business news in context, analysis with attitude

MNB reported last Friday that the US Securities and Exchange Commission (SEC) has filed civil fraud charges against three former Kmart executives and five current and former vendor executives from Coca-Cola, Eastman Kodak, Pepsi and Frito-Lay, accusing them of crafting a $24 million accounting fraud scheme. The fraud involved the improper booking of million of dollars in promotion payments by the vendors to Kmart in 2000 and 2001, which allowed the retailer – which went into bankruptcy in 2002 – to inflate its earnings numbers.

Five of the executives signed settlement agreements with the SEC without admitting or denying wrongdoing. They will pay a total of $160,000 in civil fines and, according to press reports, agreed not to break securities laws again. The other three executives reportedly are fighting the government charges and not admitting any wrongdoing.

Our comment: We wonder if the real problem here isn’t the specific fraud, but the fact the food industry has countenanced for too long a system of financial three card monte that has allowed – even encouraged – this kind of stuff to take place.

Even without indictments, too many companies have created the illusion of profitability by engaging in this nutty game of promotional allowances and fees that, in the end, defrauds investors and customers.

It is absurd. And it has to stop.


MNB user Glen Terbeek responded:

You are right, the fraud is not the most serious problem, it is the trade dollar "false economics" that are the serious problem. Not knowing the true performance of an item or individual store, or carrying and promoting items that aren't appropriate for each store's customers is what is causing the supermarkets to lose share. Of course, the fact that trade dollars are about two times the pretax income of the supermarket retailer today explains why the corruption continues to occur.

As I have always said, the quick way to fix the problem is to only pay promotional dollars on POS sales. In other words, true economics for true performance! That way retailer and manufacturer each have a stake in the appropriateness and performance of promotions at every store. And there is less chance for financial "fun and games."

Hopefully, the fraud charges will be the wake up call to the bigger trade dollar "false economics" issues.

P. S. Don't confuse this with scan based trading (consignment inventory), where I believe the retailer completely abdicates merchandising and financial responsibility to the manufacturer. In other words, the retailer has little stake in the game, except for the likelihood of losing their stores.


One MNB user wrote:

As a high ranking executive in a food manufacturing concern, it gives me great pleasure to see at least some measure of justice being served against these thieves who rape their companies and their shareholders. I believe that there needs to be more scrutiny of how food retailers account for their profits and their manufacturers “rebates”.

MNB user Sue DeRemer had a thought:

Now wait a minute… these guys engaged in a $24M accounting fraud, that undoubtedly resulted in shareholders being duped about earnings and losing countless dollars on their K-Mart investments. And the punishment? A token fine, slap on the wrist, and they all promise to be good from now on.

Why is Martha in jail and these guys aren't?


Anyone who reads MNB regularly knows that we’ve had a good deal of fun at Martha’s expense, and have very little sympathy for her. But Sue has a good point…it does seem like these guys got a slap on the wrist, while Martha got the book thrown at her. Which doesn’t seem quite fair.

Another MNB user wrote:

Boy, I am shocked that this type of Advanced Marketing Funding goes on in the industry, as well as slotting allowances and new item promotional fees and set-up fees. You posted a quote in one of our prior newsletters
"make money by selling-try to get away from the technique that it should be made through the buying process". Do you think that we need a little Darwinism in the corporate buying environment and see if "buyers" can evolve into sellers? Keep it simple, buy it a the best dead net cost and get it on the shelf in the most efficient manner, chances are if you can accomplish that your customer just may buy it and you just might stay in business for a long time. Here's the challenge, see if you can present an item without layering it with an inflated list, bill back off invoice, terms, scan allowance, ad allowance and any other marketing lingo you could possibly create and stack onto the pile. I say we are all guilty and we all know that there is something terribly wrong here!


“Terribly wrong” seems like the understatement of the year.




Regarding our piece last week about the Panera Bread Co. installing Wi-Fi in a number of its locations, MNB user David J. Livingston wrote:

Panera has already been doing this in some stores for quite awhile. For traveling business people it’s a nice drawing card. Just so long as it’s free. Many a letter to the Content Guy has been composed after buying an overpriced cup of coffee at some coffee house offering free wi fi. Before I leave on any business trip, I do a web search to find out who offers free wi fi in the area that I am traveling.

Free is best, but we have to be honest. The money we spend on Wi-Fi on the road is usually some of the best money we invest in this business.




On the subject of natural and organic food being offered at major league baseball stadiums next year, MNB user Brendan Haslam wrote:

I think it’s great, maybe only because I am a vegetarian and it would increase the amount of goods I can actually consume at a game. On the other hand, “non-healthy” options are as part of the game’s history as homeruns and the seventh inning stretch and I think it’s a part of the experience. If the eating habits at a ballgame are changing, I guess I’ll have to go to another city, since Philadelphians still love pretzels, cheese steaks, and every other junk food offered- I just haven’t seen a shift…yet.

It is a slow shift, to be sure…but it seems inevitable that a broader number of choices be available to shoppers in every venue. Which strikes us as a positive development.




On the overall subject of Whole Foods, one MNB user wrote:

Whole Foods just opened their long-awaited store here in Redwood City, CA. It is a remodel of a large-format Albertson's and is across the intersection from a large- format Safeway. Lousy parking, poor location. The place was mobbed. Still is, around the clock.

My wife and 3 1/2 year old daughter have been waiting for the opening for a year, as they must pass it to get to the Safeway (driving several miles out of their way -passing an Albertson's and another small-footprint Safeway to get there).

My wife visited the store mid-day and came to my office to drag me down there for lunch. I must say that it was impressive, in all the good ways.

As for my wife, she had what I can only describe as a religious experience.

Gotta keep loading up on the WFMI stock I suppose. Let's see, one share costs about as much as two containers of hot turkey w/gravy and a dinner roll. Okay, two rolls. Around here they call it "whole paycheck" but they still shop there. Wide range of demographics, in addition to the usual Mercedes and Volvo types.

There are messages here for other food retailers, but I'm not sure it's anything new: "Listen to the customer and give them what they want. Don't compete on price, because that diminishes your overall value and your brand is not differentiated..." To echo another phrase: "It's what I want, stupid, and I'll pay for it if you only do it right."

Oh, and I saw one of the managers of the Safeway out of uniform in the aisles at Whole Foods. Learning more about customer-focus, or dropping off his resume?





One MNB user wrote on another subject:

This is in response to the person upset over people believing that GMOs are "generally safe". GMO is a new technology, but it is an off shoot of very old technology, breeding. No one gets up in arms about selective breeding of plants, it is a similar idea. No one is advocating splicing together DNA of an iguana and tomato for a protein packed snack with lots of antioxidants.

It is simply the next step in agriculture and could have some very beneficial aspects that should be explored. We have managed to produce the cheapest, most abundant food supply in the world through researching different forms of agriculture, why should this form not be explored?





On the subject of an alliance between Home Depot and the American Alliance for Retired People (AARP), one MNB user wrote:

It seems a natural fit that AARP and Home Depot have formed this alliance. They (Home Depot) can start selling Depends and Polident and with their speed of check out, we will all be old enough to need it when the one cashier (who can never find a manager) finally gets us through her line.




MNB user Al Kober had a comment about our reference to people who choose natural and organic food because they are "customers looking for food that they believe is both more nutritious and safer than traditional fare”:

How did the organic industry get this unscientific reputation. Organic foods are higher in one thing and it is not more nutritious or safer food, is it price. Not that I am against being able to capitalize of reputation or image, but at least try to base the claim on facts.




We had a story last week about Dunkin’ Donuts offering a pre-paid card to consumers, which prompted MNB user Judith Brymer to come up with a great idea:

It's a great idea and (in my opinion) long overdue!. What would be ideal is if DD manufactured a key-chain sized card (much like CVS does). Our wallets are busting already and most customers I see run into DD with keys in hand - Ah even more convenience! That would definitely get my vote.

And MNB user John E. Derby wrote:

Kevin, as you point out we all have a number of cards in our wallets…I for one feel weighted down by all these cards and would appreciate only carrying one or two that could service all my transaction needs. Perhaps I could obtain this card from any one of my trusted retailers or financial service providers. Then, allow me the ability to decide who I want participating on the card, activate it via these organizations, and enjoy the relationship from that point forward in a simpler, cleaner way. Pie in the sky perhaps, but since many have been looking for an application for smart cards, maybe the consumer choice idea isn't that far fetched. And, I am sure all of us smart marketers and advertisers could figure out the branding ideas. Probably not an original idea, but it's a thought!




Last week, we asked whether Safeway’s newest board member, Ray Viault, was capable of being the kind of independent change agent that the chain seems to need. To which MNB user Mark Hunter responded:

Ray Viault’s background goes way beyond his time at General Mills. He cut his teeth at General Foods running several different major divisions and later doing time in Europe. He’s a leader who is not hesitant in making changes. While running Maxwell House he made more than a few significant changes to status quo including closing down manufacturing facilities. There are many GF alumni like myself who can share many a story on Ray’s role in the industry, it’s a good move for Safeway assuming they accept his input.

Big assumption. But the company at least gets points for hiring someone with sharp teeth…




Finally, we had a story and commentary last week about how retailers ought to be collecting email addresses and using them to solidify their relationships with consumers…an assertion that got a lot of negative reaction from people who didn’t want to hand out their email addresses and are skeptical about retailers’ ability to use them effectively and responsibly.

To which MNB user Mike Spindler – who also happens to be president of MyWebGrocer, the Internet service provider to a number of the nation’s retailers – responded:

Wow, I was surprised at all of the negative response to your suggestion that every grocer ought to be collecting customer email addresses, particularly those with loyalty cards.

1. Even if the retailer is not prepared to launch an intelligent, salient program today they will/may be at some point and so should be gathering that data and marrying it up with their loyalty data for that customer.

2. Successful Multi-Channel retailers have opt-in sign in forms that allow the customer to sign up for newsletters, ads, articles, events of interest to them, and also offer an effective opt-out capability on all emails (as required now by Spam laws).

3. While the opt-in program mentioned in point two offers some "wannabe-personalization", which increases saliency and therefore value/convenience for customers, we are just now beginning to see REAL personalization in loyalty efforts for store-shoppers in such programs as the limited Stop & Shop "shopping buddy" type environments where customers can assemble a shopping list online from a personalized tool and then push it into the store for actual execution. We do this today for online customers with a re-order email/personalized shopping site program that generates about 15% of our weekly repeat sales and "reminds" customers to go to the site, spurring another 45% of repeat sales. These shoppers buy more and their baskets grow more than other online, or any in-store customers.

Finally, our initial investigations into the results created by true personalization (marrying behavioral data, culled promotions, historical behavior enabled lists and lifestyle meal planning) communicated via email, but potentially executed through web and in-store availability indicate: very significant participation, significant and sustainable growth in basket size and some very interesting loyalty decile advances.

4. Multi channel marketing is very much more advanced in other retail environments. Those channels have proven that the customer who uses more than one medium to either shop or prepare to shop, spends 2-4 more times than the customer who shops in store alone. We see similar results in Online Grocery shopping and in our early efforts with multi-channel, personalized shopping preparation for in-store execution.
KC's View: