One commodity retailers never seem to run out of is problems. We’ve seen no shortage of business challenges in recent years, as brick-and-mortar retailers have wrestled with overcapacity, flat same-store sales, Internet incursions, and a tepid economic recovery.

But amidst all the hand-wringing over the future of retail, it’s instructive to look at (and learn from) those who are managing to thrive: truly forward-looking explorers who are, in many ways, migrating from an old world to a new one, and finding better “trade routes” in retail markets that have become increasingly crowded and hypercompetitive. These merchants are leading the way in what I’ve begun to think of as a new “age of discovery” in retail.

Like the explorers of old, today’s smartest retailers aren’t expecting to simply stumble upon better routes to that new world. They are exploiting new and better tools, and new and better ways of navigating. That’s only part of the story. The most insightful industry leaders aren’t jumping at every new technology and trend that promises gold. Being more strategic, they recognize that discovering new opportunities usually requires being able to see their worlds anew, from a fresh perspective. And to do that, these top managers often need to first change the lenses they use to view their businesses. They pay attention to new and different kinds of data, and use the insights that result from this to make better decisions at every level of their organizations, from the CEO to the part-time associate.

No longer focusing obsessively (and exclusively) on product or price, for instance, the savviest among them have begun to look deeply at what I call Customer Engagement—how buyers interact with their brands in their stores. They’re examining metrics such as store visits and drilling down on measures of staff productivity to better engage their customers and improve their customers’ experiences. The results? Better decisions. More transactions. Larger transactions. Profits. Take the Casual Male Retail Group, a $400 million men’s clothing retailer with over 400 stores nationwide. During the recession, like most retailers, CMRG saw a drop in store traffic. In the first half of 2009, in fact, overall foot traffic fell by double digits. Comp sales stayed nearly flat, however. “With fewer buyers coming through the door, we doubled down on improving sales productivity and raising our sales conversion rates,” said COO Dennis Hernreich. “But it’s not like we put one or two fixes in place and that improved store performance across the board. We committed to a process that transformed behavior and outcomes, first in one or two areas, but eventually that process had broad impact and changed how we do business.

“It was really about simplifying at first. Retail operations are often extremely complex. There are just so many details and so many small decisions to get right. You can get lost in it all. In our case, we decided to begin by improving a single key metric—return-on customer visits—and it turned out that improvements in that arena alone had powerful and far-reaching effects on same-store sales.”

Moreover, instead of looking at store performance in a monolithic way, CMRG also began analyzing where and how each associate contributed to each store’s sales. “This changed not only how we hire and train, but how we schedule and reward our employees,” says Hernreich. CMRG now sets individualized sales goals for each associate, and empowered store teams have taken greater responsibility for individual store sales.

Three years after they began prioritizing return-on-visits and incentivizing staff for greater productivity, CMRG is growing again. The company plans to open more than 200 new stores by 2015.

Casual Male isn’t alone in seeing a pay-off by looking at their world—and their data—differently. Advanced Auto Parts, a national chain with $6 billion in revenue, is taking its own approach to improving store performance, after examining certain key performance indicators in a new way. Staples, Inc. has embarked on a similar journey. I’ll be sharing insights and highlights from the odysseys of these two industry leaders in future editions of the Robin Report.

But for now, here are some key questions to think about in your own organization:

• What kind of customer experience does my brand promise? Deliver?
• Are high-sales stores always and necessarily my best-performing stores?
• Which stores are making the most of each customer visit?
• Am I positioned for success in each store each day?

The answers are not always obvious, and the corollary questions that follow vary from retailer to retailer. But asking the right questions and knowing what to do with the answers represent the first steps in that journey toward higher store performance and profitability. In our data-drowned industry, it’s worth noting that the real challenge resides not so much in capturing information. There are plenty of tools for that. And, as we know, good data doesn’t necessarily yield good decisions.

The task is really a matter of selecting the right data, interpreting it correctly and then knowing what to do with it to optimize performance at every level in the organization.

“We saw our stores in a completely new light,” noted Hernreich. “But we wondered if, in the individual stores, our staff would actually be able to use those insights to take specific actions. Would they be able to implement changes and then see measurable results?”

“Not only could they do it, they welcomed it,” says Hernreich. “Now we can’t imagine running our business any other way.”

I’ll be taking a closer look, in a series of articles, at how other savvy retailers, like Casual Male, are growing in this flat, hot, and crowded world. Though their business challenges vary, and there’s no one-size-fits-all solution, you’ll discover that these industry survivors and thrivers do hold certain traits in common: a willingness to look at their businesses—their products, customers and employees—from a fresh vantage point, and a willingness to chart a new course, that can be pursued consistently, in each store, each day.

In its most recent fiscal year it scored $36.1 in sales volume, driven by a widely diverse portfolio of assets. Those assets include a large-scale wholesale business plus many retail stores ranging from small chains of to large-scale retail chains and a hard-discount chain. In all, Supervalu has more than 2,400 stores.

Supervalu’s asset diversity evolved, for the most part, over a period of cautious and self-financed growth spanning its 135-year history. The company is based in Minneapolis, but operates from distribution centers in nearly 30 states, effectively blanketing much of the nation.

But there are big problems under the surface. When Supervalu is brought into sharp focus, it starts to look troubling. Clarity reveals it to be currently heavily laden with unaccustomed debt and its profitability long sinking and now vanishing.

It gets worse. Its competitive positioning is melting away and its corporate-management team is in fast-turn mode. Supervalu stock is trading near the $2-mark, except for an occasional upward spike driven by buyout rumors. Earlier this year, its stock sold for about $8; five years ago it approached $45. So What’s an Iconic Brand to Do?

In response to its mounting challenges, Supervalu has turned to a capital-conservation mode. It has gone through wave after wave of layoffs, many at the corporate level, others at the store level. At mid year, in response to a quarterly report too disastrous to sugar-coat, the board fired Chief Executive Craig Herkert, who had joined Supervalu in 2009 from Walmart. Wayne Sales, board chairman, was appointed his successor. The board discontinued the quarterly dividend after 60 years of unbroken payment.

Most dramatically, the board also announced it was open to selling all or parts of Supervalu and that it had engaged Goldman Sachs and Greenhill & Co. to help beat the bushes to flush out buyers.

The Back Story

How did Supervalu reach such a state of disrepair and what, if anything, can be done to salvage the situation? And what will happen if no buyer for any of it can be found? Let’s start at the beginning to see if much of what appears to be Supervalu’s strength is actually the core of its weakness.

Supervalu is fundamentally a voluntary grocery wholesaler. Voluntary wholesalers seek to operate at a profit, although there are also non-profit cooperative wholesalers owned by groups of retailers. The co-op model has many weaknesses and their numbers are dwindling.

Wholesalers—voluntary or co-op—acquire product from a myriad of manufacturers, aggregate it in vast distribution centers and then compile truckloads of disparate product to be dispatched to independent retailers’ supermarkets. Many of the independents are one-off operators of a single supermarket, typically under a franchised banner such as IGA or the owning-family’s name. Many independents operate in rural areas or smaller country towns. An independent-store owner with as many as five or 10 stores would be considered sizable.

That distribution method stands in contrast to those of large-scale chains, such as Kroger or Safeway, which operate their own product-acquisition and distribution apparatus. This almost guarantees that large-scale retailers can offer lower price points since distribution is operated as a break-even enterprise. Wholesalers must up- charge supplied retailers several percentage points to generate their own profitability.

During the course of its history, Supervalu acquired several retailer banners, and so gradually edged into the retail business itself.

Wholesalers, such as Supervalu, generally enter corporately owned retailing because of perverse incentives: A store or chain the wholesaler supplies decides to sell, or it files for bankruptcy. To prevent the loss of the sales volume the distressed retailer represents to the wholesaler, the wholesaler buys it. The same may happen if a retailer threatens to take its business to a competing wholesaler.

In sum, wholesalers such as Supervalu may end up with an unintended portfolio of retail stores, only some of which can be buffed up to resell or even lead back to profitability. Supervalu’s corporately owned roster of smaller retailers include Shoppers, Farm Fresh and Hornbacher’s.

In addition to the business negatives wholesalers run into by owning retailers, they also may project negative optics: incumbent retailers long supplied by the wholesaler may find themselves in the paradoxical situation of being in competition with retailers owned by their wholesaler. When that happens, supplied retailers may start to question the wisdom of doing business with the very wholesaler who is also their retailer competitor.

The Great Leap Forward

But not all retail acquisitions go sour. One of the better acquisitions Supervalu made occurred in 1994 with its buyout of Save-A-Lot. Over the years, this chain of limited-assortment, hard discount stores represented one of Supervalu’s best growth opportunities. Supervalu’s slow creep into retailing was abruptly reversed in 2006 when it took a huge leap into retailing by acquiring the majority of the retail assets of Albertsons for $12 billion in a deal led by Cerberus Capital Management.

The deal was one of the most complex ever undertaken—then or now—because it involved a buyout and two simultaneous flips. In one move, some 700 freestanding Albertsons-owned Sav-On and Osco drugstores went to CVS; and in another move, about 660 Albertsons supermarkets were flipped to a new entity known as Albertsons LLC.

The latter arrangement set up the curious situation of creating two Albertsons chains; one owned by Supervalu, the other owned by Cerberus. And the inside story was that the real task of Albertsons LLC was to dispose of what were the dogs of the other Albertsons. Today, only 200 of them still remain and are actively operated under the Albertsons banner.

The multiple transactions left Supervalu with what was considered to be the most viable assets of Albertsons in the form of about 1,100 supermarkets under multiple banners of Albertsons’ earlier spate of acquisitions including Jewel-Osco, Shaws and numerous others. The deal also larded Supervalu’s books with unaccustomed debt that it had to learn how to manage

At first, the deal looked stellar for Supervalu. After all, the economy was doing well in 2006, which made the new debt load seem less consequential. The acquisition catapulted Supervalu’s annual sales to about $44 billion, on a pro forma basis, or about twice what they had been the previous year. That propelled Supervalu to the position of the nation’s third-largest food purveyor, trailing only Walmart and Kroger.

The deal also converted Supervalu to a predominantly retailing company. Ten years ago, Supervalu drove 47% of its sales volume from wholesaling. Now less than a quarter of its volume comes from wholesaling.

In analyzing Supervalu’s huge buyout move, it’s important to remember that prior to the Great Recession of 2008, a whole range of companies were being encouraged to take on debt in a bid to quickly beef up their value to investors and shareholders. In fact, it became fashionable to go into debt.

Trouble in Paradise

The euphoria about Supervalu’s deal died down quickly. Through no fault of Supervalu’s, the economy took a nosedive. Shoppers refocused on finding low prices. This didn’t play to Supervalu’s strength; it hadn’t been a low-cost provider to its independent customers or its corporately owned units for years.

I attended a trade association seminar more than a dozen years ago at which a Supervalu executive spoke candidly, bemoaning the fact that Supervalu was delivering “insult pricing” to its consumers. He meant that Supervalu’s retail price points were so far above prevailing market prices that shoppers actually felt insulted.

Supervalu also faced headwinds integrating its new stores into its operations. Albertsons itself had made recent acquisitions that went to Supervalu. They were far from integrated into the Albertsons systems. This only exacerbated Supervalu’s difficulties with aligning its new stores with its own systems and methods. Moreover, many of Supervalu’s newly acquired stores had been neglected and were in dire need of renovation.

In short, at the very time Supervalu needed to do a lot of capital spending on facilities and to lower price points, it was hamstrung by newly assumed debt and couldn’t do so.

Waves of Change

When Herkert was imported from Walmart to become CEO in 2009, his mandate was to find a way to turn around Supervalu. Unfortunately, Herkert’s vision—or lack of it—was to find ways to delay the day of reckoning with the hope that the recession would lift quickly enough to salvage the situation before it got even more ugly. Specifically, he made moves to trim costs, lower price points in specific categories, and make minor tweaks to stores to enhance the shopping experience.

Another key element of his strategy, though, seemed more promising. That was to pump up the Save-A-Lot discount chain, the only part of the company showing much life. He aimed to double the size of the chain to about 2,400 stores in five years.

Herkert’s strategy was simply too little and too late.

Quarter after quarter went by, and sales and profits dwindled, Herkert continued to insist that his plan would take hold given more time. He did speed things up by closing numerous underperforming stores, selling some distribution assets and weeding the company of many workers, some at store level and hundreds from its headquarters staff. Ironically, Herkert rid the company of the same executives he had brought aboard earlier in his tenure.

And so it went until this July when Supervalu reported its first-quarter results. It became obvious then to even the most optimistic that Supervalu had reached a tipping point and that it was almost certainly unsalvageable in its current form. There was an alarming drop in same-store sales by 3.7%, a revenue decline of 4.7% and a profit drop of 45%.

Not long after the quarterly report was issued, Herkert was out and other drastic actions aimed at slowing the downward tumble were implemented. Of course, the biggest action of all was to make it known that the entire company, and any of its parts, were for sale.

Wayne Sales, the incoming CEO, halted virtually every element of Herkert’s plan, including the price initiatives, the rollout of Save-A-Lot units and most capital spending. He also announced the closure—not even the sale—of 60 stores, including 22 Save-A-Lots. The new plan seems to be to hanging on long enough for a buyer to emerge.

Back to the Future

Some trade observers say that very few of Supervalu’s assets will attract a buyer. The most optimistic prediction is that parts of Supervalu could be sold as ongoing enterprises or simply as real estate.

One possibility is that a buyer for Save-A-Lot could surface, although the fact that 22 of them are about to be shuttered bodes ill. Even more complicated, all but a few hundred of the 1,330 Save-A-Lots are owned by licensees and are not, strictly speaking, Supervalu’s to sell. And then there’s the wholesaling business that could be attractive to the right buyer.

Also it’s fairly certain that even if a buyer for the whole Supervalu enterprise manifests, that buyer would most likely see Supervalu as a company to dismember and parcel out. Another possibility is that Cerberus could acquire Supervalu to sell off its parts, reuniting the two Albertsons chains.

Few are predicting that Supervalu will file for bankruptcy, let alone be driven to liquidate, although there is historical precedent for just that; in 2003 Supervalu’s closest industry peer, Fleming Cos., did shut down abruptly and liquidate. To be sure, Fleming faced a different set of challenges than does Supervalu.

Since the dark days of the summer of 2012, Supervalu’s fortunes have skidded further. Its second-quarter results, issued in October, featured a loss of $111 million, including expenses related to downsizing.

Let’s hope that whatever is next for Supervalu starts to unfold soon. In any event, the Suervalu we’ve long known will never be the same.

The Touch, the Feel — but Not the Performance — of Cotton

The recent ruling by the Federal Trade Commission (FTC) to fine four retailers, including Amazon.com and Macy’s, for mislabeling textiles made from bamboo rayon as simply “bamboo,” underscores the seriousness with which the government is enforcing truth and clarity in labeling. Some onus, however, is also on consumers, some of whom are largely unaware of recent fiber substitutions in traditionally cotton-dominant apparel—a shift that can impact the care and thus, perceived value, of their purchases.

Click to Enlarge

The ubiquity of cotton in apparel and home textiles has made it the fiber to beat, or at least the one to imitate. Manufacturers of synthetic fibers and some wood pulp rayons have become adept at duplicating the tactile softness long associated with cotton. To consumers, cotton is a known quantity, especially where the feel, or hand, and laundering are concerned. Many consumers have discovered, to their dismay, a sleight of hand in the form of fiber substitutions in traditionally cotton-rich apparel.

High cotton prices in 2011 resulted in some retailers and manufacturers substituting synthetics for cotton, or blending cotton with other fibers to keep margins in check, but consumers found the quality lacking. Sixty-three percent of consumers said they felt bothered that retailers and brands may be substituting synthetic fibers for cotton in their T-shirts, and the same percentage of consumers were bothered by the possibility in their denim jeans, according to Monitor data. Furthermore, consumers reported a willingness to pay more to prevent future fiber substitution; 56% said they would pay more to keep cotton from being substituted in their jeans and T-shirts. “Even though consumers’ quality expectations have remained historically consistent, they are not immune to price changes at retail; more than seven out of 10 consumers say clothing prices have increased from last year, according to Monitor data,” says Kim Kitchings, Vice President, Corporate Strategy and Program Metrics, Cotton Incorporated.

Additionally, a majority of consumers say the clothing they purchased recently does not last as long as it used to, the fabric of their clothing is thinner than it used to be, and nearly half say clothing typically made with cotton is now made from other fibers.

“Given these changes, it is not surprising that 44% also say the quality of clothes they recently purchased has declined just from last year,” says Kitchings.

Post-recession consumers, though, continue to focus on price tags, since price has always been a key driver for purchasing decisions. In 2000, 58% of consumers reported purchasing clothing on sale, which increased to 68% in 2012. A look at 2012 holiday shopping behavior gives credence to this theory: 76% of consumers said they planned their holiday gift purchases this year, relatively flat from 2011, according to the Monitor. And 67% of consumers said they typically researched gifts online before buying in-store, while many consumers opted to reserve their shopping for major sales days like Black Friday (42%), Cyber Monday (41%), National Free Shipping Day (24%) and Thanksgiving Day (16%).

Price, however, is only one aspect of how today’s consumers perceive value. “While consumers accept that apparel prices are higher today than they were two or three years ago, they do not want to pay more for less,” says Kitchings.

One key component of the value equation is apparel longevity. Cotton fiber substitution and blending may have addressed one-half of the value equation, but fell short on the other half with the unintended consequence of complicating home care and laundering.

Click to Enlarge

“Consumers get cotton; they understand how to wash and dry cotton garments,” says Vikki Martin, Director, Quality Research and Product Evaluation, Cotton Incorporated. “But high percentages of non-traditional fibers in items like t-shirts and denim, for example, must be cared for differently, which can ultimately affect longevity.” “Consumers are still very much price-conscious,” says Kitchings. “They may feel the item and check the price tag before they buy, but it’s only when they’ve brought the garment home and worn it when they realize they didn’t get what they expected.”

Unlike price, garment care is currently low on the consumer check list. Topping consumer concerns are fit (97%), comfort (95%), quality (92%) and price (92%). With equal value placed on quality and price, it is surprising that while 48% of consumers say they check the garment care label before they purchase an item, a full 43% say they do not check the garment care label until after they have worn
the item, according to Monitor data.

For retailers and brands, addressing the new consumer value proposition entails keeping one eye on pricing and the other on managing consumer expectations of quality and performance. Labels help, when they are read and when they are clear. “Not only does the word ‘Cotton’ on the fiber content label induce a feeling of trust and understanding, but the Seal of Cotton graphically conveys the fiber content, giving consumers a sense of confidence in their ability to care for the garment, based on experience and trust in the brand,” explains Kitchings. “More than eight out of 10 consumers recognize the Seal right away. A label that says ‘bamboo,’ or even ‘rayon from bamboo,’ is less clear.”

Emily Thompson is the Associate Director, Editorial at Cotton Inc., the research and marketing company
representing upland cotton. For more information on the Lifestyle MonitorTM Survey, please contact her at
ethompson@­­cottoninc.com

Quitting the country is the easy part. Now, what about all that infrastructure?

Chronicle of a Failure Foretold

Years from now, MBA students will be puzzling over how Tesco, the British food retailer, could have stumbled so badly in its venture in the United States.

Well, more than stumbled. As I predicted more than a year ago in a news feature in the Robin Report, Tesco has called it quits in the U.S., just five years now after entering the country. Tesco racked up a horrendous record: it managed to open about 200 stores in this county, most in California, plus a few in Arizona and Nevada. It burned through well in excess of $3 billion counting startup costs and cumulative losses during its time in this country. At no time did Tesco turn even a modest profit with its Fresh & Easy stores, as they were dubbed.

That dismal outcome stands in ugly contrast to its stated ambitions. Tesco predicted it would have many hundreds of stores in the U.S. by now. It envisioned a quick leap to the East Coast with fill-ins elsewhere yielding a network of 10,000 stores.

The reality of the situation has cost the career of Tim Mason, Tesco’s U.S, chief officer. When Tesco announced in December it was quitting this country, it also said Mason would immediately leave the company. Mason was a 30-year veteran of the company and at one time was seen as the next chief executive officer of all of Tesco. Mason gave it a good shot. He moved to California from Britain with his wife, Fiona, and three of their seven children to direct the fledgling Fresh & Easy empire. Fiona took up golf to wile away the hours while Mason toiled. To the good for Mason, he left with a huge buyout and an astoundingly generous pension.

Tesco now faces the challenge of how to withdraw from the U.S. without abandoning its assets here entirely.

Flashback Fact Checking

But before we assess Tesco’s exit options, let’s take a look at how Tesco got into such a fix. After all, total failure didn’t seem to be in the cards when Tesco arrived on these shores. Tesco is a huge company with annual sales of about $103 billion. It operates a total of about 6,200 food stores in more than a dozen countries; it’s no stranger to operating in diverse cultures. Tesco is the world’s third largest food retailer, trailing only Walmart and Carrefour.

It’s difficult now to recall the fear Tesco struck in this country because of its deep pockets, success elsewhere, and outsized ambitions. Many supermarket operators and industry observers were convinced Tesco represented a huge competitive threat to supermarkets. Some even predicted Tesco could humble Walmart.

I was never of the opinion that Tesco would ride roughshod over established retailers. During the Fresh & Easy run-up toward store openings, and at the time stores started to roll out, I predicted in Supermarket News, the trade publication of which I was chief editor at the time, that Tesco would have a very tough go of it in this country, and wouldn’t fulfill many of its ambitions. I also pointed out that numerous European food retailers have tried to establish a presence in this country, and each one that tried to introduce a new model failed. My voice of reasonable doubt was a lonely one at the time.

The chief reason Tesco failed in the U.S. can be summed up in one word: “hubris.” Tesco did very little market research in its target territory. Instead, it sent a team of about 50 executives to California to study how consumers shopped. This effort was amusingly code named “Project Aquarius.”

By befriending consumers and entire families, the intrepid Tesco Aquarian team tried to leverage customers’ ideas about what they might want in an entirely new shopping venue. Clearly, this was a futile pursuit. Consumers may be good at learning how to tease value and convenience from the shopping options set before them, but they are not professional marketers. They have no valid notion of what a store format that doesn’t exist should look like, or even what they’re missing from their current options.

Nonetheless, a blueprint for the new Fresh & Easy format was developed, and Tesco started to acquire a number of locations so multiple stores could be opened simultaneously. The idea was to fire a big burst of openings that would startle incumbent food retailers and leave them helpless before the
new format.

More than that, Tesco developed a vast and costly 1.4 million square foot distribution center topped by a huge rooftop solar array to power it. By the way, it’s the largest solar unit in California. Next door, a factory was constructed to manufacture the fresh-prepared meals and pre-packaged produce items to be offered in the stores. All that happened before a single store was opened.

Failure Forecasted

The effect of all this spending and activity was to greatly increase the cost of potential failure. In fact, it pushed Tesco into a “do or die” position right out of the gate. A more prudent approach would have been to open a few store locations supplied by a third-party wholesaler so format adjustments could be made a low cost.

Sure enough, format adjustments were required all right. When the first Fresh & Easy stores were opened, the conspicuous lack of shoppers signaled that something was amiss.

Indeed, nearly everything was amiss. The Fresh & Easy stores, at 15,000 square feet or a bit more, were far smaller than local consumers expected. So was the limited product offering, consisting of restaurant-quality, fresh-prepared meals; a small grocery line; pre-packed produce; and beer and wine. The product range was simply too small, and had the huge inconvenience of forcing consumers to make yet another food-shopping stop to get what was missing. Also, American shoppers have never been big fans of pre-packed produce.

The stores featured consumer-operated checkout kiosks only; there were no staffed checkout lanes at all. Many shoppers were, and still are, reluctant to use self-checkouts, preferring a slightly higher level of service.

Finally, the stores were judged by consumers as being uninviting, stark and cold, lacking much in the way of decor and charm. The name was uninspired, too. Many consumers joked that Fresh & Easy must be a place to buy soap, deodorants or feminine-hygiene supplies. Tesco is apparently untroubled by that since it has started to use the Fresh & Easy name in its supermarkets in Britain as a private label line. In the end, Fresh & Easy presented to consumers as little more than a chain of up-market convenience stores that sold prepared meals for home consumption. This could have played well in
an urban environment, but it was all wrong for California.

Exit Strategy

So now Tesco must figure out how to depart the U.S. with as little harm as possible and, it hopes, without simply shuttering assets and walking away. Regrettably for Tesco, its options are few at the very time the need is greatest. Tesco is facing slumping sales and profits in its home country, where it generates the vast proportion of its revenue, and needs to refocus attention there.

The best departure outcome for Tesco would be to quickly unearth an investor or retailer that would buy the entire enterprise and continue to operate with the hope that profitability could somehow be achieved. This is not likely.

Tesco could also seek a partner that would do much the same under Tesco’s license, offering a way to lift investors above the hazard of purchasing the whole thing. This is less likely.

The most likely and most difficult outcome is that Tesco must sell the stores and distribution assets piecemeal. Some of the store sites could have utility to dollar stores, a surging store style, or to Walmart for its small-store food format. It’s more difficult to envision a buyer for the distribution
and manufacturing center. It’s also possible that an investor could buy the whole business to parcel out to numerous buyers.

As something of a precedent to Tesco’s plight, in 2004 British retailer J. Sainsbury sold its Shaw’s chain of supermarkets in the Northeast U.S. to Albertsons so it could refocus attention on its drooping sales back home. The Shaw’s saga didn’t end well. Albertsons, with Shaw’s in tow, was later sold
to Supervalu. Shaw’s was for long a millstone around Supervalu’s neck. Albertsons new owner, Cerberus Capital Management, will most likely feel the weight of Shaws too.That might be seen as a cautionary tale for potential Fresh & Easy buyers.

In sum, Tesco’s prospects for an exit strategy are about as bleak as its potential for success was from the start. The only good thing is that those MBA students will have a project in addition to the AOL-Time Warner fiasco to mull over.

Is this any way to manage a Jet Set brand? Maybe, if you’re looking for a quick exit.

Listening to Michael Kors CFO Joe Parsons speak at ICR on January 16, 2013 on the Kors Jet Set aesthetic—spanning wings, wheels and water—I was reminded of the brand Louis Vuitton, also rooted in luxury travel.

I make the comparison to Louis Vuitton for several reasons, beginning with its origins as a provider of luggage in the 1850s. In October 2010, I visited Paris (not just because I love to travel… and I especially love Paris) to see the installation of a Coach shop-in-shop at the Printemps flagship on Boulevard Haussmann, and do a store tour of Ralph Lauren’s new Left Bank flagship on Boulevard Saint-Germain. While I was there, I visited the Musée Carnavalet (the museum of the history of Paris). I never quite understood the fascination and demand for Louis Vuitton until I walked through the museum’s exhibit, Voyage en Capitale, Louis Vuitton & Paris.

On exhibit were the tailor-made trunks for nobility, celebrity and the wealthy. The exhibit told the brand story rooted in travel, a phenomenon that excites the imagination with the romance of new places and people, and different cultures and experiences. What holds more allure than travel? At the show, I discovered the basis of the brand’s aspirational DNA, which combines best-of-class quality and aesthetic with fashion’s excitement and superior execution at every touch point.

Is Michael Kors brand association with Jet Set travel designed to be the LV of the 21st Century?

Past performance is not indicative of future results, or is it?

Well, Kors may capitalize on travel’s allure, though I would argue that flying for all but the very wealthy is similar to herding cattle—and not at all glamorous even for the luxury traveler. The Michael Kors brand has enjoyed phenomenal sales growth in the past four years as evidenced by a 49% CAGR, with sales growth accelerating in 1HF13 to a 73% clip. Income grew even faster at 124% four-year CAGR and 135% in the most recent six-month, year-over-year period, reflecting a 1000+ basis point increase in gross margin. This is principally due to a growing proportion of higher-margined handbags, accessories and small leather goods (SLGs). There are strong double-digit same-store-sales gains, ranging between 36% and 45% in the most recent six quarters which also helped to increase the bottom line. North American store count almost tripled since 2009 to 214 (from 74).

This heady growth is reminiscent of another pacesetter—Tommy Hilfiger in the 1990s, led by the same Silas Chou and Lawrence Strulovitch who are on the board of Michael Kors. Tommy Hilfiger grew from $107 million in 1992 to $1.7 billion in 2001, before dropping to $836 million in 2008. At Tommy, sales grew by expanding wholesale, entering new categories, and growing off-price. The brand also propelled the growth of a new lifestyle category, Urban. But when that demographic moved on to newer (and more authentic) urban brands, Tommy lost the Hip Hop shopper as well as the mainstream mall mom. Sales and earnings shortfalls followed, and the shares plummeted 39% in 2000 when the company announced 2001 profits would drop by 30% to 40%.

I worry that the celebrity Michael Kors enjoys due to his past participation in Project Runway could be just as fleeting as the Hip Hop related success of Tommy Hilfiger.

What’s the brand management strategy?

One truism for good brand management visible at companies as varied as Coach, J. Crew, Louis Vuitton, Ralph Lauren and Zara, is getting the supply/demand equation right. Controlled supply creates demand. Look at the success of J. Crew’s limited edition collection, which frequently sells out quickly; or Zara’s fast fashion and Coach’s full price product, both with shallow inventories. Limited supply nurtures brand equity, grows demand, and supports full price. Compare that to what Michael Kors is doing in its full-price locations, wholesale accounts, and the off-price channel. This holiday season, Michael Michael Kors handbags and SLGs were discounted 50%+ at Macy’s, Century 21 and Nordstrom Off the Rack in New York where many international shoppers get their first access to the brand. In fact, the Kors flagship on Fifth Avenue was already offering pre-holiday discounts. This is very disturbing for me. I worry that management is so focused on optimizing current demand that they are diluting the long-term value of the brand. When will the momentum end?

It’s always hard to be ahead of trend, be a latter-day Cassandra (who foretold the fall of Troy), and prophesize doom. Doom maybe overstatement, but trading at 31X EPS estimates for the next 12 months versus 19X for a peer group of 12 apparel and accessory brands and retailers; 15X for Coach shares; 19X for Ralph Lauren; and 18X for LVMH, I see little upside. While sales and earnings are likely to achieve better than industry growth for 24 months, multiple contractions are likely. Looking at CapIQ revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) estimates through 2017, the incremental revenue in 2014 is $600 million for both, and thereafter, Michael Kors is projected to add about $100 million more to revenues annually than Coach, arriving at $4.4 billion revenues in 2017 to Coach’s projected $7.5 billion. Moreover, on an EBITDA basis, Coach’s EBITDA margin of 35.4% in 2012 compares with Michael Kors 23.8%; by 2017 analysts project Coach’s EBITDA margin to expand moderately to 36.4% a full 780 basis points wider than the 28.6% projected for Michael Kors. Recently Coach reported weaker than expected North American sales and EPS, prices, and Capital IQ of CapIQ estimates, plus shares were off about $10 or 16%. Nonetheless, why exactly does Michael Kors stock trade at more than 100% premium (31X versus 15X) to Coach shares based on forward p/e multiples?

I’m not sure investors are fully cognizant of the creative machinery and superb execution at Coach that is not easily to replicate. Coach designs for its full-price locations and flows new collections monthly, employing a broad and shallow inventory discipline (read little inventory risk). Full-price sales trends, along with regular communications with its consumer base, reveal best-selling silhouettes and colors, which Coach then produces for its factory stores, deriving economies of scale with its deep inventory commitments. Fewer than 20% of Coach clients cross-shop full-price and outlet channels. The factory product is derivative of the flagship merchandise, arriving in the outlet channel six to 12 months after the original product sold at flagship. Coach operates these two distinct channels targeting two different shopper profiles with different merchandise. Not so at Michael Kors, where products follow a more traditional seasonal pattern. Kors doesn’t offer the same level of excitement and newness that Coach does with its strategic flow of new merchandise monthly.

I recently heard Chanel’s Global CEO Maureen Chiquet who entertained questions for almost 90 minutes at the Global Luxury Retail Forum. In sum, luxury brands are about exclusivity; they are in the desire business; and it is strategic not to be everywhere. ‘Nuf said!

Note: Forward p/e’s are based on closing prices on January 15, 2013. Full disclosure: I have a small position in Coach and a healthy inventory of Coach bags and accessories.

TO: Ron Johnson, Plano, TX
FROM: A Higher Authority
RE: The Way to the Promised Land

Cecil B. DeMille, where are you now that we need you?

The expedition that Ron Johnson is leading the Penney-ites on will not last 40 years – he’ll be lucky if he gets 40 months – but in just about every other way, the trek is of biblical proportions. Johnson is trying to free one of the most enslaved retailers in the business from what seems an eternity of lackluster merchandising, dysfunctional buying and a generally disjointed business strategy that seems to go in every direction but forward.

Frogs and pestilence have nothing on this saga.

Whether he can lead the company to the Promised Land remains to be seen. Frankly, 2012 was just a warm-up and the real test comes this year when JCP has to start anniversarying its lame numbers that started last February. If they can’t beat those comps, Bill Ackman – the hedge fund honcho who has been manipulating this whole thing from the other side of the balance sheet – is going to show why patience is not one of his virtues and there’ll no doubt be a new

sheriff in Plano before long. So, as Johnson tries to part the retail seas and find a route for JCP to succeed, I say it is his Home business that is going to help lead the way. More so than at any other national general merchandise retailer, JCP Home is a larger percentage of overall sales, led by soft home. That has always been a core strength of what those in the trade still call “The Penney Company,” and regardless of the name over the front door these days, if Home doesn’t work, JCP doesn’t work.

That’s why every time Ron Johnson visits that test store near corporate headquarters in Texas, he’d better be holding a tablet – preferably an iPad – containing the 10 Commandments of Home. So, at the risk of burning a few bushes, here’s a look at the shalts and shalt-nots they need to be practicing down in Plano, if they want passage out of the retail desert.

I. Thou Shalt Not Have Multiple Merchandising Strategies.
When Johnson came on the scene a year ago he promised a simple, singular merchandising plan. It’s been anything but. In his haste to avoid using phrases like everyday-low-pricing or coupons, he has danced around enough euphemisms to fill up the Old Testament. And, this past holiday season the store was all
over the place – there were sales that were refused to be acknowledged as sales. There were coupons called everything but. One analyst even went so far as to praise Penney for this new promotional bent, comments that no doubt caused Johnson to sweat profusely in his Izod sweater. Johnson has to define his strategy – to his buyers, his salespeople and his customers – and he has to stick with it. Walmart customers know they will get low prices. Kohl’s shoppers know they will buy everything on sale. Macy’s customers know they need coupons. JCP shoppers don’t know what they are going to get.

II. Thou Shalt Not Have From-the-Grave Images or Likenesses.
Joe Fresh is fresh, sure, but Michael Graves? Conran? Even Martha? Johnson has chosen a curious collection of has-beens, barely-weres and generally used-up brands and names on which to stake its home business. The brands he inherited – Royal Velvet and Liz Claiborne – are not much better.

III. Thou Shalt Not Take Budgets in Vain.
Right now, JCP is burning through cash faster than you can build a 21st Century Golden Calf. The plan was that all of the changes in the store were going to be financed by cash flow and savings from cost cutting. But the burn rate is increasing while sales continue to plummet. Putting 100 shops into 800 JCP units is one hell of a tab, but it’s the basis of the entire turnaround strategy. Don’t be surprised to see those plans scaled back if cash flow doesn’t improve soon. But as with many things for the supremely confident all-or-
nothing strategy Johnson espouses, it makes you wonder if there’s a back-up plan…and what in the world it might be.

IV. Thou Shalt Remember the Holidays.
These month-long promotionsare going to kill Penney. For better or worse, shoppers expect big sales on President’s Weekend, Columbus Day and every other cockamamie holiday. March is not a holiday. Maybe schools and offices aren’t even closed on days like Valentine’s Day and Election Day, but no matter: there’d better be a sale that day – and a preview-shopping day the day before…or else.

V. Thou Shalt Honor Thy Mother and Father…and All the Other Older Shoppers.
When Johnson first presented his grand plan, he talked about how Penney was only getting four out of 100 shoppers into the store as customers, and if he could even increase that by one, that would represent a 25% increase in traffic. True, but that logic was based on keeping those original four shoppers as customers and there’s every reason to believe that is not happening. The traditional Penney shopper is among the most loyal customers a business could have: after all, she’s been shopping the store for generations. But she doesn’t quite get the new JCP. From the Home perspective, she still wants her floral sheets and promotional towels. For any plan to succeed at Penney it must find a way to retain the existing customer base while bringing in new shoppers.

VI. Thou Shalt Not Kill the Window Coverings Department.
Once upon a time – and not all that long ago – J.C. Penney controlled more than a third of all the curtains and draperies sales in the country. It was an amazing position, virtually unparalleled in general merchandise retailing. Before Johnson came to town, prior management was already starting to scale that business back. It’s labor intensive, somewhat messy, and more than a little complicated. Yet that’s the kind of thinking that has turned many department stores into glorified clothing stores. The truth is, window coverings are a core business, one that gets the newly formed household into your store and exposes them to the rest of your merchandise offerings. It is the shoe department of Home. It needs to thrive.

VII. Thou Shalt Not Commit Advertising Adultery.
The ground-breaking ad programs run by Target and Apple are among the most important and influential campaigns in the history of the business. The fact that Johnson was affiliated with both companies
is impressive. But the JCP advertising we’ve seen over the past year is among the most derivative, unoriginal and ineffective example in marketing. It started off last February setting the stage for what was to come… but the “it” never came. When the holiday ads promoting products and prices finally broke, they bore no real resemblance to the campaign that had preceded it and they never stood a chance against
the Macy’s and Kohl’s spots that hit it hard. You can get away with just your logo without a voiceover if you are, in fact, Apple or Target. But not if you’re JCP…or Penney…or whatever your name is.

VIII. Thou Shalt Not Steal
Okay, so maybe going after Martha Stewart wasn’t exactly stealing, just an inside job, with Ms. Stewart a willing accomplice, but it was clearly an attempt to take another retailer’s possession. I happen to be one of those who believe Martha Stewart does have a lot of life left in her brand and that using her as a linchpin for Home is not necessarily a bad idea. But the Martha move was fraught with peril right from the start, trying to box out Macy’s. Now Martha is not going to be a very big part of the picture this year – at least – and there is not a credible Plan B from all appearances.

IX. Thou Shalt Not Bear False Promotions.
Home remains one of the most price-promoted products in the store. Let’s face it, nobody really needs another set of white towels or a new frying pan. That’s why, unlike fashion where new styles drive business, or cosmetics and fragrances where the newest name gets a shopper all hot and bothered, sales are what makes people buy home products. When Ralph Lauren first got into the home business three decades ago, he refused to run sales and tried to sell everything at full boat. It was a disaster. It wasn’t until Ralph relented and got on the White Sale schedule that the brand started to click. It’s one of the reasons Walmart’s home business is underdeveloped compared to its closest competitors. Everyday low pricing does not work in Home. If you don’t believe me, ask a Bed Bath & Beyond shopper with a handful of 20%-off coupons.

X. Thou Shalt Not Covet Kohl’s or Any Other Store For That Matter.
Give Johnson credit for this one. He really is trying to create a new retailing format. For years, Penney tried to be Kohl’s and it learned there already was one. It’s the same lesson Target learned when they started to do an end-run around Walmart 15 years ago. Ultimately this will be the way Ron Johnson is judged: can he create a store that is different enough from his competitors while similar enough to still be competitive? That’s the only way we’ll know if JCP gets to the Promised Land…or just wanders around aimlessly until it becomes utterly lost.

Are we all felons bribing our way though international commerce or victims of corruption, forced to pay the price of admission?

Let’s face it. Bribery is a cottage industry in many countries—part of their cultural DNA. The sad truth is that buying and selling influence is often the grease that lubricates the wheels of global commerce.

In Spain, it’s “mordita”– the bite. In French, “dessous-de-table,” loosely under the table. In German, it’s “schmiergeld” or smoothing money and in the Middle East the ancient Persian practice of “baksheesh” or gratuity has been common currency for a thousand years.

Is it illegal? Unethical? Should it be condemned or condoned as simply the cost of doing business? And who’s really to blame? Is it the country that turns a blind eye to the problem or the local bureaucrat supplementing his salary? Or, should we punish companies that pony up to get things done during a period of difficult economic growth?

Russia is a case in point. It became one of the most corrupt major economies on earth thanks to the constraints of communism.

Today, Russia’s curious brand of capitalism is immersed in bribery and corruption. For instance, it may take 18 to 20 departmental approvals for a retailer to get a store open. Your basic apparatchik doesn’t offer a stamp of approval without getting something for services rendered?

For Russian companies doing business overseas, bribery is simply another line item. The government’s response? The Russian Foreign Ministry recently told executives that payoffs can’t be claimed as tax deductions.

Some companies choose not to participate. In 2005, the multinational retailer Carrefour pulled out of Mexico because of the level of corruption it encountered, according to insiders.

Walmart’s alleged payoffs to Mexican officials—now estimated at $24 million—violated 1977’s Foreign Corrupt Practices Act (FCPA), which has ensnared many a Fortune 500 company.

Internal investigations by the Bentonville Behemoth have led to the $30 million reorganization of its compliance department under the auspices of Jay Jorgensen, a high powered Washington attorney who was named global chief compliance officer.

Meanwhile, the company recently expanded the investigation to China, India and Brazil, some of Walmart’s most important markets. If you add Russia to the mix, all the BRIC nations are represented.

It’s interesting to note here that China and India—the world’s factories—have declined to sign the 1997 accord by the Organization for Economic Cooperation and Development (OECD) to combat bribery in international markets. They won’t enforce it, but at least Russia signed it.

Meanwhile, prosecutions—domestic and international—have been largely non-existent since the financial crisis in 2008. To put it somewhat harshly, why crack down on something that may impede economic recovery?

In 2012, only about 15 actions were brought by the SEC against violators of the FCPA. Most companies simply settled without admitting or denying guilt—the nolo contendre defense.

Of course, not everything is on a global scale.

Maybe the corner deli gives the cop on the beat a free lunch for keeping an eye on the place. Perhaps you got a job for the wife of your kid’s Little League coach to get him a few more at-bats; slipped a few bucks to the union electrician at some trade show to get something done quicker; or got Superbowl tickets for members of the town council.

It all sounds innocent enough. But they are responses to the same competitive pressures that any company faces?

In the end, it’s unlikely that the lucrative business of bribes and corruption can be eliminated. But it’s up to industry leaders to establish a reasonable code of conduct and a culture of integrity.

Trader Joe’s is undoubtedly the nation’s most successful limited-assortment grocery chain; lines actually go around the block in New York City’s two outposts during the holidays.

So what’s really going on here? Trader Joe’s uses product and pricing strategies that could easily be emulated by other chains that sell quick-turn consumables. But Trader Joe’s is not just privately held, it is fiercely private, making every effort to fend off any effort to learn how it works.

We do know, however, that Trader Joe’s net sales-per-square-foot are roughly twice those of the similarly situated Whole Foods. And Trader Joe’s performs better in smaller selling spaces, with about a quarter of Whole Foods stockkeeping unit count.

That’s impressive, but the real secret formula is Trader Joe’s product lineup. More than 80% of Trader Joe’s 4,000 SKUs are private brands, most under the Trader Joe’s name, and others under offshoots such as Trader Jose’s (Mexican food) and Trader Josef’s (baked goods), and so on.

Trader Joe’s is known for its quirky merchandising, shrouding its proprietary products with a sort of mystique that loyalist shoppers find quite appealing. Customers come to Trader Joe’s for the unique products that they won’t find anywhere else. And those products are priced substantially lower than those of most competitors, particularly those of Whole Foods.

So what products draw these shoppers back to Trader Joe’s over and over again? Well, not long ago, Trader Joe’s briefly published on its web site a list of nearly 30 products — or roughly 8% of its product range — that customers ranked from top to bottom according to which they liked best. The list was compiled using an email polling of shoppers, and shouldn’t be confused with a “best seller” list. In most instances, shoppers picked as their favorites products those in the “indulgence” or snack category. Topping the popularity list was the store brand Speculoos Cookie Butter. That’s a spread for bread similar to peanut butter, except that it contains no nuts. Instead it’s fashioned from a sort of spicy Belgian cookie. The cookies and the spread it spawned are readily available in Belgium, but neither is well known in this country. Curiously, frequent flyers will find it as an “airline cookie,” offered as a treat on Delta Airlines.

Also ranking high on the list is Trader Joe’s proprietary Charles Shaw wines, of all varieties. That’s the popular “Two Buck Chuck” wine. It remains popular despite the fact that its price is creeping above $2 in many markets, including the chain’s home market of California.

Exclusivity, whether in the luxury market or the grocery store, is a compelling marketing strategy. All things considered, shoppers will pick a destination store based on specialized products and brands not readily available elsewhere. These products transcend commodities; they become necessities by choice. That, combined with attractive pricing, and the appealing narratives or story telling about these products, is what helps insulate Trader Joe’s from both conventional and online competitors. This is a lesson that many of Trader Joe’s competitors could take to the bank.

You got rid of the landline three years ago because two-thirds of your calls were from telemarketers. Then you downgraded your cable service wondering why you were paying so much for so little. Now you watch stuff on your Tablet and laptop more and more. And when the price of a New York Times went up to $2.50, you decided to read news online from a wider variety of sources, and like it decidedly better.

Today, you live a new kind of life than you did five years ago. You have several e-mail addresses so that you can filter the spam. The snail mail is more than 90% junk so you’ve even stopped opening it; the envelope gets a glance and often gets chucked. When you drive, it’s commercial-free Satellite Radio since traditional ads, with their crazy voices and incoherent offerings, drive you crazy. You loved Marc Gobé’s film, This Space Available, downgrading billboards, and outdoor media in general, to visual pollutant status. You take a pleasure in buying the store’s house brand, not because you have to, but because the ‘superiority’ of branded products is something you seriously question. We watch commercials at the Super Bowl and Oscars for the entertainment value and once in a while on YouTube; the rest of the time you conspire to avoid them.

In-Store In Your Face

But no matter how savvy or sophisticated we are, we can’t ignore advertising and promotions at the point of sale. And very often, when we’re shopping, we don’t mind; we’re looking to be sold to and game for new products and services. So it’s no surprise that the in-store, below-the-line advertising world is thriving. It went from the premise that ‘if three signs work, then 27 signs will work better!’ overkill, to today’s more focused and intelligent treatment on the information architecture of both brick-and-mortar as well as online. The right information, at the right moment, with the appropriate message, can mean the difference between a sale and a walkout (or a click-out).

Still, the world of below-the-line is still struggling with its heritage. The long-term business model of below-the-line, you gave away the creative to get the order. Since the Point of Purchase (POP) industry was historically rooted in the sin industries (read alcohol and tobacco), many of the deals were subject to negotiation on the golf course. As POP has grown, the faint smell of corruption has been hard to get rid of.

Who’s Actually Buying All This Stuff?

Another painful process has been in understanding the difference between Shoppers and Consumers. Or more aptly, who buys stuff and who consumes stuff? The answer can be surprising. Years ago we ran a test for Super Bowl promotions in-store and found that two-thirds of those shopping for Super Bowl Parties (read: female) didn’t know the celebrity athlete typically featured on various salty snack packages. Companies were spending millions for recognizable faces that the real shoppers, well, didn’t recognize. In-store, the most personal and unavoidable of merchandising opportunities, rides on the coattails of print and broadcast media, which makes no sense at all.

How do we prove in-store marketing works? It is the million-dollar question of the research world. PoPAI, the aging trade association of the display industry, and its active rival, The Path to Purchase Institute (formerly the In-store Marketing Institute), have both announced solutions that have faded in cold light of day. The premise that someone looks at a sign or passes a display, and then buys because of that display, is difficult to prove. A decade ago, the sad truth was that a third of displays shipped to a store never made it out to the floor. Modern corporate guidelines and compliance systems, not to mention the ongoing presence of mystery shoppers, now help to enforce that process, but the realities of the in-store experience keep retail and brand executives up at night.

As money gets taken out of print and broadcast and put into in-store, event and on-line the CPG companies are looking for proof that it “works”. We already know that traditional tools used in sales and media research don’t work; you can’t interview people about what they see or don’t see since much of that information is subliminally recorded and thus cannot be reported. In-store advertising can build the familiarity with brands, and predilection to purchase, which might mean next week, next month or next year.

High-Tech, Low-Touch

We are at the tail end of our fascination with technology at the point of purchase. The first romance was with flat screens, which was built on the failed assumption that shoppers view TVs in-store the same way we do at home. Our findings were that, while a moving flat-screen image would attract twice the number of eyeballs as a static sign, it held that “look” for an identical amount of time. The worst and most common mistake was loading an in-store flat screen with the 30-second television commercial. It became visual and often auditory pollution.

Where a flat screen works is in a special, specific place: where people wait for prescribed amounts of time. Getting a prescription filled at a drug store, waiting for sandwich at a deli, or waiting in line at a bank. The key understanding is that much of that viewing time happens after the order is made, not before, so that the focus of the message should be on future consumption, not immediate. We are able to track and understand the efficacy of this, down to the precision of how long the loop should be and exactly what content shoppers want to view.

The second tech fascination is with the kiosk. I saw one the other day in the liquor section of a hypermarket, which matched cocktails and wine to occasions and meals. It’s a good idea, but with a major flaw hard to overcome: the amount of information the user had to input before they got useful output. The abandonment rate for American in-store kiosks is very high already, and this simple but painful reality rendered the kiosk a colorful commercial sculpture. Further, in America we are most likely to have the bored, mischievous nine-year-old in tow that likes nothing better than reordering shelves and turning kiosks into jungle gyms, so a kiosk that doesn’t work becomes a liability.

Surfing Into the Future

A lot of people are asking: What is the future of in-store? And the surprising truth is, it’s not in-store at all, but in your pocket. Surfing the web and downloading material to our smart phones is voluntary, done recreationally. We shop and buy online for purpose, but also for fun. It’s the future of shopping.

But even as our nation improves and evolves, bureaucracy and red tape inevitably hold us back from formally articulating the need to reduce waste in our landfills, and preserve natural resources, via technology. It might take three years, but more realistically five: Call it the Green Marketing Act of 2018, where the messaging historically put on a package must be in bytes and not in cardboard. Goodbye, plastic and cardboard and hello, efficiency
and large-scale cost-cutting.

And then we get to pick and choose what we want to look at, products and services we want marketed to us, and even optimized for the screen of our choice. Even though the future of retail is today, we may have to wait five years for it.

All the recent hubbub over a certain Connecticut homemaker’s image and brand is only the tip of a major merchandising movement that is starting to consume the home furnishings field. As national brands continue to recede from the category—they are pretty much null and void in soft home categories, like sheets and towels, and hold a tenuous position at best in some smallappliance and housewares classifications—the ascendency of private and captured brands is nearing unprecedented levels.

The spectrum goes from the extreme of Kohl’s where virtually the entire home department is proprietarily branded, to stores like Target, and now Penney, where soft home is all private and hard home is mostly national brands—to ones like Macy’s and Bed Bath & Beyond where the assortments are still…well, assorted.

To Brand or Not to Brand

Some background perspective first: The interplay between national brands and private ones goes back a long, long way in the home business. Sears built the foundation of its very business on the backs of its Kenmore and Craftsman labels. The Supremacy brand at Macy’s —certainly one of the most clever, if somewhat contrived labels anyone has ever come up with—was a mainstay on 34th Street long before Charter Club and Inc. turned up.

And the early generations of discount stores had no choice but to develop private labels due to the fact that they were locked out of the national brand arena by department stores not at all anxious to be kind to their new retail brethren.

When the first superstores like Linens’n Things came onto the scene, they too were blockaded in their quest for national brands and largely subsisted on house brands and non-brands. Not that LNT didn’t resort to some interesting tactics back then. At the time, Royal Velvet was the leading national brand for better towels and the executives who ran the company that produced RV, Fieldcrest, mostly lived in New Jersey. Linens took out a billboard at the entrance to the Lincoln Tunnel where they knew Fieldcrest execs would pass everyday, urging them to open up RV distribution to the store. It didn’t work —at least not then—but you’ve got to admire the guerilla spirit of the effort. Royal Velvet was a paragon of home furnishings brands back then, so there’s a certain irony that it is now a captured house brand only available at Penney. Because that is the business model that more and more retailers are using for their home businesses.

This spring, we are seeing several major rollouts of private and captured brand programs that are largely replacing national brand assortments. Certainly, what’s happening at JCP is indicative of the trend. Regardless of what happens in the battle for Martha Stewart between Macy’s and Penney’s, Ron Johnson and company are counting on a stable of names including Jonathan Adler, Terrence Conran, Liz Claiborne and the aforementioned Royal Velvet to resurrect the store’s home business.

Private Properties

But there are plenty of other examples hitting retail shelves over the next 30 to 90 days. One of the more interesting is what’s going on Bed Bath & Beyond with Wamsutta. BBB does many things well and is well situated in the name brand housewares business, but has struggled to find its brand mojo in soft home. While a shopper will find labels such as Nautica, DKNY and Barbara Barry in the sheet and towel department, these are technically labels available elsewhere. Now, there’s a new twist on that model. The heart and soul of the Bed Bath sheet department has always been Wamsutta, a long-time brand that had been owned by one of the great American textiles mills, Springs Industries, for decades. Springs—now owned by its former Brazilian subcontractor—has been winding down its American presence for the past decade and last year it sold Wamsutta. No public announcement was ever made by buyer or seller but this spring, a wide-ranging assortment of Wamsutta branded product is starting to appear on the Bed Bath floor, confirming the industry speculation that the store itself was the buyer. So, here you have the epitome of the transition from national brands to captured private ones: Wamsutta is the poster child for the movement.

But it’s certainly not the only example of private brands replacing national ones. Over at the mall, Bloomingdale’s is rolling out an ambitious new soft home brand called Oake. Home furnishings cynics are likely to tell you the program should be called Calvin Klein Wannabe as it takes a very similar design bent as the minimalist home classic. Calvin himself is not being kicked out of Bloomies, but valuable floor space is being reserved for the new house brand. Pick up the store’s new big home book and Oake gets four pages while Calvin is reduced to just two. Clearly, the department store has decided it would rather have an exclusive line without royalties than a nationally distributed label where the brand owner gets a cut of the profits.

Crossing the Threshold

Over at the strip center across the highway, there’s another variation on the theme. Target’s major spring reset of its soft home department puts a major focus on a relatively new name, Threshold, that appears to be the centerpiece of the bed and bath assortments. The label also turns up in some decorative accent SKUs as well. It is not a clear apples and apples equation here. Target has always had strong proprietary brands, but recently they have been captured labels such as Woolrich, Nate Berkus, Shabby Chic and Fieldcrest. All adhered to the royalty model, and while some are still on the selling floor, clearly Threshold is taking center stage, with four full pages and parts of several others in recent circulars.

What’s the central premise of Threshold? Beats me. The tagline for the brand’s Sunday circular debut reads “Quality & Design.” Does this imply that the rest of merchandise offerings contain neither?

It also talks about “updated classics”…whatever that means. Like words such as lifestyle, transitional styling and modular furniture; these things mean much more to the trade than to the consumer.

What all of these stores have in common is their perceived need for proprietary product that can’t be showroomed on the Internet. And that’s true…to a point.

Captive Audiences

Consider Kohl’s, which continues to struggle, particularly with its home business. There’s no shortage of theories for Kohl’s problems, but one prominent one is that it is relying too much on its own brands to the exclusion of national labels. Its corporate mandate to rollout brands across multiple classifications has resulted in a J Lo home program that defies success…much less logic.

Across the floor, the store has replaced many national brands in small appliances and other housewares products—categories where labels like Cuisinart, Hamilton Beach, Sunbeam and Calphalon still rule the roost—with its own, severely less well-known names.So, while it’s true that nobody is showrooming Kohl’s home assortment, it may be because nobody wants to.

That’s the danger all of these retailers risk with these new strategies. In the meantime, Macy’s seems to be doing quite nicely with its blended hybrid merchandising plan and retailers like the TJX units and Costco thrive with national brands. The pendulum between private and national brands has been in motion almost since the beginning of modern retailing. But this time around, it’s threatening to swing off its hinges.

“Bubble Capitalism” Crushes the American Dream

Forget the cresting, breaking and other visible economic waves we discern on the surface of our economy — all accompanied by “cyclical” blathering of the dire necessity to create jobs and growth, and reduce debt and deficit spending.

While we blather, we’re blind. The less visible, stronger undercurrents of our dying free market capitalism that catapulted us to global economic dominance with the promise of an “American Dream” along with it, has been morphing into what I’m calling “bubble capitalism.” Some are calling it “crony capitalism,” which is equally descriptive. It’s just that bubbles are what the cronies feed off of. And it is crushing the American Dream by tipping the once-level playing field in favor of a narrowing segment of big finance and big business, aided and abetted by big government.

And let me be crystal clear. I am not whining for redistribution. I’m suggesting that if we don’t figure out a way to get back to good old democratic capitalism and its level playing field, we will have a barren wasteland in our future, albeit one that will be filled with a bunch of worthless stuff (popped bubble residue), scattered across a country that will look more and more like the third world. Think about three million empty, decaying and devalued houses following the leveraged-up mortgage crash of 2008. And what about the jobs lost, and spike in the number of people living below the poverty line?

Sorry, you want nice, you probably won’t find it in the Robin Report. We like to make wake-up calls.

From The Land of Opportunity Where It All Began

Adam Smith, widely considered capitalism’s founding father, defined free, unobstructed or manipulated markets as the necessary ingredients for capitalism. This free “invisible hand,” as he phrased it, would guide balance and efficiency—a level playing field of democratic capitalism—with a harmonious confluence of government, business and finance all guiding us to growth and prosperity. So how has Smith’s capitalism been turned on its head?

We have to start by looking at what Adam Smith, if he were still alive, would probably point to as the quintessential example of his thesis at work: capitalism’s finest hour. The post-WWII economy in the US, lasting well into the 1970s, experienced the most explosive growth in recorded history anywhere on planet Earth.

Then consumer demand began to taper off in the early 1980s. However, the captains of industry and finance were not about to lower their growth objectives. So, to move the growth needle back up, even as competition was increasing, the magic of marketing, advertising and promoting was put into overdrive. And the shift from a production-driven to a marketing-driven economy was wellon its way, spawning the most sophisticated communications and distribution infrastructure in the world, including the expansion of the retail industry as 54,000 miles of interstate highways invited the massive construction of regional malls.

Indeed, during those halcyon years—the golden age of Adam Smith’s democratic capitalism—we were able to promise an American Dream to all who would strive hard enough to achieve it, even for those of lesser means. There was a harmonious balance of supply and demand, of production and consumption. There was also a great balance in people’s lifestyles…until there wasn’t.

The American Dream On the Slippery Slope Of Trading Value Creation for Bubbles

Entering this new phase, greater capital would be invested in the tools of marketing to create demand and ever-higher levels of consumption. Thus, the US economy was transforming itself from primarily creating value to consuming it. According to the Economic Strategy Institute, total manufacturing as a percentage of GDP has been in steady decline from about 25% in the early 1980s to roughly 11% today. Worse, the decline accelerated during the past decade, dropping some six percentage points. Conversely, consumption has risen from about 62% of GDP to roughly 73% during the same period. Further, the Institute states that our drop in manufacturing has been more dramatic than in any other industrialized economy.

Of course we knew we would lose labor-driven, basic manufacturing industries to lower-cost countries. But the good news about this was supposed to be that we would simply move up the “food chain” to create higher levels of value, such as the technology, engineering, science, and other industries requiring higher and more specialized skills and educations. It did not happen, and there are many supporting metrics and arguments as to why this “brain drain” will continue, easily enough for another article.

Therefore, the famous quote of a half century ago by then-President of General Motors, Charles Wilson: “What’s good for General Motors is good for the country,” could credibly be replaced with, “What’s good for Walmart is good for the country.”

So, the real marketplace economy begins to drift into lower levels of value creation; namely, the services and marketing industries, to fuel more and more consumption, faster and cheaper, required to keep the economy growing.

Thus, the American Dream was stepping onto a slippery slope, in an economy that was shifting from value creation to value consumption, which would make it more difficult to achieve the dream. And thus began a spiral downward that fed on itself, as I will explain below.

Big Government, Big Business, Big Finance: The Bubble Capitalism Playbook

In fact, I would suggest that Adam Smith’s invisible hand is indeed invisible to most of society, however very visible to those they belong to: the hands of big business, finance and government.

Sailing into the 80s with the tailwinds from the golden age, the titans of business and masters of finance created several innovations in an attempt to stimulate the then-slowing pace of growth. One such idea was stock-based compensation (stock options), promising outsized pay for outsized performance. Paradoxically, in many cases it has re-defined real growth as simply “making the numbers, however we must.” And of course, the new masters of the universe now residing in a handful of “too big to fail” financial institutions, not only added to the pressure on businesses to deliver, they too, needed to find ever more creative ways to gin-up growth.

And the third component (following big business and big finance), of what would turn out to be a deleterious cycle of “bubble” formation (leveraging up worthless value), and creating an unlevel playing field, was the complicity of big government. As the financial industry, with their armies of the “best and brightest” in kind of a creative Nirvana, began engineering hundreds of new instruments—not for investing, but for “betting,” insuring, hedging and swapping—it required that the government relax its rules and regulations to create what the masters of finance proclaimed would be healthier and freer markets.

With little urging, the government complied. Ironically, instead of freer markets, and a more democratic, meritocratic capitalism delivering greater real growth (as a result of the convergence of these three entities), instead it led to real invisible hands manipulating capitalism, often creating bubbles of worthless value. And as we’ve witnessed, when these bubbles pop, their creators at the top of the pyramid get bailed out, and those on the bottom are left with worthless residue, certainly nothing any American would be dreaming for.

Understanding the Playbook

Capitalism, therefore, as envisioned by its founder, based on competitors winning or losing in the real marketplace of supply and demand, has given way to market expectations of what the top- and bottom-line “numbers” must be for winning or losing. And of course it is fueled by stock-based executive compensation.

Thus, big business has a strong incentive to do whatever is necessary to make those numbers, and the financial industry thrives on market expectations, its volatility, and winning in their marketplace is often achieved more by trading value than building it.

Of note, just as our value creation in manufacturing as a percentage of GDP gave way to value consumption, now at 73%, the financial sector doubled its share of GDP during the period between the early 1980s and today, from 4% to 8%. And its share of all domestic corporate profits soared from 16% to a whopping 41%.

So, the game of expectations is trumping the “real” game of capitalism and the invisible hands of big finance, big business and big government are tipping the playing field in their favor, and the American Dream is beginning to look like the American Nightmare for far too many.

From the Land of Opportunity to A Barren “Deflated” Wasteland (The Scenario)

So into the US consumption machine we go. It’s now fully driving our economy. And we must meet our “numbers expectations”—double-digit, quarter-on-quarter growth. How do we do it?

Well, we can engineer financial strategies to stoke ever-higher levels of consumption. Whoa! What do you mean by “engineer” financial strategies? Well, how about providing unlimited credit to any consumer who wants it—no questions asked, nor credit rating needed—or promoting credit to those who are not even asking for it.

Aha! I get it, just keep ‘em buying, whatever it takes. You got it: freely available credit, and when the economy collapses like it did in 2008, under the weight of a total credit market debt that was almost 400% higher than our GDP (versus about 160% in the 1940s), our government can jump in and play its part to perpetuate our now clearly consumption-driven economy. They can print money, trillions of it, and just throw it out there hopefully to keep consumers borrowing and consuming. The notion is that businesses will take advantage of borrowing “free” money (low-interest rates) to invest in growth, thus hiring more workers, thus generating more disposable income, and thus encouraging more spending on consumption.

Well, so much for that notion. The financial giants have borrowed the “free” bucks and are using them not to invest in building new value but rather to trade value, for higher profit-taking (and much of it through “speed trading”). And companies have never had so much cash sitting on the sidelines—trillions actually—that they have not used for expansion in the US, much less rush to hire more workers.

Why? Because there is not sufficient demand to invest in new plants, equipment, or more workers. Hmmm! Seems like we need another bubble.

So, the conundrum continues. The Fed throws more and more cash at the wall, hoping a consumer or two will spark another borrowing frenzy to buy, buy, buy. And of course, our hungry retailers, prodded by Wall Street’s demands for growth, are doing their part by deeper and more creative discounting, and opening more and more outlet stores. And all of their consumption stoking is added to by the multiplicity of new websites launching daily, each one offering a better discounted “deal” than the one before it, or selling “pre-used” goods, or just plain “swapping.”

In the face of this deleterious type of demand creation, we must accelerate it to even higher levels because we counterintuitively continue to create more and more stuff and stores, piling on the over-capacity already existing in most industries.

This is a train wreck that is happening as I write! We can see it every day. We acknowledge it, but then continue to open more stores and websites and throw more stuff into an already over-stuffed marketplace, only to have to discount even deeper, and/or provide easier credit to get it sold to a consumer whose real, inflation-adjusted income hasn’t budged for 30-plus years, to say nothing of their disposable income.

And, I’m sorry to say, that for every new, innovative, exciting product, service or experience breaking through with real new value, there are ten times more of commoditized excess that sit on shelves until it is all but given away.

This is simply and clearly, and as I’ve said before, a vicious cycle of value deflation, dragging “all ships down.” In my opinion, this dynamic of a demand- and consumption-driven economy, aided and abetted by government, the financial industry, and big business (all juicing consumption with free money, freer credit, and insane levels and types of discounting), all while being complicit in juicing the supply side using the same tools, leveraging credit and piling on more capacity, is unsustainable.

Furthermore, as I’ve also pointed out, just as there is too much stuff sloshing around the globe, there is too much capital racing at lightning speed, frantically looking for investment opportunities. Well, guess what? The trillions of capital is invested in three places: either to build more capacity (which we do not need in the US); or invested to prop up losers (I rested my case on the Sears example long ago, and there have been, and will be, many others); or, to leverage up another “bubble” (technology maybe?). This vicious cycle accelerates and perpetuates the paradoxical and unsustainable combination of an economy reliant on consumption for growth—the demand side—and over-capacity on the supply side, that is being devalued daily in the attempt to get it sold.

As value is being deflated, over time, in the aggregate, it deflates the economy and everything in it. The end game may not be the US slipping into third-world status, but it could easily slip us into the ranks of a third-rate global economic engine, as a mere consumption machine for the rest of the world.

So, If No Real Growth, Where’s the Next Expectation Bubble?

Well, as former Secretary of Defense Ronald Rumsfeld said, “…you go to war with the army you have.”

So, should we accept bubble capitalism and “go to war” with it? Should we find more bubble opportunities to blow up with credit, enabling everybody to sip Champagne on the way up? Then, following the “pop,” the titans of industry, the masters of finance and big government can continue sipping the bubbly, counting their bounty as they also take a headcount of the number of additional jobs lost, more declining income, and the residue of whatever excess stuff is left scattered across the landscape, adding to all the previous excess?

But not to worry, our now compulsively consumptive culture will be there waiting, with one of the multitude of credit cards sent to them in the mail—no questions asked—poised to find the best deal ever for more stuff than they will ever need.

Seriously, There Can Be a Happy Ending

According to Dr. Robert J. Gordon, Economics Professor at Northwestern University quoted at a recent TED conference, he asked, “…would it be so terrible if economic growth slowed to a halt?” and replied, “…it’s worth considering.” The editors of Forbes posited, “The great concern these days about a lack of growth is primarily due to technological progress: If GDP growth does not keep up with productivity growth, the result is unemployment, but an end to productivity growth would end this worry. Even by Gordon’s estimate, this could happen in the US in the middle of the century at a GDP of around 80,000 dollars per capita. More equally distributed, this should be plenty for a comfortable life. Interestingly, this point was argued 80 years ago by the father of modern macroeconomics, John Maynard Keynes, in an essay titled “Economic Possibilities for our Grandchildren.” In the essay, he suggested that his grandchildren “… might use improvements in productivity to enjoy more leisure and less work. Maybe we do not need economic growth beyond a certain level.”

Whooopeee!!! We can take it easy and smell the flowers along the way. But, wait a second! I have to go shopping. There’s a sale at the “Everything For Free Store.” They’re paying customers to take the stuff. Can you believe it?

Yes I can.

The Final Word

Without the elements of trust and fairness, democracy and free market capitalism cannot work. And poll after consumer poll are revealing that a greater percentage than not believes our government and the business and financial sectors are lacking both.

As I said, it’s not about rules and regulations, it’s about fixing a broken capitalism.

Adam Smith, where are you when we need you?

Supermarket retailers are facing a sea change when it comes to how the products they sell are marketed. That responsibility is going to migrate from manufacturers to the retailers themselves before too long.

Why? Because supermarket shoppers are a fickle bunch. And nowhere is that more evident than in their fast-changing attitudes toward brands and their loyalty to them — or, to be more precise, their lack of brand loyalty.

Of course, brand loyalty has been fading for a long time, but for the first time, surveys of motivations behind consumer buying decisions show that a large majority of supermarket shoppers have no brand preference at all. Instead, they are prone to swing between brands, or to opt equally for specialty or store brands.

Several newly issued consumer studies show how dramatic the decline in brand loyalty is. For instance, Deloitte’s American Pantry Study shows that 90% of shoppers at least occasionally will opt for a store brand in lieu of a national brand. That finding is backed by other surveys that indicate a striking 56% of shoppers have no brand loyalty at all.

This lack of brand loyalty gives national manufacturers of consumer packaged goods (CPG) every reason to feel agita. It also means that manufacturers soon won’t have the wherewithal to do all the heavy lifting concerning product promotion.

So, if manufacturers soon won’t promote as effectively, who will? Well, the only player left is the retailer.

Here’s some of what retailers will have to do better on their own:

• Seize the product-development initiative from national CPG manufacturers. No longer should store brands mimic national brands in content or appearance. Instead, store brands should be high-quality and attractively packaged products in their own right. They should be priced near, or even above, similar national brands’ price points. Supermarkets can also lift a page from Target’s playbook by offering tiers of store brand product ranging from value offerings to high end.
• Make the supermarket stand for something. It should be conspicuous to shoppers that the store means, say, quality, innovative products, or price. Limited assortment operators including Whole Foods, Trader Joe’s and Aldi, respectively, already do this. Or, like Target, supermarkets can stand for “cheap chic.”
• Make the supermarket an inviting destination so customers will want to go there instead of viewing shopping as drudgery. That means the supermarket must have high-quality perishables departments, be convenient to shop, and feature high service levels. Supermarket operators Wegmans and Publix already do a good job of this.

Even with those basics under their belts, supermarkets still will face a few challenges. That’s because consumer studies show that huge majorities of shoppers are looking for quality products throughout the store — up to 75% of shoppers say that is what they have in mind.

And, just to complicate things, many shoppers make buying decisions on the basis of whim or desire rather than more rational-seeming reasons.
Finally, retailers must market with this conflicting mandate in mind: shoppers still demand reasonable price points.

Now let’s return to the original issue of the decline of brand loyalty. A multitude of reasons have contributed to the phenomenon, but the longest-running factor is the migration of mass media toward niche media. There was a time when brand owners could blanket the consciousness of consumers with a few strategic ad buys in broadcast and print media. Those days are long gone.

Other factors include consumers’ growing awareness that food and health are intertwined. Consumers also are on constant lookout for new and attractively designed products; some 20% of shoppers seek new-product alternatives during every store trip. Neither of these factors cater to CPGs strong suit.

In the end, maybe it’s just as well that mass marketing is disappearing and consumers are more assertive about what products they want. Retailers using new media to cater to small groups of like-minded consumers or even individual consumers have in their hands the means to present to shoppers just what they’re seeking.

Conventional supermarket retailers can’t catch a break — even sometimes.

Conventional operators — Kroger, Safeway and the like — face a vast array of competition developing on all sides. That includes food purveyors such as deep discounters, mass merchants, membership clubs and restaurants, just to cite a few. Competition is always evolving with new strategies and new players, but one constant is that shoppers demand good value for low prices, and are quick to change stores if they think that’s not happening.

Regrettably for supermarkets, the battle for the low-price prize isn’t in their favor, and not just because of increased competition. The looming threat is really information: thanks to increasingly sophisticated online price-comparison websites and mobile apps, it’s getting easier for shoppers to take a look at several retailers’ price lineups before leaving home, or while in the supermarket.

Up to now, most online services compared prices among competing supermarkets in a defined geographical area so shoppers could make a convenient shopping choice or decide to patronize more than one local store in their quest for low prices.

Online Agentry

That may be changing. Not long ago, a new pricing model opened for business at online mysupermarket.com. That service offers side-by-side prices of individual products offered by eight retailers, each with substantial online fulfillment capability. They are: Amazon, Walmart, Target, Costco, Walgreens, diapers.com, soap.com and drugstore.com.

Mysupermarket displays several of the lowest-priced individual products available, grouped by category with each retailer’s prices displayed. Total-package prices are displayed along with unit prices to facilitate the comparison of dissimilar package sizes.

To use Mysupermarket, the shopper selects the item and retailer, presumably selecting the lowest price. The cost of the selected goods are then shown to the shopper, including the delivery fees. The shopper can then tweak the order to, say, take advantage of a certain retailer’s lower delivery fees. The shopper makes the final decision about which retailers are patronized, and after payment is tendered, the total order price is displayed, including shipping fees. Acting as an agent, Mysupermarket then dispatches the order; fulfillment and shipping are executed by the selected individual retailer.

Mysupermarket has been operating since 2006 in the U.K. and claims to attract four million monthly users there. Is this a big threat to brick-and-mortar supermarkets? We’ll see.

As innovative as it is, Mysupermarket isn’t terribly evolved, yet. Only commodities such as canned goods, snacks, cereal and paper are offered. No fresh product, including produce or milk, is available. Only national brands are listed; none of the frequently cheaper store brands can be found.

In short, Mysupermarket may be fine for consumers wanting to do some large-scale pantry loading, but it’s nowhere near sufficient to persuade anyone to give up the local supermarket. This is of some comfort to supermarkets, but it may be cold comfort. After all, we can only assume it’s just a question of time before conventional supermarkets and perishable-delivery trade channels will be folded into Mysupermarket’s mix of retailers. And if that doesn’t happen, a competitor will see the opportunity and pounce on it.

Spin to Win

The greater hazard to supermarkets may be the price listing featured by Mysupermarket. Shoppers can use the list to check to see if their favorite supermarket’s prices are out of line, even if they have no interest in using the site’s ordering capability.

Mysupermarket and similar price-comparison services are bound to accelerate the long-simmering race-to-the-price-bottom among supermarkets, and that sets up a strange paradox. The supermarket that wins the price race may reduce margins to the point that continuing to operate at all makes less and less sense. At what point will it become more profitable to cash out of the business and invest in the stock market with the proceeds?

Manufacturers don’t get off lightly either. As retailers press them for price discounts so they can stay in the game, what will happen to manufacturers’ ability to improve and innovate products?

Once again, the law of unintended consequences proves itself. As brick-and-mortar stores entered the world of online retailing in an effort to protect their business, they unwittingly helped promote the ubiquity of price information, opening a new front in the price wars. They’ve also handed quite a problem to their manufacturing partners.

Consumers love celebrities and are more than willing to fork over billions of dollars for things they endorse. But do you want them to land on your product when they fall from grace?

That multi-million dollar celebrity endorsement deal for your store’s organic clothing line is going gangbusters, with sales soaring 20% in just four weeks.

But then your squeaky clean, environmentally-active spokesman is caught in a sleazy hotel room wearing a sequined ball gown, with two underage prostitutes, a German shepherd and a bag full of crack cocaine. What now?

A little over the top? Maybe. But when it comes to celebrities nothing is impossible. As someone once said, “you pay your dime and take your chances.”

American Royalty

But we love our celebrities. No, let me amend that. We worship them! From Snooki to Jennifer Anniston they are American royalty—and we imbue them with superhuman status. We spend billions of dollars buying what they sell in hopes of looking like them, being like them and having what they have. Psychologists call it adaptive behavior.

And if we can’t, we take a Schadenfreude-fueled pleasure in watching them implode. That is, unless you’re a marketer, in which case you start looking for the morals clause in their contracts before their fall from grace crushes your product. The bigger they are, the harder they fall—and you don’t want to be underneath.

If you want to get technical, Moses and Jesus were probably the greatest celebrity spokesmen of all time. Think about it. They sold something no one could see and are still selling it thousands of years later. You think the George Foreman Grill will last that long?

But If you want something a little more modern, my money is on Nike’s deal with the always affable and consumer-friendly hoops icon Michael Jordan. And the development of Air Jordan has been one of the most lucrative partnerships in endorsement history.

Navigating Celebrity Minefields

But celebrity endorsements can also become a minefield, with manufacturers and retailers scrambling to avoid craters of bad publicity. Are these people worth the money and worry? Is there such a thing as a safe bet when it comes to endorsers? And at what point should a marketer cut and run?

You’d think companies would know the answers by now. The first recorded advertisement I found was in 1880 when the Mariani Wine Company was awarded a gold medal by the Vatican and immediately put the likeness of Pope Leo XIII on its labels. His Holiness was not amused and this was not a guy you wanted to piss off.

The 1930s and 1940s were the heyday of celebrity endorsements. Blonde bombshell Jean Harlow was washing her undies in Lux soap flakes and so did Fay Wray after King Kong carried her up the Empire State Building.

Tobacco companies defined American culture by paying millions of dollars to actors like Clark Gable, Joan Crawford, Gary Cooper and John Wayne to make cigarettes a must-have accessory for generations of movie-goers. Then you had Jimmy Stewart endorsing socks, Humphrey Bogart for Whitman’s Chocolates, and Wheaties became the “Breakfast of Champions” by putting pictures of guys like Yankee slugger Lou Gehrig on the box.

Keep going to the 1950s—when they first plopped me down in front of the TV babysitter—and you have Dinah Shore singing her heart out to “See the USA in your Chevrolet” which was sung with such gusto that my father switched allegiances from Dodge to Chevy.

The Kardashian Konundrum

Today we’re in the netherworld of people who are famous-for-being-famous like the Kardashians, whose on-camera pseudo-dramas and titillating tabloid tidbits have netted the clan $100 million in endorsement deals—almost enough to pay for their makeup. Kim, alone, can get an estimated $25,000 just for mentioning a product in one of her Tweets. I have to admit being an admirer of their methods. This is a family that really knows how to exploit the media, and a consuming public that can’t seem to get enough of them.

Then there’s the dark side. Some put Martha Stewart’s jail time for insider trading into this category. Personally, I think she just made a dumb move and was pilloried because of public sentiment about Wall Street excesses and corporate greed in general. Her business suffered but only briefly because Martha’s got better moves than Michael Jordan. Tiger Woods wasn’t as successful and lost an estimated $22 million in endorsements when the public found out he couldn’t keep his pants zipped around women that weren’t his wife. Time will tell whether he lost sponsors due to his morals or lousy play.

Things get far darker. What happens if your product is in the hands of O.J. Simpson, Lance Armstrong, Michael Jackson, or designer John Galliano whose anti-semitic tirades got him canned from Christian Dior in 2011 and shunned by the fashion industry.

The $-word

Celebrity chef Paula Deen’s multi- faceted empire unraveled pretty quickly after she admitted to using the “N” word” in the past. I suspect that time and a few more mea culpas will start to heal the wound. A white woman brought up in the deep South in the 1950s who used the “N” word” is not exactly an earth shattering revelation. Frankly, the disclosure of her having diabetes while pushing high-fat recipes probably did as much or more damage to her image.

As gambler friends have reminded me over and over, there’s no such thing as a sure thing. And in the age of social media there’s no such thing as managing a situation or putting a positive spin on bad PR. The old 24-hour news cycle where you could contain the story and all would blow over in a day, no longer exists.

Information, and misinformation, move at lightspeed with celebrity faux pas, crimes and misdemeanors going viral in seconds, instantly making them more of a liability than an asset. When something goes up on the Web it’s there forever. And so is the association with your brand.

This brings us back to the question of what to do when and if something happens to your larger-than-life spokesperson. To paraphrase Gilbert & Sullivan, “let the punishment fit the crime.” There are degrees of transgressions. Celebrities are people too. They make mistakes and the court of public opinion can be very forgiving. But in a hyper-competitive business environment are you willing to bank on it?

Maybe the answer is creating your own celebrities. The Geico gecko and Betty Crocker never got caught in compromising situations—at least not yet! But there have been rumors.

Len Lewis, is editorial director of Lewis Communications, Inc., a New York-based editorial planning, research and consulting firm. He is a contributor to several retail publications and trade groups in the U.S. and Europe and the author of The Trader Joe’s Adventure-Turning a Unique Approach to business into a Retail and Cultural Phenomenon. He has been a speaker and moderator at numerous industry events. He can be reached at lenlewis@optonline.net or via his website www.lenlewiscommunications.com.

In my last article, I addressed the importance of “individualizing” store growth plans based on each store’s metrics and specific DNA. Now, let’s discuss the next step in the process — looking further inside the “black box” to the individual associate’s performance to help each person reach his or her full potential as reliable, strong contributors to store growth.

Developing associates to be more productive has never been more important than right now! Retailers face increasing pressures on labor costs. The Affordable Care Act (ACA) forces companies to make hard decisions on full-time vs. part-time staff. Although many retailers remain committed to maintaining a core staff of full-timers, these higher costs must be offset somehow. Our answer is to systematically increase individual productivity. When associates learn and apply new skills to help more customers buy, and buy more, they dramatically offset increases in wages or benefits.

As we all know, retail boils down to customers and associates. Associates are the ultimate touch point — where their interactions with customers strongly influence the likelihood of hearing, “Yes, I’ll take it.” So what’s the best way to systematize individual performance improvement and develop more top sellers?

From my point of view, it starts by making sure you have three critical elements in place:

• Clear standards for behavior and productivity
• Measurement of individual performance
• Coaching of behaviors

• Clear Standards You Can SEE

Visualize that perfect customer experience — the one we hope that every customer gets when they interact with our associates. Is this vision clear in our mind? Can we communicate it to others? Even if we answered “yes,” we know that day-to-day execution is inconsistent, with some associates delivering it better than others. How do we fix it?

First, our desired customer experience needs to be translated into observable behavioral standards. Define “what right looks like” — the specific and measurable behaviors associates are expected to deliver to each customer, every day. When defined this way, everyone has a clear picture of what they should see and hear if behaviors are being demonstrated correctly and consistently on the retail floor.

Now think about our associates’ roles. Is each associate expected to interact the same way with customers? Should some roles require more and higher-quality interactions? Defining interaction behaviors for each level of associate — from entry level part-timers through the highest paid, most experienced full-time associates — is a more nuanced approach to setting standards.

• Linking Measures to Behaviors

Next, we need to measure individual performance because if we can’t measure it, we can’t manage to it. This measurement needs to be granular, directly reflecting the actual behaviors of each individual associate. After all, we can’t drive “individual” performance improvement if we can’t accurately see what an individual is doing well and what they need to improve!

But it’s not enough to just understand an associate’s sales results. We need insight into “how” the result was achieved and understand the “why” behind performance successes and shortfalls. We need transparency into each store and each shift, providing a clear view of what happened and why. From my experience, this is the only way we can truly isolate individual performance and determine the specific behavioral development opportunities for each individual in a consistent, scalable manner.

When we analyze granular data in this way, the results are eye-opening for our clients. Productivity among associates in the same role typically ranges between 300 to 500 percent from top to bottom based on annual productivity measures.

Let’s look at a simple example: Katie — a full-time sales associate — regularly achieves $450 in sales per hour. Meanwhile, Michelle — in the same role and working similar hours — achieves $150. Why such variation? Is this difference in productivity due to external factors (e.g., how busy the store is during their shifts) or something about the associates themselves?

With the right data matched against defined behavioral standards, managers can readily see these differences in performance. As a result, they can make better scheduling decisions and trade-offs between team members, understand the full potential of each associate’s time on the floor, and know how to develop associate skills to improve performance as mapped against specific, individual opportunities.

• Coaching Behaviors and Developing Associates

“We can’t expect our managers to coach behaviors. They’re operators!” We hear this often from retailers. However, we expect our managers to maintain merchandising standards by coaching, so why can’t they coach individuals on their behaviors? The answer is they can — when they have clear “observable” and “measurable” behavior standards so they know what to look for, along with measurement tools and learning materials to develop them.

Historically, “coaching behaviors” was difficult because managers didn’t have a line of sight into individual performance. Now that they can have this insight — with granular data that reflects individual behaviors — managers should be out of the back room and on the selling floor, observing customer interactions and effectively coaching associates.

Through ongoing coaching and development, associates learn to see the connection between the quality and frequency of their customer interactions and their resulting productivity. One associate put it well, “I never knew how big a difference my actions and behaviors could make!”

For the Katies and Michelles out there, we now have the right tools to identify and develop their individual strengths. As one manager put it, “I can finally look at two different team members and give them individualized, specific coaching that makes a difference.” It’s empowering for our managers and highly valuable for our associates, resulting in more sales, increased job satisfaction, and a reduction in turnover.

• Performance Improvement is a WIN, WIN, WIN!

When retailers appropriately recognize and reward their strongest performers, help marginal performers improve, and proactively facilitate the replacement of underperformers, they establish a powerful upward spiral of success. The result is greater employee engagement, more consistent customer experience delivery, and dramatically improved sales and profits.

As employee costs continue to go up and competitive pressures increase, retailers need to reevaluate the value they are getting from their huge annual expenditures on labor hours. In the past, it may have been enough to focus on cost containment aspects of labor. Going forward, retailers will need to focus on improving the productivity of their labor as well. When this is done in the ways outlined above, everybody — employees, managers, customers, and shareholders — is a winner.

Suburban Sprawl Gives Way to the Not-So-Mean Streets of the Big City

The Great American Dream isn’t dead, but it’s certainly on life support.

After decades of unprecedented growth, suburbia has been surpassed by the inner city. It is — if you’ll excuse an old saying from my quasi-hippie days — where the action is! And that action is attracting an incredibly broad demographic — everyone from young professionals and singles to baby boomers who don’t want to end up living in God’s waiting room.

We have already seen the beginning of an inner city building boom by retailers who want a piece of the action and are willing to embrace the idea that bigger is not necessarily better or practical. Those who are late to the party or ignore this new urbanization should have no trouble finding new careers in the healthcare or dogwalking industries.

But to understand where we’re going we have to look at where we’ve been.

“White Flight”

Most historians concede that suburban life really took off in the late 1940s and early 1950s with GIs returning after World War II. This was the beginning of the so-called “white flight” to bucolic suburban settings where the kiddies were safe, stay-at-home moms traded recipes and child rearing advice across white picket fences and all was right with the world — far from the mean streets of New York, Chicago, St. Louis and L.A.

Those left behind, however, witnessed urban decay, a descent into the heart of darkness where once-vibrant neighborhoods became ghost towns after dark, street crime proliferated, empty stores were boarded up canvases for graffiti and the scent of dinner from apartment windows was replaced by the stench of urine, garbage and despair.

I didn’t read all this in some urban history book. I lived it in New York throughout the 1970s when muggers could elude police by ducking around piles of uncollected garbage. But the pendulum, I’m happy to say, has swung in the other direction.

In places like New York, Atlanta, L.A. and points in between, we are seeing the reanimation of city life and a retail renaissance that has drawn the attention of everyone from Costco and Home Depot to Walmart and a new generation of small but competitive neighborhood stores.

The New Normal

A temporary phenomenon? I think not. I believe the financial crisis of 2008 was a major turning point — a time when the dream of home ownership became a nightmare of foreclosures or at least unattainable for younger people. If you want to add another label to your already overburdened lexicon, forget about Millennials, Gen X, or Gen Y, What we’re seeing is “Generation Rent.”

This isn’t the end of suburban sprawl. Many people still yearn for the pastoral life and the retail industry is happy to oblige. But remember the old saying that retail follows the rooftops. Increasingly, those rooftops are urban high-rises and the impact on people and business will be tremendous.

But reurbanization, gentrification or whatever you call it has its dark side. It often displaces people who have lived in some neighborhoods for generations. For instance, take the Chinatowns or other ethnic enclaves that have been fixtures in cities like New York, San Francisco and London. Young professionals and Millennials are paying rents that have forced out long time residents. Such is the price of urban renewal or, as the novelist and playwright James Baldwin called it, “Negro removal.”

On another front, legal and illegal immigrant populations — now 40 million strong across the country — are growing rapidly and moving from their traditional central-city locations to the inner suburbs or ”exurbs” in order to find affordable housing. They are creating cities within cities.

Chinese Checkers

Of course, if you want an extreme example of reurbanization gone wild just look at China. For decades, millions of people were practically ordered off the farms and into the cities to bolster the country’s insatiable demand for industrial workers. People happily obliged in order to get lucrative factory jobs that would lift them from abject poverty. Now the government is encouraging people to leave the cities for rural areas to alleviate overcrowding and re-populate the interior. It’s like Chinese checkers but with real Chinese.

Reurbanization is an economic issue here as well. Gas and commutation prices and real estate taxes are so high in some areas that you can literally save thousands of dollars annually by moving to the inner city. Besides people like the “walkability” factor and are tired of the sedentary lifestyle that requires one to own a car or two. .Additionally, the number of married Americans continues to dwindle or people are getting married later and having smaller families.

In fact, due to the above factors and lingering economic uncertainly that some call “the new normal,” the US Census Bureau and the Department of Housing and Urban Development (HUD) forecast that by 2025, only 10% of new households will have children. Put another way, only 2.6 million of the 27 million new households to be formed will have children.

Other sources have gone even further, stating that by 2025, families with children will account for only 25% of all US households. Basically, the days of cheap money, cheap mortgages, cheap gas and long-term economic stability are over. As Yale economist and Nobel Laureate Robert Shiller has noted: “the heyday of the exurbs may well be behind us.”

Foundations for Growth

I’m not sure I agree and the reasons may be of interest to retailers formulating expansion plans over the next few years. It’s the far fringe suburbs that are in jeopardy for the reasons previously stated. The exurbs, in my definition are the inner-ring suburbs — places outside of city centers but accessible by public transportation or even bike paths. I believe these areas will be the foundations that support economic growth in cities across America.

Herein lies the conundrum for retailers who have erected those monuments to consumerism called malls and supercenters. They aren’t obsolete. But how many more of these pleasure palaces can you build before reaching the saturation point or the point of no return on investment?

The entire concept of retailing needs a refresh to compete in space-starved urban environments.

Some say retailing is retailing no matter where you are. For years, the mantra was “bigger is better” But urban living means give and take — giving up space and taking less home. Trust me. In New York closet space is scarcer than a parking space.

From the retail perspective, building in a city like New York means dealing with uncompromising union rules, convoluted fire and electrical codes and erratic deliveries. Getting timely deliveries is like planning the Normandy invasion. Only Allied forces never had to deal with parking violations.

Nonetheless, retailers like Target, Walmart, Costco and others have seen the future and are focusing more closely on smaller urban formats.

Urbanization is not a fad or a simple trend. It is an inevitable, unstoppable force. Retail will follow the rooftops in the cities as they have done in the suburbs, creating new jobs and becoming one of the foundations of urban economic growth. This in turn will hopefully contribute to a stronger infrastructure and, in turn, a better quality of life for everyone.

Kind of makes you wonder. America’s Heartland may not be where you think it is.

I resent the fact that I can’t walk down a street in New York City without breathing in a potentially lethal amount of second-hand smoke. So imagine my satisfaction when, on February 5, CVS announced it was going to cease selling tobacco products at its 7,600 stores by October 1.

CVS Loses a Loyal Customer

I became a CVS customer about 30 years ago. I found the stores conveniently located, bright, clean, and easy to shop. The product assortment was excellent and well-priced, and the ExtraCare loyalty program, of which I was a charter member, was terrific. I started shopping there for my prescription and over-the-counter medications, health and beauty aids, and vitamins, eventually expanding to cereal, juice, sundries, holiday candy, and school supplies. As the years went on, I did a greater portion of our family shopping there, and each quarter I would receive a generous coupon of “extra bucks” — free money to spend in the store.

However, it had become increasingly difficult for me to reconcile my disdain for smoking with shopping at CVS. The shelves of cigarettes behind the cash registers looked to me like a giant wall of tobacco marketing. Late last year, I’d had enough. I switched my prescriptions to a local independent pharmacy that doesn’t sell tobacco. I began writing to CVS/Caremark asking them to stop selling cigarettes. And I started ordering health and beauty aids on Amazon, whose refusal to sell cigarettes is well-known.

One Small Step for CVS, One Giant Leap for Public Health

CVS/Caremark made its announcement with little fanfare. It issued a press release and posted short notices on its retail and corporate websites. “Ending the sale of cigarettes and tobacco products at CVS pharmacy is the right thing for us to do for our customers and our company to help people on their path to better health,” said CEO Larry J. Merlo. “Put simply, the sale of tobacco products is inconsistent with our purpose.” “We’ve got 26,000 pharmacists and nurse practitioners who are helping millions of patients each and every day,” continued Merlo. “They manage conditions like high blood pressure, high cholesterol, and diabetes — all conditions that are made worse by smoking.”

In short, dispensing healthcare advice right next to a rack of cigarettes for sale had become tantamount to holding a Weight Watcher’s meeting in a Dunkin’ Donuts: it just didn’t work anymore.

CVS’s purpose, of “helping people on their path toward better health” has driven its transformation from just another drug store chain selling magazines and gum to a central player in the US healthcare system. It has opened almost 800 in-store “Minute Clinics” where customers can get flu shots, diagnostic tests, and other medical treatments. It entered into a deal with medical products distributor Cardinal Health to form the largest generic drug sourcing operation in the US. It also acquired a specialty infusion business that would allow it to provide more pharmaceuticals through needles and catheters.

CVS Invests $2 Billion in You and Me?

So the company, after years of wrestling with the issue, finally decided to do the noble thing. It was so determined to enhance the health of Americans that it would take a $2 billion hit to sales, set an example for its competitors, and become the first US drugstore chain to kick the habit.

To which I said: yeah, right.

Don’t get me wrong. I’m supremely happy about the decision. And I’m sure health concerns were part of the retailer’s motivation. But I’m not delusional enough to believe that the move wasn’t also driven by some serious long-term strategic and financial reasoning.

It’s true that smoking is the leading cause of preventable death in the US. The Surgeon General estimates it kills over 480,000 Americans each year (in other words, one in five deaths in the country), and takes an average of 10 years off a smoker’s life.

But US companies have a fiduciary duty to their shareholders, not to public health initiatives. Although some firms have become positioned around values (Chick Fil-A won’t open on Sundays; Chipotle only uses fresh, local, responsibly-grown ingredients; and Warby Parker donates a pair of glasses to a developing community for every pair it sells), those initiatives relate more to brand positioning than to public welfare.

To make a drastic move that sends a large chunk of customers out the door to the competition would be irresponsible. It might backfire, and ultimately do little to curb smoking. CVS must have felt the timing was right to make such a bold move.

Transforming From Drug Store to Healthcare Leader

To shed more light on the decision, it’s helpful to look at some numbers and trends. Last year, CVS/Caremark sales totaled $127 billion, of which less than $2 billion was tobacco. Tobacco represents less than 2% of its revenue, and CVS has a less than 2% share of the $100 billion tobacco market in the US. Prescription sales are becoming a larger and more profitable part of its business. In December, the company predicted that its pharmacy benefits management (PBM) business, the “Caremark” part of CVS/Caremark, would grow more than three times faster than its retail business in 2014.

Cigarette sales and smoking are both on the decline in the US. Despite the rise in their stock prices, which have been buoyed by overseas sales growth, a hefty dividend, US sales at Altria, Reynolds and other companies allowed to sell a lethal product and make tons of money in the process have been declining. Altria reported a 2.6% drop in net sales for the fourth quarter of last year as domestic cigarette shipments plunged by almost 6%.

Adult smoking rates have dropped from 43% of Americans in 1965 to 18% in 2014, according to the Centers for Disease Control. The American Lung Association and others predict that smoking will decline to under 10% of the adult population by 2024. Despite a temporary uptick during this Great Recession, smoking among young people has continued to drop, with fewer teens starting the habit.

The Cigarette Market

Like many commodities, cigarette sales are an increasingly competitive market. Selling cigarettes profitably has become increasingly difficult. The dollar stores have joined convenience stores as a top distribution channel and, along with warehouse club Costco, are putting tremendous downward pressure on prices. According to the Wall Street Journal, drug stores only account for 16% of tobacco sales. Many in the industry feel that CVS’s tobacco sales were slowing anyway, and would continue to be a drag on sales and earnings.

The healthcare market, on the other hand, is growing rapidly, and presenting huge upside potential. Aetna, the large healthcare insurer, predicted that total healthcare spending in the US would grow from $2.6 trillion in 2010 to $4.8 trillion in 2012. In an investor day presentation last December, CVS put the total pharmacy market potential at $340 billion, compared to $15 billion for front-end retail and over-the-counter products. The company expects the country’s shortage of primary care physicians to increase to 45,000 by 2020, resulting in skyrocketing demand for its Minute Clinic services.

Long term, then, it’s a whole lot more profitable to be in bed with Big Pharma than with Big Tobacco. CVS’s move to cease selling cigarettes is allowing the company to trade a small, underperforming part of its mix away for the potential to greatly grow sales and profits, and to get a lot of goodwill in the process.

The decision, which will inevitably be followed by others, will help intensify the decline in smoking, which will also help solidify CVS’s leadership position in the industry. It’s already been demonstrated that when cigarettes suddenly become more expensive, or when smoking or buying cigarettes becomes more inconvenient, smokers tend to quit.

I’ve moved my prescriptions back to CVS. My return to the store after three months away was accompanied by huzzahs, high-fives, and a $236.76 transaction.

What’s the next move in CVS’s transformation into the good-for-you store? Will it stop selling sugary sodas, infomercial “nutritional” supplements and dangerous diet pills?

One thing at a time.

On the corner of 7th Avenue and 12th Street in Manhattan is a fruit and vegetable cart. Others just like it are scattered across New York City. They tend to be run by hardworking immigrants willing to stand up all day and put up with whatever weather comes their way. I’ve passed this stand thousands of times as I walk to and from work. Last fall, I stopped for the first time noticing that the same blueberries and blackberries that have now become my breakfast staples were cheaper than in the grocery store down the street; the same box and brand, but 25% less.

In retrospect, it makes perfect sense since my grocery store pays more in rent than the street vendor does. It wasn’t just that the berries were cheaper; when I actually compared the other fruit and vegetable prices, everything else was too. I started buying avocados, eggplant, onions and melons. Not only was it cheaper, but it was more convenient. Yes the selection was narrow, but it met my needs. The vendor was friendly, and his name was Ali.

In my first transaction, I realized that the sales protocols were different. I understand the self-service routine of the farmer’s market where you pick over and select what you want to buy in the midst of other frenzied Saturday morning customers. Ali, on the other hand, rarely takes care of more than one customer at a time. He doesn’t like you touching before you buy. He curates your purchase for you. He asks when you are going to eat something, what you are making, and will make suggestions; plus he will not sell you anything that isn’t ripe enough.

It is always a polite exchange, and even when I don’t stop by, I get a friendly nod of recognition. It has become one my beacons of humanity as I move through my neighborhood. I haven’t stopped going to the grocery store or the farmer’s market, but Ali has received a piece of my weekly budget.

The grocery industry is in trouble.

Everybody else is targeting grocery customers. Sales in the grocery ‘Center Store’ for non-fresh food products have declined with each passing year. The convenience store business has done a good job overcoming the perception of higher prices and lower quality. Many of the major drug chains have expanded their food offerings. Some specialize in single-serve and expanded dietetic offerings. Dollar Store and mass merchants have chomped off pieces of this business as well. Costco, Trader Joe’s and Aldi have taken their bits, too. Ask Millennials where they do their shopping for food and household supplies and you’ll get a list of eclectic locations, on and offline.

It isn’t just the chains and alternative channels that are offering new options. The Farmer’s Market movement, which 10 years ago had a 50% failure rate, has stabilized with some 8000 markets across the country. Project for Public Spaces, a non-profit in New York City, runs a training program for farmer’s market managers. The markets themselves have improved, as small farmers have learned more about the customers they serve. My market in Abington Square in the West Village on Saturday mornings has some 15 stalls, with everything from bread, veggies and fruit, to artisanal cheeses and mushrooms. The farmer’s market is fun and interactive. Even CSA, community supported agriculture, has made its inroads into big cities.

And it isn’t just North America where the grocery store is under assault.

Across many emerging economies, organized retail started with grocery and hypermarkets. In Argentina and Brazil, modern supermarkets took fewer than 10 years to dominate food distribution; they offered hygiene, safe parking lots and international brands. But even in South America, traditional farmer’s markets have been on the upsurge. They have looked at the grocery store and improved their merchandising. Often, vegetables and fruit are pre-bagged and simply priced. The transaction is quick and easy. Many of traditional street markets are immediately adjacent to public transportation. It’s a new version of grab-and-go. Just like Ali’s fruit stand for me, it’s convenient.

The big, traditional city-center markets have also cleaned up their act and added value offerings like smoked meats, small-batch pickling, and even “fresh” or “new” wine sold by the jug. In spite of challenged parking and security concerns, they have become a destination, almost like the shopping mall was 20 years ago, but with a new sense of authentic charm, with tempting smells and sounds.

In the face of so much competition, where is American Grocery Store innovation? In mainstream America, we have no true national chains. Neither Kroger nor Walmart have the same presence as say, Tesco in Britain, or Carrefour in France. Both Walmart and Kroger have had their butts kicked as they have tried to invade markets with strong regional players, like HEB in Texas, Wegman’s in upstate New York, and Meier’s the Midwest.

The big regional American players have built superstores that duplicate the European hypermarkets. All of them have aggressively built private label brands and localized their mix of offerings. Many have the advantage of being privately held, which has sheltered them from vapid shareholders looking at quarterly results. The regional chains seem to operate more consistently store to store, unlike Walmart and Kroger where the strength of the individual store can vary greatly. Part of the success of Whole Foods is that it functions like a series of regional businesses. Company headquarters may be in Austin, but the regional offices do much of their own buying and control their own destinies.

What is the future of grocery?

About 80% of our weekly purchases are routine. After a certain age, we have landed on the brands of juice, butter, yogurt and mustard we prefer. We have settled into our choice of laundry soap and bottled water. Yes, we may vary our purchases by season or occasion, or buy on deal, but our basic brand palate remains the same. But what if our kitchens could order for us? What if replacement was driven not by highly-merchandised shelf presence, but by storage efficiencies and easy recycling? I am not bullish on the long-term future of the supermarket, as we know it, along with the consumer packaged goods companies that rely on them for distribution. There is change streaming into the pipeline. We like the experience of buying fruits and vegetables, there is some sensual pleasure to it; but walking down the laundry aisle or staring into the milk cold case? These commodity products could easily be replenished automatically through smart appliances that interface with online grocery orders.

Years ago at a retail conference in Istanbul, I heard a street vendor talk about how he organized his offerings. He knew which way the eye scanned his cart and the order in which a buyer thought about selecting produce; lettuce is always bought first, then the tomatoes and cucumber. He talked about sun angles and how he repositions his cart from morning to afternoon. It was a brilliant, simple string of merchant logic.

The unstoppable marketing professional I am, I tried last fall to help Ali rethink his signage. He smiled and took me for a Village idiot. He is just fine with his simple approach. And I predict I’m going to short A&P and Kroger over the long term. Ali is going to do just fine.

The media at large has publicly exposed enough of the “dirty” part of this “jokester” that I don’t need to pile on more. Although it might be a more titillating read to add more dirt to the pile, I’ll just sign off on his disgusting behavior during his tenure as CEO of American Apparel by saying it’s equally disgusting to me that the board didn’t kick his butt out of there a long time ago. It never ceases to amaze me that too many boards are still weak on proper governance in protecting the shareholders from the egregious, deleterious behavior of miscreant CEO’s. And American Apparel’s board seems to be one of those.

But for the moment, let’s forget about Charney’s sexual proclivities, including allegations of abuse. Many top executives have been caught with their pants down, so to speak, albeit not all as flagrantly as Charney. Many were fired, yet many others have just had their dalliances swept under the rug.

Charney’s real dirty joke is that he is a business joke of the tallest order.

A Business Joke

Reluctantly, I feel it’s necessary to acknowledge Charney’s entrepreneurial accomplishment in creating a brand that hooked up with (no pun intended) young urban consumers in a sensuously charged way. It took off and spread like wildfire. It was at that moment in time when Charney should have removed himself from running the business and hired a CEO with management, operating and leadership credentials. Entrepreneurs, by definition, are creators and most often are not capable of managing and profitably growing a business. Charney is no exception.

Not only has he proven to be an inept CEO, given the continuing decline of the business (propped up by one loan after another), his maniacal micromanagement of every aspect of the operations has decimated whatever semblance of an organization there might once have been. Worse, his “everyone reports to Dov” insanity has driven off all of the skilled executives he briefly had. One example of his warped behavior was reported in a New York Times op-ed column by Joe Nocera: “In 2007, after the company went public and he had to bring in a chief financial officer, he told The Wall Street Journal that the man he hired was a ‘complete loser,’ which of course caused the man to quit.”

Anecdotally, anonymous observers provide a disturbing picture of his dysfunctional, really whacky, abusive management style and hodge-podge approach to a retail business. Here’s one observation: “There is no retail management for the 250 or so stores. Everyone reports to Dov, from the assistant store manager in Cincinnati, to the visual display assistant. Dov conducts a meeting generally from his bedroom every week. He has every store call in. Seoul Korea calls in. Santa Barbara calls in. Berlin calls in. Lots of time differences … and languages … but the one constant is that Dov does all the talking. If business is bad in a store, it becomes a weather report by Dov: ‘Toronto, your business was terrible! it rained (or snowed, or was hot).’ …Any reason for slow business was due to the weather. And the solution was always the same: ‘Toronto, if your business doesn’t improve next week I’m coming up there and cutting off your (expletive).’

“There is no allocation department. That area is the lifeblood of specialty retail. So, instead of an algorithm for allocating, it is all Dov: ‘Send 5000 to the stores! Its gonna get cold soon so we need to send a lot of jackets to the stores!’ Product development is all done by Dov, as well. Nail polish is made in downtown LA. It is not FDA approved, and several bottles have exploded.”

Another anonymous comment: “Dov’s favorite lines to his employees: ‘I’m gonna make you bleed. I’m gonna break you in half. You’re a fraud.’”  It is all Dov, all the time. There is no one else running the store.

Another blatant example of abusive behavior towards his employees, and one for which Charney is being sued, was reported in a recent Bloomberg Businessweek article: “In November 2012, Michael Bumblis, a store manager in Malibu, had accused Charney of rubbing dirt in his face because Charney was displeased with the store’s condition and performance. Bumblis’s lawyer, Ilan Heimanson, says he informed the company of evidence of the confrontation beyond the accounts of witnesses. The stores had security cameras, and Bumblis had access to the video. Among the details in the complaint was a phone call Charney had supposedly made to Bumblis about his store’s poor sales. ‘Get your f-?-?-ing s-?-?- together, fag. Where is your f-?-?-ing creativity? Get some f-?-?-ing girls in bikinis to stand on PCH [Pacific Coast Highway] and have them wave a f-?-?-ing American flag. Are you a fag? Do you not want to see girls in bikinis? Are you banging that girl you were with in Vegas? What’s her name?’ American Apparel’s lawyer said in a filing that Bumblis was a poor-performing employee who was dismissed and that his story is ‘entirely contrived or wildly exaggerated.’

The article went on to say: “That case could bring other complications. Heimanson asked a Los Angeles court to try the case rather than send it to confidential arbitration, as American Apparel requires in all such matters. The judge ruled that the documents all American Apparel employees have to sign are ‘unconscionable,’ according to legal filings. The agreements forbid workers from filing claims against the company, talking about the company, or sharing any information about the personal life of the CEO. If they do, they risk being sued for $1 million. The company is appealing the ruling. If it stands, ‘we’ll be able to shine sunlight on the backroom dealings of American Apparel and Dov Charney,’ says Heimanson.”

The Unravelling

Following its IPO in 2007, Charney put his ambitions on steroids along with his chaotic, micro-managing behavior. This combination of a publicly traded company being run by an overzealous entrepreneur with zero management skills with a looming recession was bound to become a train wreck. A tipping point likely came in 2009 when an immigration audit forced him to lay off over half of his illegal factory workers. The subsequent disruptions to the business while replacement workers were hired and trained just exacerbated the declining business.

Between 2009 and 2013, the business consistently hemorrhaged money in addition to taking on costly debt, ballooning from under $100 million to around $250 million. In the last three fiscal years, American Apparel lost $270 million and its stock traded for under 50 cents earlier this year, down from $15 at the end of 2007.

In 2011, Lion Capital, one of American Apparel’s major lenders and a Charney supporter at the time, urged Charney to hire an experienced C-level apparel executive to stabilize the business, reorganize the infrastructure and operating functions, and to strategically put the business on a profitable growth trajectory.

Obviously in an attempt to protect their interests and ward off a potential disaster, Lion Capital reached out to Marty Staff, former successful CEO of JA Apparel (owner of the Joseph Abboud brand) and previously, CEO of Hugo Boss. In my opinion, Staff was precisely what Charney needed to turn the business around.

It was a doomed relationship from the start. First of all, Charney gave Staff the title of President of Business Development. And as I wrote in an article for The Robin Report upon Staff’s departure after only six months on the job, (American Apparel: A Last Chance Lost) that title didn’t even imply operating authority. Charney just continued to micromanage every part of the business, and Staff got frustrated and left. This is not unlike the turnover of many other capable operating executives who wouldn’t put up with the tumultuous and chaotic working environment where it was impossible for them to develop and implement sound strategies for achieving growth.

I also wrote in that October, 2011 article: “Quite frankly, it amazes me that as CEO of a publicly owned company, given American Apparel’s financial condition and his questionable and storied behavior, Charney still has a job.”

Indeed, Staff was a “last chance lost” as American Apparel continues its downward spiral.

Enter The Money Guys

Now the money guys are circling. Lion Capital is demanding payment of its $10 million loan at 20% interest. Following his ouster by the Board, Charney requested New York investment firm Standard General to do a financial deal, which he hopes will be a mechanism to reinsert himself back into the business. And I guess Standard General believes there’s still a viable business that if turned around, could end up being a smart investment.
Standard General’s deal with Charney provides an immediate infusion of $25 million to shore up American Apparel’s financial mess, including repayment of the Lion Capital loan. Charney gets to keep a 43% share in the company but relinquishes his ownership control to Standard General. His fate for returning in any capacity to American Apparel, including reinstatement to the Board, is pending an investigation into his conduct and alleged wrongdoings. The deal also includes a commitment to continue manufacturing the apparel in the US, which has been a strong marketing position for the brand from its inception. The Board will be recast and, amazingly, Charney will be a paid consultant during the investigation period.

My Advice: Dump Charney

My final perspective amidst the cacophony of the media storm around this dirty business and dirty joke is one of disgust. Lion Capital and Standard General as well as all other funding sources that have thrown money down this cesspool ought to have their heads examined. I’ve been around long enough to know that most investors, no matter how deeply they analyze companies, don’t have a clue as to how businesses are run. The “numbers, the numbers, the “numbers” is their war cry. At the end of the day, it’s not about making a better America, about creating real value, or about improving the economy. It’s about making money.

Okay so be it. We live in a capitalistic economy. But from day one when Dov Charney luckily hit on a hot idea, all anybody with any common sense had to conclude was that it was not ever a question of whether American Apparel would collapse under his ineptness. It was only a question of when.
And now that the end is near, it’s equally incredible to me that Charney is being kept on on as a consultant, or even as janitor, as he so flippantly suggested to the press. Whatever his capacity, he has demonstrated from American Apparel’s opening day that he is not only an abusive micromanager, but also incapable of sustaining profitable growth.

Regardless of the outcome of the current investigation, if the American Apparel brand has any chance of being turned around, I advise the Board: Open your eyes and dump Dov Charney. Now.

In the land of the brand, the Holy Grail, surely, is building a brand that’s universally known and is in constant mention by consumers.

Or is it?

There’s such a thing as too much familiarity. There are more than a few instances of brand owners losing legal possession of their own brand because they became generic descriptors of the product, sometimes with dire consequences for its erstwhile owner.

Now, in an interesting lawsuit filed in US district court of the Southern District of New York, Tiffany is in legal battle with membership retailer Costco about the appropriation of the Tiffany name by Costco. There’s some reason to believe that while the facts would seem to strongly favor Tiffany & Co, it may not be the victor, at least not in a narrow legal sense.

But first, let’s take a look at how brands can evolve into popular vernacular, to the degree that their ownership is snatched from their creators.

Among a number of examples of brands lost in legal action are thermos, escalator, linoleum, videotape, and yo-yo. In the last instance, the Duncan Toys Co. went bankrupt when it lost control of its trademark. Also in the litany of lost brands is aspirin. That brand was once owned by Bayer, a German company, but it was awarded as war spoil after World War I. So it became a generic term in the US, the UK and France. In other parts of the world, Bayer still defends the use of its Aspirin brand. Curiously, Bayer also lost the right to its Heroin brand under the same circumstances. It hasn’t seen fit to defend it. Yet.

Numerous other brands are teetering perilously close to becoming generic terms, brands such as Scotch Tape, AstroTurf, Jacuzzi, Band-Aid, Frisbee, Hoover, Taser and Rollerblade.

To be sure, prudent brand owners take a range of actions to defend ownership of their brands. Milder steps include issuing letters to offenders, such as publications, reminding editors about trade names. Owners are particularly sensitive to use of their brand name spelled without a capital letter. As past editor of a major trade publication, I received countless letters from brand owners reminding me about correct usage, even when no error had been committed. Brands often ran paid ads to remind the trade who owned a brand. These activities can be seen as setting the stage for a lawsuit, should one be required.

Of course, lawsuits are filed, even for comparatively minor offenses. For instance, Faberge has sued the owner of a restaurant in Brooklyn called “Faberge.” The restaurant also appropriated Faberge’s purple color motif and has menu items such as “St. Peter’s Kabob” that are evocative of Faberge’s Russian heritage.

This brings us to the matter of Tiffany and Costco. For many years, Costco sold a particular type of engagement ring as a “Tiffany ring.” When this came to the attention of Tiffany, it filed suit. It would seem that Tiffany should be on firm ground, especially since, like Apple, it controls the entire process from product and package design, to manufacturing and to its own retail stores. Maybe not. Costco argued that the particular Tiffany ring setting featuring a pronged diamond setting, which Tiffany first produced in the 19th century, had devolved to become a universal descriptor and wasn’t really Tiffany’s to control any more. Costco said its own ring vendor and other retailers follow the same practice.

In an early ruling in the ongoing court battle concerning Costco’s claims, a judge said “a genuine factual dispute” exists about whether the Tiffany trademark has taken on a generic meaning in the minds of consumers. That could be very bad news for Tiffany and, by extension, other brands.

Despite that encouragement, Costco subsequently discontinued use of the Tiffany name to describe the ring and has offered refunds to any consumer claiming to be deceived by the ring’s description, possibly to contain the size of the judgment should it lose.

Indeed, Tiffany continues to press its lawsuit by seeking a court order that forbids Costco from using its brand again and — in a bit of overreach — wants disgorgement of a portion of all of Costco’s profit, even profit from the sale of products totally unrelated to jewelry, such as gasoline, food, clothing and memberships.

Doubtless, Tiffany wants to put the trade on notice that there’s a high price to be paid for seizing its brand.

As we look out years into the future, it’s possible to see now-solid brands that might slip into generic usage; brands such as Coca Cola (or Coke), Google, Twitter and maybe even Apple’s iPhone. Apple is fortunate that no one calls computers “Apples” in a broad sense.

How bad is this news for brands? It’s very bad since for many companies, its brand is by far its most valuable asset. Loss of exclusive brand ownership spells doom for many companies. For Tiffany, loss of the Costco lawsuit could render its Tiffany engagement ring all but worthless. Look for brand owners to remain dedicated to the fight for the right to their own brands. After all, as we’ve seen in The Robin Report, brands are in enough trouble already.