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.

Return of the Soaps?

In the last few years, one of the side effects of media fragmentation (and a host of other social and demographic trends) has been the decline of TV soap operas. Several have disappeared – Guiding Light, which started on radio in 1937, was cancelled last year, and it was announced recently that As the World Turns will be discontinued soon.

The soaps got their start as advertising vehicles for companies marketing laundry, dishwashing and related products, thus the genre’s name. Now, just as they shuffle off to wherever old TV shows go to spend their sunset years, it looks like they may be replaced by another form of sponsor-created programming – this time with a trade promo twist.

The world's biggest retailer, Wal-Mart Stores, and the world's biggest consumer-products maker, Procter & Gamble, are jointly creating a made-for-TV movie, in an effort to promote "family-friendly" alternatives to what they say is increasingly risqué TV fare. The two advertising heavyweights have teamed up on the two-hour "Secrets of the Mountain," to be broadcast in April on NBC. The movie, which focuses on a single mother who brings her family to a mountainside cabin, highlights values—such as generosity, honesty and togetherness—that Wal-Mart and P&G executives say are in short supply on television. Ads for both companies will run during commercial breaks, and the film will include product placements for both, their executives say. P&G is spending more than $4.5 million to produce the film, says a person familiar with the matter. It also paid for airtime for the broadcast. Wal-Mart paid some of the costs, including a fee to P&G for the right to be "presenting sponsor.

BusinessWeek said that the movie “features a single mother and her three children who use P&G’s Duracell batteries for flashlights and feed their dog the company’s Iams pet food ... The family eats breakfast cereal from Wal- Mart’s Great Value private-label brand …”

We salute Wal-Mart and P&G and wish them well in their efforts to create family-friendly TV programming. Both companies say they plan additional programming, though it’s not clear whether there will be further production partnerships.

From our perspective, the interesting thing here is that the old idea of advertiser-produced programming has been given the new twist of a supplier and retailer joining together to do the production jointly – that is something that (as far as I know) has never happened before. It adds interest that it is one of the original ‘soap companies’ that pioneered the idea in the earliest days of radio that is also one of the partners in this latest iteration.

Here at TPMA, we’ve been debating whether Wal-Mart and P&G will be sufficiently successful that this will lead to future similar efforts by other major retailers and suppliers, so we’ll make that our exit question: Will it become common for retailers and suppliers to jointly produce programming as advertising vehicles, just as Wal-Mart and P&G are doing?

Is Wal-Mart in 'Stealth' Mode Internationally?

The Guardian (UK) reports that Wal-Mart has “embraced something of a ‘stealth’ approach to growth” as it expands outside the US, though the evidence seems to consist primarily of the use of different names: “Maxibodega in Costa Rica, Todo Dia in Brazil, Despensa Familiar in Honduras and the awkward-sounding Best Price Modern Wholesale in India.”

This is part of a Guardian series on “Companies to Shape the Decade.” This graph demonstrates why Wal-Mart was chosen:

Overheated rhetoric aside, the article does a great job of looking at issues related to Wal-Mart’s policies and exploring how Wal-Mart is leveraging its strengths globally, while learning from past experience to avoid trying a cookie-cutter approach to international consumers:

During earlier decades, the firm's approach to expansion was simple. It built US-style out-of-town discounting superstores around the world and expected shoppers to flock there for bargains. But this didn't always work. Travel patterns, family roles and shopping habits vary. Ventures into Germany and South Korea came to a sticky end with expensive exits in 2006. Under the new approach, the "front end" of Wal-Mart's stores can look like enlarged family-run convenience stores. The contents, to some extent, are locally focused. Chinese stores offer live crustaceans, while South American outlets are heavy on spicy beans. But the "back end" is a duplicate of the US model. "From the customer point of view, it might appear to be a certain brand," says Slape. "But everything that is 'back of house' – systems, processes, buying – we can leverage a lot of that globally."

And of course it is generally accepted that it is Wal-Mart’s systems and processes that have propelled it to the top of the global retailing heap, so customizing the front end to national tastes while employing proven back room techniques, seems more like common sense than stealth.

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.

Wal-Mart Signs Deal to Operate World Cup Stores

Wal-Mart will have World Cup shops within its stores around the world next year, offering licensed merchandise customized to each local market. The last World Cup in 2006 had more than 26 billion cumulative viewers (which means that each person in the world watched four matches on average). By the way, TPMA Outlook's sports department reports that the USA got a good draw for the World Cup – we're in the same group with England, Slovenia, and Algeria, and will be favored to make it through the group stage to round two.

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.

Building Your Brand at Wal-Mart

I read two articles last week that come together to make an important point about how brands are built and maintained.

The first was this article, by the chief research officer of the Advertising Research Federation, which argues that suppliers are destroying their brands by diverting funding from national advertising to trade promotion.

He bemoans the shift of national advertising funds to trade promotion over recent years, arguing that the move diminishes brand image by emphasizing pricing. He also notes that the shift is in part due to the measurability of the effectiveness of trade promo spending through scanner data, and argues for the development of better measures of brand value and the effect of advertising in maintaining and growing that value. An excellent article.

The other was this article in Advertising Age, which notes that Wal-Mart is partnering with some of its suppliers to produce innovative ads that don't have the traditional retailer-centric look.

The Advertising Age article makes several interesting points, among them, an estimate that Wal-Mart collected about $100 million in vendor funding for this initiative last quarter, enough to merit attention on the quarterly analysts' call:

In an earnings call Nov. 12, Wal-Mart U.S. CEO Eduardo Castro Wright said vendor funding accounted for about two-thirds of the retailer's increase in ad spending for the fiscal third quarter and a substantial portion of the around $480 million increase in his unit's gross margin…

But of greater interest is the nature of the ads themselves. In this ad for Unilever's Dove products, the Wal-Mart logo is shown only briefly in the background as a shopper crosses the parking lot, and in the close, with Dove's logo. There is no mention of price. Of particular interest is that the ad was jointly produced by Wal-Mart's agency (Martin) and Unilever's (Ogilvy & Mather).

The connection between these two articles, I think, is that while the point of the first is valid (it is essential that manufacturers invest in their brands), it makes the assumption that brands can be built only through traditional national advertising. The Wal-Mart article brings up one way in which that assumption may be false; national ads need not be traditional, an ad that promotes both the retailer and the supplier's product might also support the brand's image.

Additionally, it's important to consider shopper marketing and other in-store promotion; with the decline and fragmentation of traditional media, the best medium for promoting your products may in many cases be the store. Too often, we think of in-store promotion as an endcap with a big "SAVE!!!" sign on it. But there's no reason innovative marketers need to be any more limited in the store than they are in print or broadcast.

Wal-Mart Offers Vendors a Way to Faster Payment

With the bankruptcy of CIT, the factor for many suppliers, this offer will look good to a lot of companies. Wal-Mart is offering to allow their suppliers to get payment from banks for Wal-Mart invoices at 10-15 days instead of the usual 60-90. Wal-Mart then pays the bank. Currently the offer is good only to Wal-Mart’s clothing suppliers (about 1000 companies), but one assumes it will spread if successful. What isn’t known is what the suppliers have to give Wal-Mart in return for the use of Wal-Mart’s credit rating.

Wal-Mart Eyes Urban Expansion in US

Wal-Mart sees the potential for strong growth in urban areas, and is stepping up efforts to increase its store count in Chicago, and to break into cities where it has been locked out completely – especially New York. An interesting line in the story: “The retailer has also adopted a more politically focused approach to its charitable giving.”

Follow-Ups: Postal Service Problems, Book Wars, Newspapers in Decline, and the Economy

We had an item last week about catalogs that touched incidentally on the financial problems the US Postal Service might face if catalog distribution were to be cut back, especially if there were a Do Not Mail list mandated by Congress. The Economist has an article in their current issue on the problems faced by USPS and other postal services worldwide:

Overall, many postal firms now expect total letter volumes to fall by 5-10% or more in 2009. America’s postal service saw a drop of almost 14%, or 28 billion items, in the year to September. Menno Sanderse, an analyst at Morgan Stanley in London, predicts that European postal services could lose half their mail volume over the next ten years.

The book pricing war between Amazon and Wal-Mart continues to get a lot of attention. One ingenious step independent booksellers were discussing was ordering their own books from the giants, since that would be quite a savings compared to buying them wholesale. Alas, Wal-Mart, et al. aren’t dumb enough to fall for that- they have instituted order limits:

Plans by independent booksellers to buy the 10 November titles being offered at steep discounts by Wal-Mart, Target and Amazon have been foiled by the big box retailers who are limiting the number of books one customer can buy. According to the Wall Street Journal, Wal-Mart is limiting purchases to two copies per customer, Amazon has a three-copy limit and Target five. There has been lots of discussion in bookseller forums about buying quantities of titles at the big box retailers as a protest to the discounting policies, but also as way to get a better margin since the 10 books would be cheaper to buy from the stores than from the publishers.

We’ve often discussed the decline of newspapers and the effect that has had and will have on retail advertising and trade promotion. The decline is continuing, and accelerating, with newspaper circulation now lower than it was in 1940, when US population was about 40% of what it is now:

The ABC data estimate that 30.4 million Americans now pay to buy a newspaper Monday through Saturday, on average, and about 40 million do so on Sunday. These figures come from 379 of the nation's largest newspapers. In 1940, 41.1 million Americans bought a daily newspaper, according to the Newspaper Association of America. Average daily circulation of all U.S. newspapers has been in decline since 1987 as papers have faced mounting competition for reader attention and advertising. Online, newspapers are still a success -- but only in readership, not in profit. Ads on newspaper Internet sites sell for pennies on the dollar compared with ads in their ink-on-paper cousins.

That last point would argue strongly once again for shifting trade spend to the web.

And finally, a note on the economy, with a bit about private label. News came out last week about an uptick in GDP, and also about improved results and forecasts from some major brands:

Signs of an improving economy might be in your kitchen or bathroom cupboards. Consumers are showing a willingness to pay a little more to get Colgate toothpaste, Kellogg's Frosted Flakes and Gillette Fusion shavers. That's good news for the economy and the multibillion-dollar companies that make those products and have been battling to keep shoppers from trading down to store brands to save money. Procter & Gamble Co., Colgate-Palmolive Co. and Kellogg Co. all gave upbeat earnings reports and even stronger outlooks for next year on Thursday, a day that also saw the announcement that U.S. gross domestic product rose for the first time in a year. "The strongest brands are the most resilient to economic stress and the first to bounce back as soon as consumers can pay for it, because they don't want to trade down," said Allen Adamson, managing director of branding firm Landor Associates. "They want to get what they want."

Wal-Mart Focuses on Smaller Format

This report says that Wal-Mart will begin giving more emphasis to its Neighborhood Markets format. “The retailer is recruiting a new team of managers and buyers that will focus exclusively on the smaller stores, which, with just more than 150 locations, currently represent only a fraction of Wal-Mart’s total US 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.

Poll Results: Wal-Mart's Pricing and SKU Rationalization

We discussed Wal-Mart’s SKU rationalization efforts and reports that they might be looking to cut margins next year. This raised the question of who such moves would hurt the most. So we asked: “Who will have the toughest time dealing with Wal-Mart’s pricing and SKU rationalization initiatives next year?”

• 80%: Wal-Mart's suppliers
• 14%: Wal-Mart's competitors
• 6%: Wal-Mart

Perhaps the Amazon item below is an early indicator that will let us know who suffers the most.

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?

Walmart Tries a Contrarian Approach

The basic idea is that you cut pricing during a recession in order to gain market share, and then you raise prices in the recovery to reap the profits from the share gains. Right?

Wrong, says Walmart.

Walmart’s share gains during the recession have not been, for the most part, the result of price cuts. According to this Wall Street Journal article, Walmart has cut its grocery pricing only 2.6%, compared to 14.4% cuts at Kroger and 9.7% at Safeway (nonetheless Walmart remains substantially lower). The result has been that Walmart’s gross margins have been improving.

However, now that recovery seems to be on the horizon, we get the word from Bentonville that margins will cease to rise.

But with comparable-store sales barely growing, Wal-Mart appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. Following unusually high gross-margin growth in recent quarters, Wal-Mart Chief Executive Mike Duke told The Wall Street Journal Thursday he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves.

That could put Wal-Mart's smaller rivals further on the defensive.

Sure could. Many rival chains, in grocery and other channels, have been scraping by through the recession, cutting margins to the bone and looking forward to better times. But if Walmart is going to cut prices in the recovery, then there will be no easing of margin pressure for Walmart’s competitors.

Yet another argument for optimization tools.

In other Walmart news, the movie studios got a peek at ‘Project Impact’ and probably didn’t like what they saw (we commented on Project Impact a couple weeks ago).

In another WSJ item, we read that:

A recent shift in merchandising strategy by the world's largest retailer spells more trouble for DVD sales and the entertainment industry that depends on them for profits. As part of a larger effort to clean up its aisles and appeal to higher-end shoppers, Wal-Mart Stores Inc. is doing away with display cases to promote the latest hot movie titles.

The move comes as major film studios are reeling from declines in revenue from DVD sales as cash-strapped consumers turn to low-cost rental services and digital downloads for home movies. "We think the new strategy implies Wal-Mart no longer sees DVDs and Blu-ray discs as traffic drivers," J.P. Morgan analyst Imran Khan said.

The move fits in with two inter-related points of Project Impact: improving the look of the stores – which requires cutting out some displays and cutting back on the number of products carried – and concentrating on profitable and high-volume items in the reduced space.

This is a considerable blow to DVD suppliers, for whom Walmart represents one-third of their volume, and they’re already down double-digits this year as a result of video-on-demand and low-cost rentals from Redbox and Netflix.

The combination of these two items gives us some idea of what next year is going to look like for Walmart’s competitors: continued low margins; and their suppliers: pressure on shelf space and reductions in displays – which will presumably lead to higher costs for the displays and other in-store promotions that Walmart permits.

Walmart Angles to Keep Those Who Traded Down

An interview with CEO Mike Duke as he discusses the upcoming Christmas season; the consumers' mood; categories where he sees growth potential; and Walmart’s lobbying efforts in Washington. Strangely, I didn’t see much in the interview having to do with the headline.

Poll Results: Project Impact

Last week we discussed Walmart’s "Project Impact" and speculation that Walmart might have their sights set on driving a few of their competitors out of business (or at least inflicting some serious wounds). So we asked, “Which national retailer is most in danger from Walmart’s Project Impact?”

And you responded in record numbers. A majority of 56% said that Kmart is in the biggest trouble. But good percentages picked just about all the possibilities:

• 56%: Kmart
• 14%:Toys R Us
• 7%: Michaels
• 7%: Rite-Aid
• 16%: Other

It looks like I should have included Target on the list, because Target got enough write-in votes under “other” to just about tie Michaels and Rite-Aid. Other write-ins went to Best Buy, Sears, none of the above, and all of the above.

Wal-Mart Private Labels in Bharti Stores

India's leading financial paper reports that Bharti, Walmart's partner, is introducing several Walmart private label brands in their Easyday grocery chain. The Great Value and George brands, among others, are also being sold in wholesale outlets that are a joint venture between Bharti and Walmart, meaning that they might also be found in other stores.

Walmart Rolls Out "Project Impact"

Time had an article this week on Walmart's new initiative, Project Impact. Much of the article described the intent of the project in terms of making the store cleaner and more inviting – "Action Alley" has been cleared out, leaving more room for shoppers and clearer sight lines through the store. Departments have been moved to make them more intuitive to shoppers – cosmetics, health & beauty, and pet food are next to groceries, mimicking the layout of a supermarket.

But the layout and the emphasis on certain departments also leads to speculation about whether Walmart is targeting certain competitors:

With Circuit City out of business, the electronics section has been beefed up. Walmart is also expanding its presence in crafts. Sales at Michael's Stores, the country's largest specialty arts-and-crafts retailers, have sagged, and Walmart sees an opportunity. Stores are chock-full of scrapbooking material, baskets and yarns.

Retail industry observer Burt Flickinger is quoted as saying:

"They've got Kmart ready to take a standing eight-count next year," says retail consultant Burt Flickinger III, managing director for Strategic Resources Group and a veteran Walmart watcher. "Same with Rite Aid. They've knocked out four of the top five toy retailers, and are now going after the last one standing, Toys "R" Us. Project Impact will be the catalyst to wipe out a second round of national and regional retailers."

As a consumer and as a marketer, I have very ambivalent feelings about Walmart. Like most folks, I hate bullies, which is how I perceive Walmart, and love underdogs, which is how I perceive anybody battling with Walmart. At the same time, I greatly admire Walmart's efficiency and innovation. We may not like a team that always wins, but we still have to acknowledge their excellence.

For competitors, the idea that Walmart is preparing to take things up a notch has to be chilling. For suppliers, the idea that Project Impact may lead to another slew of closures of key accounts, should also be scary. However much they may have slipped in recent years, Kmart still represents a significant piece of business for many suppliers. Rite Aid, Michaels, Toy R Us – does Project Impact really represent a fatal blow to these huge players?

I'll be looking forward to checking out the new stores as they're rolled out, to see if they are the competition-crusher some seem to think. Which raises the cautionary note with which the Time article ends: How quickly can this new model be implemented?

What analysts really want to see from Project Impact, however, is a faster pace of implementation. "The biggest hurdle facing Walmart is the speed with which they can roll this out," says Feldman. As more Project Impact stores pop up, the existing stores appear worse by comparison.

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.

Poll Results: Walmart vs. Target

Last week, we discussed how Walmart has widened their lead over Target during the recession, as consumers tightened their belts. With signs of recovery, we wondered how things will go in the near future and asked, “Whose sales will grow more over the next twelve months – Walmart or Target?”

We hit your hot button apparently – this question got far more responses than any we’ve ever asked before. And our readers are divided, but with a definite pro-Walmart bias. The results were:

• 59%: Walmart
• 47%: Target

I was a little surprised, to be honest (I cast my vote for Target). But the consensus seems to be that, even as things improve, more consumers will opt for "cheap" than "chic."

Follow-Ups: Media, Walmart

We’ve written often on the decline of traditional media, and the effect it may have on trade promo, as retailers and suppliers look for alternatives. Recently a number of articles have piqued our thoughts on this point:

This article (on a study sponsored by the Newspaper Association of America) notes that newspapers are still cited by a majority of adults as their primary source of shopping information:

59% of adults identify newspapers as the medium they use for planning, shopping and purchase decisions, making newspapers the leading advertising medium cited by consumers for these activities.

Additionally, 73% say they read newspaper inserts, and 41% cited newspapers as their “primary medium” for checking advertising, almost double the 21% for the second-place medium, the internet.

That’s the good news. On the other hand, ad spending in newspapers dropped an incredible 29% in the second quarter:

It's the deepest downturn yet during a three-year free fall in advertising revenue-newspapers' main source of income. The magnitude of the industry's advertising losses have intensified in each of the last 12 quarters.

The question for newspapers is how much of this decline is due to the recession, and how much is the result of permanent shifts to other media. I did a little research based on an item I read about the effect of the introduction of that other disruptive new media, television, on existing entertainment forms of the era. Here’s a chart on the attendance at major league baseball games in the 40s and 50s:

After shooting up when World War II ended, attendance dropped as television started becoming commonplace in homes. The interesting point is that even after the initial drop, the recovery that followed was slow – baseball attendance did not reach twenty million again until the early sixties (when the leagues expanded). Not what newspaper, radio, and TV people want to hear, I’m sure.

A few weeks back, we wrote about Walmart’s recent request that suppliers give them a share of the suppliers’ marketing budget equal to Walmart’s portion of their sales. This blog entry looked at the subject from an interesting perspective. We are all used to the idea that the store is now an advertising/promotional medium, but Walmart’s move might lead to the retailers becoming, in effect, ad agencies:

As always, Walmart is a fringe case. They basically commanded Saatchi & Saatchi X to exist, and it did. Then, when it came time to roll out the Smart Network, they once again built an ad sales agency out of thin air (Studio2). If the cost-supplement initiative really takes off (and the Robinson-Patman issue gets resolved), I could easily see the same thing happening, with a new entity formed to allocate and spend the billions of dollars pumped in via product makers. Not too long ago, Walmart said in-store media is their most important channel, so who knows how far they'll take it when someone else is footing the bill.

What's the most likely outcome here? As Walmart and others heap more trade promotion fees on their suppliers, the overall percentage of ad dollars they control could increase dramatically. This raises several questions:

Will retailers (or at least the largest of them) continue to manage the advertising funds themselves, as they have in the past? Will existing agencies step up to the plate with services tailored to these growing programs? Or, will entirely new entities be spawned for the sole purpose of handling retailer-specific spending accounts?

If I were in the ad agency business, I’d find this rather scary. The rise of the store-as-medium has played a significant part in the current problems of traditional media. The store-as-agency might create similar problems for agencies.

What’s Next in the Walmart/Target Battle?

Walmart, everyone agrees, has had a very good recession. Their chief competitor in the discount sector, Target, has fared better than many retailers, but has definitely not kept pace with the leader.

In all, total sales at Wal-Mart rose 2.7% last quarter from a year ago, to $104.3 billion, when one ignores the impact of currency fluctuations, which hurt Wal-Mart's large overseas operations. At Target, sales fell 2.7%, to $14.6 billion in the second quarter.

Apparently a lot of people felt that Target’s celebrated “cheap chic," which had served it so well in good times, might have too much emphasis on “chic” and not enough on “cheap” and therefore opted for Walmart’s single-minded focus on low prices.

But what about the next round? If we are finally starting to see a recovery, how will the two giants fare over the next six months to a year?

The answer, I think, lies in the answer to another question that has been widely debated – has the recession created a "new normal?" Is there a new mindset which will cause consumers to continue to scrimp even as the economy recovers?

My guess, as I’ve stated here before, is no. While this has been a strong recession, deeper than folks even in their forties have felt in their adult lives, it has not been a re-run of the Great Depression, which shaped consumers’ outlooks for decades. It has been more like the nasty recession of the early eighties, which people shook off relatively quickly. While we may not return to conspicuous consumption for a while, I think most folk’s basic buying patterns will return to near-normal in 2010. This article cites something that doesn't impress me at all as proof of big changes in consumer behavior:

… consumers moved by the end of 2008 to save more than 4 percent of their disposable income, the highest rate since January 2004. Clearly, things have changed for American consumers and for CPG companies.

An interesting data point, but savings rates weren’t at record levels in 2004, so a rate that isn’t even that high doesn’t seem to signal a huge shift in behavior or thinking.

But I’ve been known to be wrong.

The outcome of this question about overall consumer behavior and attitudes, though, will probably determine which of the discounters wins the recovery. If most of the public continues to hold on tight to their paychecks, then Walmart will have the edge. If people decide they can perhaps afford a bit of chic along with the cheap, then Target will be the winner.

Poll Results: Is Walmart violating FTC Act?

There was overwhelming agreement that Walmart's demands that suppliers turn over a percentage of their marketing budgets equal to Walmart's share of the suppliers' sales is a violation of the FTC Act. A strong majority thinks that the FTC is unlikely to do anything about it, although almost a quarter of our respondents said that they think the FTC might act. About an eighth think Walmart is acting legally in light of current practices.

* 63%: Probably illegal, but the FTC won't do anything
* 24%: Probably illegal, and I think the FTC will have to act this time
* 13%: Probably legal under currently accepted practices

Is Walmart Violating the FTC Act?

Walmart has been telling its suppliers that they think they're entitled to the share of each supplier's marketing budget that they represent of the supplier's sales. That is, if Walmart accounts for 30% of your sales, you should give them 30% of your marketing budget. Reasonable enough, if we are discussing your trade promotion budget – this is, in fact, approximately what the Robinson-Patman Act says you are supposed to do. But Walmart is referring to your entire marketing budget – trade promo, consumer promo, national advertising, online … whatever.

By coincidence, these demands are coming at the same time that Walmart is conducting a SKU rationalization program intended to reduce the number of products on their shelves by 15%. Some might conclude that suppliers who are told that they face banishment might be likely to give in to Walmart's demands.

However, for a supplier to do what Walmart is asking would mean that they would have two choices:

1. Turn their entire marketing budget over to their retailers, or
2. Violate the aforementioned Robinson-Patman Act

Since R-P requires that suppliers give funding on proportionally equal terms to all their customers, if they are giving Walmart a share of their whole marketing based on Walmart's share of sales, then they would have to give every other retailer the same treatment, thus parceling out their entire budget. Therefore, we come to two more possibilities – if a supplier to Walmart is spending any money on advertising or promotion of their own, they are either:

1. Not complying with Walmart's demands, or
2. Violating the Robinson-Patman Act

But what about Walmart? Are they violating any laws here?

First, the obligatory disclaimer: I am not a lawyer. But the law seems fairly clear on this (at least to an amateur). R-P is specifically written to address suppliers, not retailers, so they aren't violating R-P. But the FTC Guidelines on trade promo spending contain the following wording in regard to retailers: "…the Commission may proceed under section 5 of the Federal Trade Commission Act against a customer who knows, or should know, that it is receiving a discriminatory price through services or allowances not made available on proportionally equal terms to its competitors…" It goes on to cite an example that seems to be exactly what Walmart is doing:

Example 1: A customer should not induce or receive advertising allowances for special promotion of the seller's product … when the customer knows or should know that such allowances, or suitable alternatives, are not available on proportionally equal terms to all other customers competing with it in the distribution of the seller's product.

Whatever we may say about Walmart, we would never call them stupid, so I think it's reasonable to assume that they know (or certainly should know) that suppliers are not making similar allowances available to Walmart's competitors, and in fact could not possibly do so without ceasing all other marketing efforts. Therefore, asking for such allowances would appear to be a violation of the FTC Act, as defined in the Guidelines.

OK, enough amateur lawyering – is it likely that the FTC is going to go after Walmart on this? Given that the last time the FTC enforced any rules related to trade promo (a minimum advertised price consent decree against music distributors) was in May 2000 (perhaps we should plan a tenth anniversary party), it seems unlikely.

Still, the violation seems fairly clear, and the violator fairly prominent (to put it mildly), so it seems an excellent opportunity for an Administration that talks about "change" to very visibly indicate that it is interested in changing the way the largest of businesses operate.

Just don't hold your breath.