Follow-Ups

The Trend to Smaller Stores
Last week we noted Meijer’s new down-sized store format, and here’s an article about Wal-Mart and Target doing much the same thing.

Target and Wal-Mart have both told analysts they are creating smaller stores that could fit in the heart of densely packed cities where they have no presence. But analysts warn that creating a small store doesn't just mean shrinking a big one. Big box retailers need to whittle their merchandise to suit shoppers who live in smaller spaces, use public transportation and prefer eating at coffee tables to large dining sets. They also need to figure out how to make money if they cannot stock as many high-profit margin goods, like clothes, to offset brisk sales of low-margin items, like pasta sauce. "When you have a big box mentality, your orientation is toward lots of SKUs (items) across lots of categories," said Leon Nicholas, director of retail insight at Kantar Retail. "When you try to move into a small box the question then becomes do you cut SKUs or do you cut categories so far ... that you lose that one-stop-shop kind of mission?" Or, he said: "Can you be Wal-Mart in a small box?"

Online: Pricing, Conversion
There has been discussion and commentary concerning online retailers who hide their prices, apparently in response to manufacturers who don’t want to facilitate comparison shopping that would lead to eroded margins. As a consumer, I hate it when I can’t find the price – online or in-store – but as a marketer I understand the suppliers’ sensitivity.

The missing prices are part of a larger battle sweeping the world of e-commerce. Wary of the Internet’s tendency to relentlessly drive down prices, major brands and manufacturers — and now, book publishers — are striking back, deploying a variety of tactics and tools to control how their products are presented and priced online. “You are seeing firms of all types test the waters” with strategies to control online pricing, said Christopher Sprigman, associate professor of intellectual property at the University of Virginia School of Law and a former antitrust lawyer at the Justice Department. “They feel they have more freedom to do it now.” In many cases that freedom stems from a 2007 Supreme Court ruling in the case of Leegin Creative Leather Products v. PSKS. The ruling gave manufacturers considerably more leeway to dictate retail prices, once considered a violation of antitrust law, and it set a high legal hurdle for retailers to prove that this is bad for consumers. Ever since that decision, retailers say manufacturers have become increasingly aggressive with one tool in particular: forbidding retailers from advertising their products for anything less than a certain price.

I’ve mentioned before that I wonder how much longer the Leegin decision will stand before Congress overturns it.

In Australia, the two giant retailers who almost totally dominate that country are taking the opposite tack – putting more pricing online as proof of their price-cutting:

Woolworths' move to put the price of 5000 products online has been cautiously welcomed by consumer advocates, and has its major rival looking at following suit. The grocery giant yesterday took what it called "the first step in the journey" by posting the information online, but admitted it had some way to go. Its move follows criticism … of recent claims by both Woolworths and Coles that they were lowering prices, without providing hard evidence. […] Woolworths earlier said it was permanently reducing prices of 3500 products - but provided just 16 examples - while Coles said it was committed to uniform statewide pricing.

And our interesting factoid of the week: Here’s a chart of the top ten online retailers by conversion rate. Interesting that most (except Amazon) are relatively smaller niche sites – but that may explain why they convert relatively higher percentages of shoppers.

Private Label
There’s always more news in the private label arena. Wal-Mart is experimenting with private label spices, a move that must have folks at McCormick tossing and turning all night:

McCormick generates 11% of its revenue from sales to Wal-Mart, mainly by selling brand-name spices. But Wal-Mart has considered switching to private-label spices, testing the idea by replacing McCormick products with generics in some stores. True, McCormick's sales at Wal-Mart may not be wiped out altogether if such a switch gathered pace. The company also produces private-label spices that could replace some of its brand-name products on Wal-Mart's shelves. Even so, McCormick's margins could take a big hit. The company's generic spices sell for 30% to 40% less than its regular products.

Family Dollar is also looking to increase its private label share:

Kenneth Smith, Family Dollar's chief financial officer, said the company sees an opportunity to increase consumable private-label sales from current levels of 10% of sales to 15% to 20%. Storewide, Smith said Family Dollar plans to increase private brand penetration from its current 19% level to 25% penetration.

The Sports Desk: Super Bowl Advertising
As we mentioned last week, the Super Bowl came in second last year in viewers to the European soccer championship. We’ll see how it does this year against the Olympics and the World Cup, but it broke all previous records – not only for viewers, but for number of ads run, and a Doritos ad is said to be the most-watched ad ever:

A fourth-quarter Doritos commercial featuring two men attacked in a gym for stealing someone else's Doritos, was seen by an estimated 116.2 million viewers during the Super Bowl, making it the most watched television commercial of all time, according to Nielsen.

In other Super Bowl news, I understand Drew Brees had a good game, too.

Upcoming Webinar Reminder
I’ll be moderating a webinar for DemandTec next Wednesday, Finding True North in Trade Analytics Adoption, and on March 10, we’ll be hosting a webinar by MEI, What Does ‘Trade Promotion Optimization’ Really Mean? Click on the links to get more information and to register.

Poll Results: CPG Online

We discussed Alice.com last week, and the idea of selling CPG products online, and we asked our readers, “In three years, what percentage of CPG products will be sold online?”

• 9%: Less than one percent
• 15%: One to two percent
• 15%: Two to three percent
• 61%: More than three percent

Our respondents are pretty optimistic about the prospects for online retail – I think it will take a bit longer, so my own guess was about one percent, but overall responses were very much to the higher end of the scale. Even 1% of the CPG market would be a huge number.

Follow-Ups

The Kraft/Cadbury Merger
After playing hard-to-get for a suitable period of time, Cadbury finally came around when Kraft upped the ante a bit. Mergers/acquisitions may be ready for a comeback. “While mergers involving food companies dipped somewhat last year — preliminary data from the Food Institute, a trade organization, showed 58 acquisitions in 2009, versus 130 in 2008 — analysts expect deal-making to pick up again as companies seek greater scale and presence in developing countries.”

Beer: Prices Up, Sales Down
We mentioned this one last October, when the price hikes were announced, and commented then, “Their logic is that because demand is down and the economy is weak, it must be a good time to raise prices. Huh?” The result: “U.S. beer sales volumes fell 2.2% last year, the highest rate since the 1950s, with demand worsening late in the year …” Of course, the two big breweries need to pay off the costs of their mergers, and perhaps the increased prices will offset the decreased sales.

Sears Emphasizing Online
Sears/Kmart comp-store sales have declined every year since their merger. But their online business has been growing strongly, reaching $2.7bil last year – 6% of total sales, and significantly more than walmart.com’s $1.7bil. An analyst’s comment: "If they can do this right, it may save the company. There is a sea change happening in retail right now and it is not clear what stores are going to look like in 10 years, so why spend money now? It may make sense for some companies, like Wal-Mart, as a defensive posture, but that is not the position Sears is in."

CPG Online

This could fit into our ‘Follow-Ups’ department, since that is where we regularly discuss online issues. Just last week we carried an item about Procter & Gamble’s eStore initiative, which is also discussed (along with a similar move by General Mills) in this Advertising Age article.

Despite the tremendous growth of online retail in a number of categories (I do a fair amount of my own shopping online – books, music, video, and electronics for the most part), I have been skeptical about the viability of online for CPG. I’m still not 100% convinced, but I am sufficiently intrigued by the business model for a venture called Alice.com that I am willing to be convinced.

The full purchase price of products at the site goes to the suppliers, meaning that they get their own margin plus the retailer’s margin on all sales. Where Alice makes her money is on marketing support funding from the suppliers:

[Alice] is collecting $10 to $12 in marketing dollars from manufacturers for coupons, loyalty programs and free samples on a typical shopping cart, which has 10 to 11 items and a ticket just less than $50.

This is really not as new as it sounds. After all, a traditional supermarket has net profits in the low single digits – which means that most goods are sold at a loss, offset by income from the 15%-20% trade promo funding the stores receive on most purchases.

Two benefits for suppliers selling through Alice.com (there are already more than a hundred, including some very big names) are that they set their own prices and that Alice, who makes her money from them, has no incentive to introduce private label.

The big names will of course garner the most attention, but I also think sites like this might be a way for second-tier suppliers and niche products to maintain distribution as they see their shelf space diminished by SKU rationalization.

The concept is certainly not proven yet, but the site, which was launched in June 2009, is already getting two million unique visitors per month, a pretty impressive total. This is a development worth watching. Last fall, I bought a new GPS from Amazon. This past December, I bought most presents online; perhaps soon I’ll be buying my tea there as well.

Exit question: In three years, what percentage of CPG products will be sold online?

Quickly Noted

Deep Discount on Space Shuttles
NASA is offering used Space Shuttles at a discount price of $28.8mil, marked down from $42mil. Look, if you’ve cut price by 30% and that doesn’t work, do you think maybe you should try an end-cap?
New York Times, 16 January 2010

On Second Thought, Maybe the RIAA Did Conspire to Fix Prices, Appeals Court Finds
An antitrust suit against the leading music labels and distributors was re-instated upon appeal. "The complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants," said the court, specifically mentioning that “none of the defendants dramatically reduced their prices for Internet Music (as compared to CDs), despite the fact that all defendants experienced dramatic cost reductions in producing Internet Music.”
BetaNews, 13 January 2010

Mobile to Outpace Desktop Web by 2013
Gartner predicts that within three years, more people will be accessing the web from mobile devices than from desktops. “But the firm warns that many sites still are not optimized for the mobile Web, even though cell users expect to make fewer clicks on their phones than on a PC. To successfully expand into mobile, publishers will have to reformat sites for the small form-factor of handheld devices.” By 2014, Gartner says that three billion adults will be able to make transactions via internet or mobile technology.
Online Media Daily, 14 January 2010

Tesco Loses Place in Global Top Three of Retailers
Tesco has been, for the past several years, third in the global retail standings behind Wal-Mart and Carrefour. But (as the chart above notes), Germany’s Metro has pulled ahead of them.
The Times (UK), 11 January 2010

Follow-Ups

Regulatory/Law: UK to Have Supermarket Ombudsman
Last week, we mentioned that the Conservative Party in the UK had promised to appoint an ombudsman to oversee disputes between supermarkets and suppliers. Almost immediately, the governing Labour Party pre-empted the promise by doing so:

The U.K. Competition Commission recommended the establishment of a body with the ability to penalize grocers in August after an inquiry found they were passing on “excessive risks” and “unexpected costs” to suppliers. The opposition Conservative Party, which leads in opinion polls, has also recommended the appointment of a supermarket ombudsman citing so-called “retrospective discounting,” where retailers reduce the price of products at a later date when they fail to sell.

Online Marketing: P&G Opening eStore
Procter & Gamble is creating an ‘eStore’ to sell its products online. They say they are doing so to research consumer buying habits and will share data with its traditional retailers, but the new outlet may also be an effort to overcome lost shelf space as many of their retailers cut assortments.

Media: Magazines Lose 25% of Advertising
The bleeding has not eased at all in the media space – the latest report is on magazines, who lost 25% of their ad pages in 2009:

Between 2008 and 2009, magazines lost, on average, one-quarter of their ad pages — the worst drop in the decade of data that the bureau, which measures virtually all major American magazines, had readily available. It is significantly worse than even 2001, when pages declined by 17.2 percent from the previous year. And magazines ran only about 170,000 ad pages last year, versus about 238,000 in 2001.

SKU Rationalization: Supervalu Cutting Assortments
We mentioned a month or so ago about Supervalu’s plans to reduce assortments. The Wall Street Journal provided an update, summarized in the opening paragraph:

Supervalu Inc. said it will be reducing the number of items it offers per store—in some cases by as much as 25%—in a move intended to more prominently feature store-branded items and extract lower prices from vendors.

Follow-Ups: Online Retail, Regulation/Law

We’ve had numerous items on the Wal-Mart/Amazon battle, and this article goes into depth on some of the challenges facing Wal-Mart as they try to fulfill their goal of being “the Wal-Mart of the web.” Wal-Mart’s pricing challenge to Amazon on best-sellers garnered a lot of attention, but it also pointed out a problem for a company that is primarily bricks and mortar:

The price competition highlights one of the key challenges facing any store-based chain selling online: how to reconcile prices in stores and on the web. Low web prices could undercut store visits, while high web prices mean the e-commerce site can’t compete.

Wal-Mart, after all, wants you to come into the store, where they can sell you a bunch of other stuff, not just a few loss-leader books. That same issue shows up in shipping, where Amazon emphasizes the free-shipping option of Amazon Prime, while Wal-Mart wants to persuade us to use their ship-to-store option.

The article also mentions the problem for a bricks and mortar retailer in opening up its website to other merchants – Amazon has done so very broadly, while Wal-Mart’s efforts are limited thus far to retailers who sell non-competitive products.

Speaking of which, Sears also has opened its website to other sellers, leading to this criticism from the Chicago Tribune:

Keeping quiet may work when operating elite hedge funds, but it's usually not a great strategy when running a retailer. For the past six months, Sears Holdings Corp. has been operating an online marketplace that allows third-party vendors to sell goods on its Web site. But few consumers knew about it. Sears waited until Thursday to unveil "Marketplace at Sears.com," disclosing that its Web site carries more than 10 million products, including furniture, art, cosmetics, appliances, sporting goods and shoes.

I’ve never had any problem criticizing Sears, but I think it’s the Tribune that’s at fault here. Sears has made no secret of this effort – we mentioned an item about Marketplace back in October.

On a separate note, we mentioned regulatory actions against Intel, and Intel’s settlement of its lawsuit with AMD not long ago. Now the Federal Trade Commission has announced an investigation of Intel, but is basing it on graphics chips rather than on CPUs.

To date, the antitrust actions of regulators worldwide toward Intel have focused on sale practices for central processing units, or CPUs, a market over which the company has fought heavily with Advanced Micro Devices. On Wednesday, however, the FTC spelled out a litany of allegations about Intel's alleged anti-competitive behavior in the market for graphics-processing units, or GPUs, in which Nvidia is a major player. […] Why graphics, and why now? "It would be really hard to sell the public on expending resources to take Intel through administrative proceedings when it had already paid over a billion dollars to AMD," said Joshua D. Wright, a professor at George Mason University School of Law and a scholar in residence at the Federal Trade Commission until 2008. "[The FTC] needed to be seen as doing something new."

Intel sounds rather annoyed about it:

This lawsuit is not based on claims that Intel violated the existing antitrust laws. Instead, the FTC is advocating new rules regulating business conduct. Those rules would harm, not help, competition and would reduce incentives for companies to invest in research and development and other pro-competitive activities.

And several months back, we mentioned a decision that greatly broadened the definition of ‘competing customer’ for Robinson-Patman purposes. The decision in that case, in which a distributor sued Michaels Foods for selling at different prices to food service company Sodexho, has been reversed on appeal:

The case, Feesers, Inc. v. Michael Foods, Inc. and Sodexo, Inc., was filed in 2004. In the suit, Feesers, a regional food distributor based in Pennsylvania, claimed that it competes with Sodexo, Inc., a multinational food service management company, and that Michael Foods was required to sell its products to both companies at the same price. The Third Circuit Court of Appeals today rejected Feesers' claim, holding that Feesers and Sodexo are not competing purchasers.

Presumably there will be further appeals.

Online Retail Sales Set a Single-Day Record by Topping $900 Million

On December 15th online sales totaled $913 million. Each day of that week through Thursday, the last day to order with assurance of delivery by December 24th for many sites, topped $800 million, and total sales for the holiday season reached almost $25 billion, up 3.7% over 2008. I bought just about everything online this year (anything to avoid the malls), and everything arrived on time.

Follow-Ups: Private Label and E-books

The increasing quality of private label products was the subject of an item here a few weeks ago, and tests in San Francisco confirm that store brands are often equal to or better than comparable branded products:

Our five experienced panelists - local chefs, cookbook authors and food professionals - test products blind, concentrating solely on texture, appearance and, most importantly, taste. Time and again, they find that grocery store brands come out on top. In fact, in the 44 tastings from 2009, more than one-third of the winners were grocery store brands.

A steady stream of articles like this will begin to put greater pressure on brand name marketers to find ways to justify their price differential.

We also discussed, just before Christmas, the growing popularity of e-readers and the concerns they are raising among publishers, who are looking for a way to battle the downward pressure e-books will put on prices for ‘real’ books. We suggested that this might be the year when e-readers reach critical mass. Looks like we may have been right:

Amazon's Kindle hit an important and startling milestone yesterday: On Christmas, the company sold more Kindle books than physical books. Yes, this is obviously the result of everyone who got a Kindle for Christmas (lots of folks) firing it up and ordering a bunch of eBooks on a day in which most physical-book readers weren't shopping. But it's still important and impressive.

I’m waiting to see if publishers will have a strategy for digital books that works better than the record labels’ response to digital music.

Follow-Ups: Social Media, 'Project Impact,' and Costco/Coca-Cola

A busy week on a number of topics we've addressed here before. There was an interesting article in UK's Observer titled "Facebook now has 350m users, and there's no point in advertising to them." The author notes that Facebook is ostensibly valued at $10 billion, but has only $500 million in revenue. Twitter is valued at $1 billion and has revenues of...zero.

We've debated online advertising often here, this writer thinks it's not effective, especially in social media:

The truth is that investing in social networking represents the triumph of hope over experience. The optimism comes from a feeling that it's impossible to gather, say, 350 million people in one place and not somehow make money. In the real world, one would charge them admission and sell them hot dogs and overpriced T-shirts. But that doesn't work in cyberspace. If Facebook started to charge for membership, its population would dwindle to the number of people who think that its services are worth paying for, probably not that many... ComScore also concluded that a hard core of 8% of all internet users, christened "Natural Born Clickers," are responsible for 85% of all banner clicks on the web. Everyone who uses the web has experienced the ineffectiveness of online advertising. If it's obtrusive, it's an irritant that gets between you and the content you're seeking and you hit the "Click here to skip this advertisement" button. If it's unobtrusive, you ignore it. Either way, it's ineffective.

Target's hometown paper did a mostly positive article on how Wal-Mart's Project Impact is reshaping the rival's stores.

The strategy aims not just to make stores look cleaner and more open, but to fine-tune vast product offerings and reframe the way Wal-Mart markets itself to consumers. In many ways, Wal-Mart has become more like its top competitor — Minneapolis-based Target Corp. The strategy comes at a key time. As the recession has widened, Wal-Mart has continued to outperform nearly all retailers, including Target, as well as stores that aim for a piece of its business, such as Best Buy, Toys 'R' Us and even smaller specialty chains such as Michaels crafts store. Now the fight is on to keep those shoppers.

The article notes that, while customers like the new look of the stores, and sales have been good (especially compared to retail as a whole), Wall Street seems unimpressed:

"No doubt, Wal-Mart is executing," said Lauri Brunner, an analyst who covers Wal-Mart and Target for Thrivent Investment Management in Minneapolis, who said the stores have "never looked better." But, stock prices indicate "Wal-Mart has been a big underperformer," Brunner said. "Wal-Mart doesn't win when everyone is fighting for the lowest price, as they are now. Wal-Mart wins when prices are going up and people want to go to the low-priced outlet." Wal-Mart's stock hit an all-time high of around $70 just before the beginning of this decade, and since then, it's been trapped mostly between $45 and $60 a share.

And a final note: Costco and Coca-Cola have declared a halt to their fight. No word yet on who gave up what to get the product back on the shelves.

"Our program aligns Coca-Cola's brand and package offerings with the needs of Costco's members in a way that is fair and equitable for both Costco and Coca-Cola," (a Coke spokesperson) said.

Publishers Like E-books, But Not at Ten Bucks

Book publishers are wondering how to respond to the pricing pressures they are going to increasingly face from retailers as e-books grab more market share. At present, e-books represent a small portion of the market (sales in September were up 171% over the previous year, but that was still less than $16 million, in a $23 billion annual market), but with readers such as Kindle coming down in price and up in consumer acceptance, the pressure is building. Some observers think this Christmas may represent the point at which e-readers reach critical mass.

Amazon is pricing e-books at $9.99, and publishers are getting antsy about what that will mean to sales of their thirty-dollar hardback bestsellers.

"As e-books grow as a category, there will be cannibalization," Epps says. "The early adopter buying an e-reader device happens to be the same customer who would have bought a hardcover book."

A big problem is that publishers can't afford to annoy Amazon. They have a channel with only three significant players (Amazon, Barnes & Noble and Borders make up 70% of the consumer book market) and one of them, Borders, is facing major difficulties. Nor is B&N willing to concede the e-market:

"Books are sold in thousands and thousands and thousands of outlets in America, and more than 50% of the books sold are outside of bookstores," Barnes & Noble CEO Stephen Riggio told analysts last month. "We believe that digital content will be much, much less fragmented than that, and we've established a strong position in order to gain a sizable market share as this market develops."

One approach publishers are considering is delaying e-book sales by several months, as they have long done with paperbacks.

What frightens publishers is that they may go the way of the record labels, which have proven incapable of dealing with the disruption to their business model caused by digital music: plummeting prices, piracy, and the almost total disappearance of the music store channel.

The iPod was introduced eight years ago, at which point digital music took off. We seem to be at the takeoff point for digital books and the question is whether book publishers have learned from the music industry's experience and will come up with a better strategy for dealing with change. Where will book publishing be eight years from now?

Follow-Ups: Amazon/Wal-Mart and Stores-within-Stores

The Amazon/Wal-Mart battle has expanded beyond price-cutting on a few bestsellers, and neither side shows any sign of backing down. Which makes the web traffic reports for Black Friday of particular interest:

Amazon not only maintained their top spot in terms of traffic, but also showed the biggest gains over the previous year. Not a bad performance.

A surprisingly strong entrant is Sears, at #5. We commented a few weeks ago that we thought they had played the Amazon/Wal-Mart battle well, and this would indicate we may have been right. Their showing is especially strong if you combine the Sears and Kmart numbers, in which case they move ahead of Best Buy into fourth. Many people (including me) frequently criticize Sears and Kmart, but they may be doing something right online.

J.C. Penney has had a lot of success with their Sephora stores inside many Penney locations, as we discussed a few weeks back, and is planning to take another shot at the stores-within-stores concept by inviting in European 'fast fashion' retailer Mango.

In 2010 the new line, MNG by Mango, will be in 75 locations as well as being available online; by Fall 2011 it will be in 600 stores. Penney will also be adding 75 additional Sephora locations to the 155 now open.

Sephora shops have higher sales per square foot than the rest of the store and create a "great halo effect," bringing in new shoppers who then explore other departments, said Liz Sweney, executive vice president and general merchandise manager of women's apparel at J.C. Penney. "Our ability to attract Mango had to do with our success with Sephora," she said. Mango is one of Spain's largest women's apparel chains, with sales last year of $2.2 billion from 1,300 stores in 94 countries, including 12 in the U.S.

It appears Penny is taking aim at younger women who would not normally be attracted to them, but may come in for Sephora or now for Mango, and perhaps stick around to shop other sections of the store.

Evian Roller Babies Makes Guinness Book of Records

I suspect this is a record that will be broken quickly, as online video ads grow in popularity, but it is certainly a coup for Evian to get such a tremendous amount of exposure at relatively little cost. If you are not one of the forty-five million people who have already seen it, click on the link. Speaking of which, the Guinness Book of Records has also done well for its parent company – it was originally developed as a giveaway to bartenders to help them settle disputes in pubs.

Kohl’s Says Online Sales to Grow at Least 30% in 2009

Kohl’s plans to increase web advertising by 25% this holiday season, hoping to grab business abandoned by departed competitors like Gottschalks and Mervyns. They also are looking for big increases in online sales.

Poll Results: Wal-Mart/Amazon Price War

Our recent item about the Amazon/Wal-Mart battle quoted the African proverb “When elephants fight, it is the grass that suffers.” Our question of the week was “Who will suffer most from the Wal-Mart/Amazon battle?” and a large majority agreed with the proverb, saying it won’t be the elephants:

• 44%: Independent booksellers
• 21%: Publishers
• 10%: Wal-Mart
• 9%: Amazon
• 9%: Barnes & Noble
• 7%: Borders

I thought Borders and Barnes & Noble would get a few more votes, because I definitely think they’ll be harmed, but I voted with the plurality – I think the greatest harm will be to independent booksellers and publishers.

Follow-Ups: The Book War and ‘Project Impact’

There has been a lot of action and commentary on the Amazon/Wal-Mart battle that we commented on last week.

Other stores, of course, have waded into the fight. Target matched the Wal-Mart and Amazon cuts, but Sears took a different approach:

Buy any one of those deep-discounted books at Target, Wal-Mart, or Amazon, and send Sears the receipt … and they'll give you a credit of $9 towards anything you buy from Sears online.

So now your book is free (you could even have made a two cent profit if you bought it at Wal-Mart). And you end up with an incentive to shop at Sears.com. I haven’t seen much clever marketing from Sears in recent years, but this strikes me as an excellent job of piggybacking on what other stores are doing, without it being a me-too effort.

Meanwhile, though, the independent booksellers (who will be most hurt by this, according to respondents to our poll) have asked the Justice Department to intervene:

The American Booksellers Association has asked the U.S. Department of Justice to investigate the book price war under way between Wal-Mart Stores Inc., Amazon.com Inc. and Target Corp. to determine if it constitutes "illegal predatory pricing."

In a letter dated Oct. 22, the ABA said it believes that the discount pricing—which has led to 10 of the most anticipated hardcover titles being priced as low as $8.98 on walmart.com—amounts to such an act and that it is "damaging to the book industry and harmful to consumers."

The letter said while it may appear that the prices will generate "more reading and a greater sharing of ideas in the culture," many of the independent stores that belong to the ABA won't be able to compete.

"The net result will be the closing of many independent bookstores and a concentration of power in the book industry in a very few hands," the letter said.

The Justice Department, Amazon and Target declined to comment.

The commentary on this that I’ve seen indicates that people knowledgeable in antitrust law don’t think the booksellers will get far with this.

As for the publishers, who look to be hurt almost as badly, they’re stuck between immediate gains and long-term damage to their margins. This blog notes something I had not thought of, that publishers might be able to use the Leegin decision to invoke minimum pricing rules:

What's interesting is that book publishers have the power to end this massive discounting. In 2007, the U.S. Supreme Court ruled in the Leegin case that it is legal for manufacturers to set a minimum retail price for their products. Thus, book publishers can legally tell Amazon and Wal-Mart that their books can be sold at a minimum price (say, 50% of retail price) or higher. So with the plethora of "devaluation" complaints, why aren't publishers doing this? They are stuck in a prisoner's dilemma.

The prisoner's dilemma is a classic game-theory case that shows when people behave in a manner that maximizes their welfare (profits/happiness), they can actually end up being worse off.

Consider how the prisoner's dilemma applies to the Wal-Mart/Amazon price war. Publishers have sunk millions of dollars in non-refundable advances to big-time authors. Especially in this economy, is a publisher really going to walk away from potentially an extra million units of sales by saying, "Don't sell our book for $9?"

Actually, saying flatly that the Leegin decision makes it “legal for manufacturers to set a minimum retail price for their products” is misleading, since the Court put a number of restrictions around the rule. But whether it might apply in this case is probably moot, since the publishers are unlikely to be brave enough to forego the immediate profits from the sales the price-cutting will generate regardless of what it does to their margins. The profits are today and the margin damage is tomorrow.

Advertising Age had an article on Wal-Mart’s Project Impact, reporting that the 32% of stores that have rolled out the new design are out-performing the rest of the chain, despite the elimination of millions of feet of merchandising space:

In fact, results to date indicate overall same-store sales are 1.25 to 1.5 percentage points higher in the remodeled Impact stores, which have 8% to 9% less inventory than similar un-remodeled stores, Chief Merchandising Officer John Fleming said in a presentation to analysts today. "One of the most important elements from a customer perspective is this idea of giving space back to customers," he said. "This has been highly controversial. There's been a lot of debate."

He said Wal-Mart has rolled out the elimination of in-aisle displays to an additional 300 stores beyond those fully remodeled, and that those stores have seen 0.4 percentage points faster same-store growth than control stores with a 3% decline in inventory. "It's working well," he said. "And we're rolling it to the [entire] chain next year."

Of course, there are options for suppliers losing out on those displays that are being eliminated:

Realistically, suppliers increasingly shut out of "action alley" will also be more motivated to pony up for Wal-Mart's growing number of pay-to-play in-store marketing options, including event marketing for $200 to $250 per store and end-cap displays linked to the Wal-Mart Smart Network in-store TV program, which will also bolster Wal-Mart's bottom line.

Wal-Mart and Amazon Going Toe-to-Toe

Wal-Mart appears to have thrown down the gauntlet to Amazon. As Amazon has expanded into numerous categories beyond their original book niche, they have been infringing on Wal-Mart’s turf. So the Bentonville gang has responded by attacking Amazon’s turf, cutting prices on pre-orders of some upcoming bestsellers on walmart.com to $10. As their CEO said, “If there is going to be a ‘Wal-Mart of the Web,’ it is going to be walmart.com.”

Amazon responded by cutting their price on the same books to $10, at which point Wal-Mart went to $9, and was again matched by Amazon. (As an aside, this may be a bit of confirmation of our item last week, about Wal-Mart possibly planning to cut margins in the coming year).

The Wal-Mart/Amazon battle is interesting in itself, but it also calls to mind an African proverb: “When elephants fight, it is the grass that suffers.” Playing the role of grass in this scenario are publishers and independent retailers (and maybe even Borders and Barnes & Noble).

At the moment, the prices Wal-Mart and Amazon are charging on these books make them loss leaders. Publishers normally sell to their customers at half the list price. Thus, Sarah Palin’s new book, which is one of the books being discounted and is listed at $28.99, will result in a loss of $5 or so on each copy Amazon and Wal-Mart sell.

But without bestsellers to pull in the customers, bricks and mortar bookstores will suffer, losing not only the sales on those popular books, but also the supplemental sales they might have made from browsing customers. Independent bookstores have been suffering for years, Borders has been in deep trouble recently, and even B&N had its sales drop 5% last quarter.

Publishers are concerned that this price-cutting, added to the effect of e-books (which are regularly priced at $10 or so) and the growing popularity of e-readers, will cause consumers to balk at paying full price for books, eroding their margins. It seems like a reasonable concern.

Poll Question: Who will suffer most from the Wal-Mart/Amazon battle?

Follow-Ups: SKU Rationalization, Online, Kohl’s

SKU rationalization has come up as a topic with great frequency lately. Here’s another perspective on it from the Bishop 2009 Total Score SuperStudy that includes some thoughts on how suppliers should evaluate a category and their position in it:

"To assess their category and brand vulnerabilities, suppliers need to have a firm grasp on five key metrics, according to Bishop: variety (What does the retailer need to meet consumer demand?); profitability (How much money does the retailer make on this item/line/category?); productivity (How productive is this shelf space?); working capital (What is the inventory costing, and what is the ROI?) and growth (Is the category growing or declining?).

We’ve regularly discussed the need for trade promo to become more prominent online. Further proof of this comes from the UK, where online has now surpassed television to become the #1 advertising medium.

"The UK has become the first major economy where advertisers spend more on internet advertising than on television advertising, with a record £1.75bn online spend in the first six months of the year." "The milestone marks a watershed for the embattled TV industry, the leading ad medium in the UK for almost half a century. It has taken the internet little more than a decade to become the biggest advertising sector in the UK."

Last week, we discussed how Kohl’s is having a good recession and was opening thirty-five new stores in former Mervyn’s locations. This article takes a similar tack, and notes that Kohl’s has the cash to buy up additional empty stores.

"The fourth-largest U.S. department-store chain is accumulating cash to grab locations abandoned by shrinking or defunct retailers, said Chairman and Chief Executive Officer Kevin Mansell. Any store takeovers would come on top of as many as 25 new locations Kohl’s already plans to build for next year at a cost of about $275 million," he said. “Nobody’s come to us and said they want to sell us 50 stores, but I suspect it’s going to happen,” Mansell, 57, said in a Sept. 24 interview in New York. “We want to be in a position to act.”

Retailers Join Walmart's Marketplace

Walmart has opened the Walmart.com website to some smaller retailers, allowing the small-fry to access Walmart’s traffic and use the giant’s checkout process. Walmart, meanwhile, gains breadth of selection: “‘We've added nearly one million new items to our online assortment with the introduction of Walmart Marketplace, making it even easier for customers to find more of what they want when shopping Walmart.com,’ said Kerry Cooper, Walmart.com's chief marketing officer.” Walmart also, of course, gains great insight into how items they don’t currently carry are selling.

Online Ads Lift CPG Sales 9%, on Par with TV

We’ve discussed (here and at the recent TPMA Conference) the need for trade promo people to get more involved in online promotion. I’ve thought of online mostly in terms of consumer durables and B2B products, but this study indicates that online promotion works as well as TV (or slightly better) even for CPG brands. Given the generally lower prices for online advertising (though the article doesn’t say how much was spent on the advertising), as well as its better measurement, it would seem that trade marketers really need to look into their spending patterns, across all product segments.