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    Published on: February 26, 2008

    by Michael Sansolo

    For very good reasons, many of us know far less about economics than we should. Even in economics classes in college we were reminded why it’s rarely the most popular subject. One economics professor once told me that economists are accountants without the personality. And that if every economist was laid end to end they still wouldn’t reach a conclusion.

    In the world of economics, those are the best jokes we have. So it’s worrisome when economists become sexy. Get worried! Economics is coming back and it matters.

    The headlines sound the warning almost daily. It’s more than the strange fluctuations in the stock market or the equally stunning changes in oil prices that happen weekly or even daily. It’s in the steady beat of two stories that should command our attention.

    First, inflation seems to be rearing its ugly head, especially in the food industry. Recent government reports suggest that the four percent hike in food prices in 2007 and likely to be followed by at least as large a hike in 2008. The causes are laid far and wide, including the increasing competition between food and fuel for key products like corn and soybeans. The price hikes might be welcome in some circles as a chance for the industry to regain some rationality in pricing and to post some healthy growth numbers. But the second story shows why prices hikes won’t come without cost.

    The second story is this: There are increasing signs of an economic slowdown, either through the mortgage mess, layoffs, reduced growth forecasts and more. Inflation and economic slowdowns rarely arrive together. But when they do it’s never good.

    I was reminded of this last week while touring stores with a long-time industry veteran. As he pointed out, there are far too few people left in the industry who remember the early 1970s.

    The early 1970s were when the US learned the word “stagflation,” the strange combination of inflation and stagnation. It was supposed to be an impossible combination, but it happened. As Ed Walzer, my editor at Progressive Grocer used to explain, it didn’t come lightly. In the early 1970s, the industry simultaneously confronted an end to cheap energy, cheap food, cheap money and rapid population growth. The combined impact of those four issues sent some supermarket companies into irreversible declines and gave rise to the era of generic products, massive discounting and the start of supplier deals and allowances.

    Sounds really attractive, doesn’t it?

    Only it’s what everyone should be studying these days. We need to understand how the softening economy and rising prices are changing shopping patterns and product selection. We need to start considering how shoppers who through the years have grown increasingly desirous of time saving products and other conveniences, will deal with restrictions on the purse strings. It’s time to examine how the industry can best align with the changing needs of the shopping population, to satisfy those needs as quickly as possible.

    The combination of economics woes doesn’t necessarily mean the worst of outcomes. Food at home always has massive economic advantages. There’s the ability to use a single shopping trip to create a week’s worth of meals, which should ring true with shoppers looking to reduce gas usage costs. And while food made at home isn’t always cheaper than restaurants (an 89-cent hamburger is still a tough match) the food supermarkets offer can provide healthy, interesting eating choices that meet the many goals of today’s shoppers in an economical fashion.

    Of course, it won’t be easy, but in tough economic times our ability to help the shopper solve their problems is the easy answer.

    There are few more overused quotes than philosopher George Santayana’s warning that “Those who do not remember the past are condemned to repeat it.”

    Start remembering.

    Michael Sansolo can be reached via email at msansolo@morningnewsbeat.com .

    KC's View:

    Published on: February 26, 2008

    The Austin Business Journal reports on how Wal-Mart is upgrading its image in some markets, such as Dallas and Austin, to appeal to more affluent shoppers.

    The Journal writes: “Wal-Mart made headlines when it opened a Plano luxury store, featuring $500 wine, wood floors and sushi. The company has since opened another high-end concept store in Highland Village in Dallas that features an upgraded interior design and a bike and repair shop instead of its standard tire and lube shop. The Highland store also uses energy-efficient technology, such as LED lighting and motion detectors.

    “In Central Texas, Wal-Mart plans to squeeze in a multilevel Supercenter alongside Austin's Northcross Mall, and plans call for the store to have high-end materials incorporated into the design of the store. The exterior of the Northcross Wal-Mart looks more like a department store rather than it's usual beige box design.

    “Wal-Mart says it has always tinkered with store formats, but some analysts say the retailer is thinking more outside of the Supercenter-sized box to gain market share.”

    The story notes that Wal-Mart plans to incorporate many of these design and products details into other stores, using the prototype stores as a kind of feeder mechanism that it can use to keep the entire chain up to date.

    KC's View:
    Wal-Mart’s moves are particularly interesting right now because as the country’s economic situation worsens (see Michael Sansolo’s column above), its “always low prices” approach would appear to be well-positioned to take advantage of consumers’ shifting priorities.

    At the same time, Wal-Mart has had a few years to test the notion of what “upscale” means. It has learned that certain things work, like a focus on sustainability and environmentally friendly buildings, and more up-market electronics; it has learned that certain things are at odds with its image and appeal, like upscale clothing that many shoppers find jarring. Which means that Wal-Mart, in many ways, may be a stronger and more competitive entity than it was a few years ago.

    The Journal makes the point that Wal-Mart currently operates three formats, but in a few months it will have a fourth – the new small-store food-driven concept it plans to test in Arizona, pitting it directly against Tesco’s own-small-store format.

    I’m just guessing here, but I think it seems like a logical bet to suggest that the new small-store format could integrate many of these up-market touches … which would create a very different shopping experience from Tesco’s Fresh & Easy, which have fairly been criticized for being somewhat sterile … and yet will not abandon the value foundation upon which it is built.

    Published on: February 26, 2008

    The Wall Street Journal reports that the Bush administration has decided to support legislation that would give the US Food and Drug Administration (FDA) explicit authority over imported food and drugs.

    According to the Journal, “The FDA has been hobbled in its enforcement of imports even as the number of products entering the U.S. has skyrocketed.”

    In a letter to GOP lawmakers, Health & Human Services (HHS) Secretary Mike Leavitt wrote, “Foreign firms can often deny U.S. officials access to their facilities without any adverse consequences … Such an amendment would better enable FDA to address criminal conduct that occurs entirely outside of the United States and threatens the health and safety of consumers within the United States.”

    KC's View:
    It would appear to be a simple proposition – if you want to export your products to the US, you have to give US officials access to your facilities. Though I suppose there are all sorts of other geopolitical considerations that go into whether some governments will get pressured and others will not.

    While it pains me to do so, it seems important to point out that the US isn’t particularly good at inspecting domestic facilities – though it seems likely that this more a matter of an overburdened and inefficient infrastructure rather than any sort of malevolence. (Though I’d guess that there are more than a few people who would disagree with that assessment.)

    There are moments when proposals and amendments and policy shifts seem like so much noise, designed primarily to convince the citizenry that problems actually are being addressed by the government, that things actually can get better. But in the darkness of my soul, I remain abidingly skeptical.

    Published on: February 26, 2008

    Fascinating piece in Consumer Reports looking at why “more than 25 million pounds of beef believed to be tainted went to market in 2007, up from less than 200,000 pounds the year before.” It seems that at least one theory is that the blame can be traced to increased production of ethanol.

    According to the story, “Government regulators and beef industry officials have been scrambling to explain the increase in beef contamination. Among the theories: rising oil prices have encouraged greater production of ethanol, which creates a corn byproduct that increasingly is being used as cattle feed. This feed appears to make the animals' digestive tracts even more hospitable breeding grounds for the toxic strain of E. coli bacteria, says Kenneth Petersen, an assistant administrator in the Office of Field Operations at the U.S. Department of Agriculture. Droughts in some regions might also have contributed to the survival of more virulent forms of the bacteria, and better investigation methods now can link far-flung cases of beef contamination to a single cause.

    “But the main obstacles to preventing the spread of toxic E. coli are inadequate government inspection and meat-handling practices, particularly in slaughterhouses, where contamination is most likely to occur.”

    KC's View:
    You can't win.

    But the real lesson is that increased and more vigilant inspection is mandatory, even as scientists try to figure out how to deal with the ethanol production issue.

    Published on: February 26, 2008

    Whole Foods reportedly plans to open four stores in Hawaii, with three stores on Oahu and one on Maui, all of which should be open by 2010.

    While the company believes that the Whole Foods approach is ideal for the islands lifestyle, there are those who are concerned that the openings could be just the beginning of a series of store openings that could negatively impact local organic and natural foods retailers.

    KC's View:
    A word of advice to these local retailers. Start preparing now. Start competing now. Don't wait until the Whole Foods stores actually are open.

    Figure out what your strengths are, and enhance them to the best of your ability. Then, figure out where your strengths overlap with Whole Foods’, and then start developing other strengths that the bigger chain cannot replicate. Know more about your customers than they do. Invest in your business, working to be both more productive and more efficient – in that order. Cater to their habits better than Whole Foods can. Make sure that you have the products that your customers want, when they want them, how they want them, where they want them, at a price that customers think is appropriate.

    Published on: February 26, 2008

    In Minnesota, the Pioneer Press reports that “upscale grocery chain Kowalski's is revamping its Grand Avenue store in St. Paul to have more of a European street market feel with more fresh fruits and veggies, meats, takeout, artisan breads and new pasta and salad bars.

    The tweaked format will be tried out at Grand Avenue and a planned store in Eagan, and is gradually being phased in at other locations because the people behind Kowalski's believe that's what customers want … In the updated Kowalski's format, grocery items such as cereals, flours and spices will be available but the selection may be reduced in favor of more produce, deli items, meats and specialty products.”

    KC's View:
    Tough to compete in the upscale food market when Lunds/Byerly’s is not just dominant, but also excellent in catering to these same tastes.

    Still, I have to say that I like the idea of reducing the number of SKUs that are carried by everybody else, and focusing on the SKUs that Kowalski’s perceives as its differential advantage.

    Published on: February 26, 2008

    In the UK, the Retail Bulletin reports that Wal-Mart’s Asda Group has announced a series of measures designed to address concerns about underage binge drinking. The chain has said that it will stop selling booze between midnight and 6 am, is strengthening its age verification procedures, and will use an independent auditor to make sure that it is meeting its goals.

    The announcement comes just days after Tesco called on the British government to pass legislation that would make it illegal to sell alcohol at cut-rate prices, which Tesco believes is critical to stopping the binge drinking trend.

    Asda CEO Andy Bond, however, disagrees with the Tesco conclusions. “I believe our targeted measures will go a long way towards tackling the issue of underage sales, and alcohol fuelled anti-social behaviour … Unlike some in the industry I am also not prepared to hide behind calls for more legislation. I believe there are plenty of things we can do now to start tackling this important social issue, which is why we are announcing these measures today.”

    KC's View:
    I agree with Bond on this – companies should never wait for governments to handle their problems, but rather should get ahead of governments on issues whenever possible.

    I also love something else Bond said: “As a parent myself I find it unacceptable that children in the UK are still able to purchase alcohol from retailers and pubs. So from today we are adopting a zero-tolerance approach.”

    Business people sometimes forget when they get to work that they also are parents. So it is refreshing when a senior executive makes the opposite point – that parental responsibilities don't stop when you leave the house.

    Published on: February 26, 2008

    The California Grocers Association (CGA) reportedly is opposing a proposed Santa Monica, California, ordinance that would ban the use of disposable plastic bags by all stores and restaurants in the city, and would require retailers to charge a fee for paper bags.

    According to the Los Angeles Times, “The California Coastal Commission estimates that, worldwide, as much as 80% of all marine debris is plastic. Because most plastic bags do not biodegrade, they tend to break down over time into smaller pieces that are consumed by birds and marine animals.

    “More than 1 million sea birds, 100,000 marine mammals and countless fish die annually in the North Pacific from eating or becoming entangled in plastic bags and other debris, studies show.”

    The CGA says that the ban would undermine recycling efforts.

    KC's View:
    My position on this issue has been made abundantly clear in recent months. I think that any strategy that gets rid of plastic bags and gets shoppers to change their habits, using canvas bags that are not going into landfills or into the ocean, is a step in the right direction. It doesn’t get rid of the problem, but it is a positive move.

    And if I were a grocer, I’d be trying to figure out how to get ahead of the shift, not resist it.

    Published on: February 26, 2008

    The Wall Street Journal reports this morning that “some food companies are growing frustrated with the government's handling of the largest meat recall in U.S. history, and a few are holding off on destroying the meat with the hope it could be donated or put back in stores.

    “As the beef recall begins working its way through the nation's food chain, industry officials say it could cost food makers hundreds of millions of dollars and result in some small meat companies going out of business. Some companies, like retailer Costco Wholesale Corp. and food-service firm Advance Food Co., have pulled the meat from circulation but are holding onto it for now.

    “Wal-Mart Stores Inc., the nation's largest food retailer by sales, said yesterday it has pulled meat from its stores that was tied to Hallmark/Westland Meat Packing Co., the meat company that was the subject of the recall. A Wal-Mart spokeswoman said a company called Stampede Meat informed Wal-Mart last Tuesday that it was a customer of Hallmark/Westland. Wal-Mart directed its stores to destroy the affected products … Yesterday, Burger King Corp. disclosed that some patties shipped to a limited number of Burger King restaurants may contain a small portion of beef from Hallmark/Westland.”

    KC's View:
    Retailers have no choice. As agents for the consumers, they have to be fast and decisive…and leave no doubt that they are protecting shoppers in every possible way.

    It seems to me that potential waste is a tiny problem when considered in context. And probably will be a tiny problem when the extent of the current problems actually is known.

    Published on: February 26, 2008

    • The Los Angeles Times this morning reports that “Wal-Mart Stores Inc. is launching a Web-based tool to help identify new ways to make its operations more environmentally friendly.

    “Cleantech Group, a small Michigan company that links inventors of sustainable technologies with investors, will solicit ideas for Wal-Mart to address such diverse problems as the reuse of vegetable fats from the retail giant's deli fryer and more efficient batteries for the company's thousands of forklifts.

    Cleantech will use its network of scientists and industry experts to assess ideas and business plans submitted to its website, and pass along the most promising to Wal-Mart within about six weeks … Wal-Mart said it hoped to implement the most practical ideas as widely as possible within two years, especially if they can improve the company's bottom line.”

    KC's View:

    Published on: February 26, 2008

    • The Kroger Co. reportedly has launched an internal television network – named “KTV” – that will be used as an employee communications tool, with production facilities in each of the company’s divisions.
    KC's View:

    Published on: February 26, 2008

    • GMDC announced that Christopher M. DePetris has been hired as its new Director of Wellness Programs, responsible for advancing GMDC’s position in wellness in the General Merchandise and Health Beauty Wellness supplier, wholesale, and retailing industries. DePetris joins the GMDC staff after most recently serving as Director of the Holistic Health Department at Wild Oats Markets Inc., now Whole Foods.
    KC's View:

    Published on: February 26, 2008

    …will return.
    KC's View: