infinitely more distressing that the government has not raised any red flags about the impending takeover of the Wall Street Journal by Rupert Murdoch. And this is not a political issue. I also wouldn’t want the Journal taken over by NBC, CBS, Disney, the New York Times or the Washington Post. Any of these are unacceptable because it puts too much power into just a few hands.

    The FTC argues that Whole Foods behaves improperly because it may demand that its suppliers not sell identical items to Wal-Mart. To which one MNB user responds:

    With regard to Whole Foods blocking suppliers from selling to Wal-Mart.. I suppose Wal-Mart does no arm twisting!

    If Wal-Mart didn’t invent arm-twisting of suppliers, it certainly perfected it.

    That said, I’m not sure of the legalities…but since when is it improper for retailers to take product on the condition that they have exclusivity?

    One MNB user, however, disagrees with some of my conclusions:

    While it’s likely the WFM-WO merger will go through, your idea that Whole Foods will reduce prices is naïve, which is surprising to me.

    WFM already has the biggest buying power in the natural/organic trade, and are consistently increasing margins and prices in many categories. Why would they reduce prices after they absorb the competition? They will use high-margin private label brands to compete on price directly with Trader Joe’s in center store categories and a few high visibility items (organic milk, etc.), and will continue to get top dollar in their high end perimeter categories and national branded natural/organic packaged goods. Unlike regional grocery chains serving the broad middle demographic and competing for the same households, WFM’s stores are located precisely where pennies don’t matter to consumers. They’ll have 300 locations in a market universe of 50,000+ food stores nationally. They’ll never need to compete on price.

    Fine. Let them raise prices or keep them high. My argument is that there are plenty of other options out there for consumers. And if they start losing sales to, say, Sunflower, Whole Foods will have to lower prices. Or not. But consumers have other choices, which I thought was the whole point.

    MNB user Philip Herr had some thoughts on the argument we’ve all been having about the carrying restaurant-branded products in supermarkets. (I think it is a mistake because it gives visibility to competitors in the battle for share of stomach; virtually the whole world disagrees with me.)

    I know you have been consistent in your opposition to supermarkets carrying branded products from "competitive" chains that vie for the same share of stomach. I can't agree with you. Firstly you are assuming that all shopping trips are equal in the needs that they serve. Not true, a trip to the supermarket to stock up, fulfills a different role from stopping by the coffee shop to buy coffee and a donut. So by purchasing packaged coffee at Costco or Kroger, the shopper is satisfying a different need, which I see as totally non-competitive.

    The second objection I have to your position is that supermarkets generally all carry the same SKU's. (I'd guess that 95% of branded offerings in center store are common to every chain). So by extrapolating your argument, Kroger should stop carrying Tide because both Costco and Wal-Mart carry it also. How is Dunkin' Donuts packaged coffee different from Maxwell House or Folgers or Starbucks -- all of which are available in packages in my local Stop & Shop and just about all supermarkets?

    Bottom line, as long as supermarkets continue to satisfy consumer needs in every way they can, they should carry whatever brands appeal to them.

    In a broad sense, I disagree. Supermarkets ought to be carrying products – or at least putting the greatest emphasis on products – that differentiate them from the competition. You’re right – supermarkets generally carry all the same SKUs. And that’s why, in my humble opinion, they end up battling about price and driving down everybody’s margins. That’s why consumers carry a dozen ‘loyalty cards” and use them only to get lower prices. That’s why the real growth is coming from the differentiated chains such as Trader Joe’s and Whole Foods. And that’s why almost 50 percent of the nation’s food dollars are being spent on food eaten outside the home – because supermarkets think they aren’t competing with fast food chains, and because so many of them haven’t given consumers compelling and differentiated reasons to shop their stores.

    I argued at one point that rather than carrying Dunkin’ Donuts products and giving that chain increased visibility – especially in places where it does not yet have stores but plans on building them – supermarkets ought to have a better coffee and doughnut program. But MNB user Dale Tillotson disagreed:

    Supermarket donuts have become the lowest standing member of the donut totem pole, proven by the fact many retailers now invite donut shops into their business.

    This does two things.

    1- It saves retailers valuable labor dollars that they have been using to produce an inferior donut in the first place.

    2- It starts to get customers back into their stores to pick up those somewhat decent donuts by made by somewhat decent donut makers.

    Ah, there’s the key – “saves retailers valuable labor dollars.”

    So it really isn’t about not being able to make a better doughnut. It’s about the fact that it takes a real investment to do it right, and retailers would rather save the money than get competitive.

    For just a moment, forget about my literal argument that brand such as Taco Bell, White Castle, California Pizza Kitchen and the like ought not be sold and billboarded in supermarkets.

    I’m talking about share of stomach. I’m saying that while there are different need states and different shopping occasions for consumers, supermarkets in general – which have a declining share of stomach – cannot afford to be bolstering the competition for short term profits.

    Once again, permit an aging former altar boy to quote Scripture:

    What does it profit a man if he gains the whole world but suffers the loss of is own soul?

    By going for the short tem dollar and not competing for share of stomach at every turn, the supermarket industry risks the loss of its soul. And in the end, it’ll lose the world, not gain it.

    As the famous Jimmy Malone once said (in words that were given to him by David Mamet):

    Here endeth the lesson.

    (Go ahead, take your best shot. I’m sort of enjoying being the vocal minority of one on this issue…)
    KC's View: