HIGHLIGHTS

RETAIL – PRICE STRATEGIES

Asda to cut petrol prices again
Supermarket chain Asda has unveiled a fresh round of petrol price reductions - cutting the cost of a litre by 1p. Asda said that from Wednesday the price of unleaded petrol and diesel at its UK forecourts would be 78.9p a litre.
Britain's second biggest grocer cut petrol prices by 2p a litre last Thursday, prompting a wave of similar reductions by rivals.
Asda said its decision had been made possible by the falling cost of oil on the world market.
Petrol pledge Paul Mancey, Asda's trading director, said: "We all had to pay higher prices when costs went up and we should all be paying less now. Our customers, quite rightly, expect nothing less."
The company operates 150 petrol stations across the UK.
Responding to Asda's announcement, supermarket rival Sainsbury's said it would also be looking to cut prices.
A spokeswoman for the firm said: "In line with our policy of selling the cheapest petrol where we trade, we will be undercutting Asda again."
Source; BBC News, June 04
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BEVERAGE SECTOR – MARKETING

Coke's water bomb
Coca Cola is not a company known for making too many mistakes. Its marketing is slick and Coke is the best-selling soft drink in the world. Few would have predicted that Coke's attempt to launch its Dasani bottled water brand in the UK would prove to be a disaster for such an experienced company.

Yet, in March this year, only five weeks after its multi million pound UK launch, red-faced Coke executives were forced to take Dasani off the shelves in the UK.
What went wrong?
Dasani was launched in the USA in 1999 as a bottled, purified water, and had become a huge success there. Taking that same formula and repeating it for the UK market must have looked like a breeze, but that wasn't quite how it turned out.
Unlike most of the bottled water sold in British petrol stations and supermarkets Dasani hadn't come from alpine glaciers or trickled out of a precious natural spring - it had come out of the local tap. True, the company put it through a purification process and added mineral salts, but the source was still tap water.
At its launch on 10 February, some people in the drinks industry already knew Dasani's big "secret". Simon Mowbray of The Grocer magazine had mentioned the source of the water in an article, but didn't think anyone else would pick up on it. Now, he sees it more graphically. "It was a bomb waiting to go off," he says.

The Real Sting
At first, the launch seemed to have go well, and Coke executives thought the public would respond to their new product with its distinctive blue packaging. But everything changed when the Press Association reporter Graham Hiscott saw the reference in the Grocer magazine to the real source of Dasani.
The following day, the story was splashed across the daily papers. Headlines like "The Real Sting" a play on Coke's "The Real Thing" slogan and the more obvious "Coke sells tap water for 95p" could hardly have been worse for Coke and their new baby.
The tabloids drew on the uncanny parallel with the episode in the BBC sitcom "Only Fools and Horses", in which Del Boy and Rodney take ordinary tap water from their Peckham flat and bottle it up to sell as Peckham Spring. The irony couldn't have been worse. Dasani was sourced and bottled in a factory in Sidcup, just a few miles down the road from Peckham! The tabloids continued their onslaught. "Are they taking us for plonkers!" yelled the Daily Star.

Contaminated
Despite the pages of negative press coverage, Coke persisted with Dasani. Executives protested that they had been misunderstood and that the drink was not just tap water but in fact the result of a highly sophisticated process to create the purest drinking water you can get. As far as Coke were concerned, Dasani was a lifestyle drink, a drink you would want to be seen with, the source was all but irrelevant.
Then on Thursday 18 March there was even worse news.
Something had gone wrong at the Dasani factory and a bad batch of minerals had contaminated the water production with a potentially carcinogenic bromate. Coke admitted defeat. Immediately they withdrew all 500,000 bottles of Dasani in circulation. In just five weeks, Dasani had come and gone, arguably providing more in terms of entertainment than refreshment.
The cost to Coke is thought to run into the millions, but behind the financial loss is the possibility of an even more serious problem. After years of heady growth, sales of Coca-Cola are beginning to flatten out. Bottled water, by contrast, is now the fastest-growing of the soft drinks and Coke still need a successful bottled water for the UK and the European market.
An organisation the size of Coke, with the marketing strength that has made it the biggest drinks company in the world, is unlikely to give up easily. Astonishingly, Dasani could make a comeback one day. Asked whether the company has any plans to bring Dasani back, Patricia McNamara, New Beverages Director at coca cola GB says coyly, "we like to think it's a definite maybe".
Source; BBC Money Programme, June 04
Write; by Bill Garrett
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RETAIL – M&A

El Corte Ingles denies offer for Ahold's Spanish assets
Spanish retailer El Corte Ingles has denied bidding for the Spanish operations of Dutch retail giant Ahold.
"El Corte Ingles hasn't made any offer on the Dutch group Ahold," a company spokeswoman was quoted by Dow Jones International News as saying.
Earlier this week a report in a Spanish newspaper said that El Corte Ingles had made an offer of €480m (US$579.8m) for the assets, which include more than 600 stores.
Ahold, which has made several major divestments in the last year as it seeks to cut debt in the wake of an accounting scandal, has said it hopes to sell its Spanish operations by the end of the year.
Source; JF, June 04
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SUPERMARKET SECTOR – INDONESIA MARKET

Hero supermarket’s domestic expansion
PT Hero Supermarket said today it plans to build four new hypermarkets this year to boost sales. Hero also plan to build another 16 pharmaceutical shops and small-size convenience stores. The company will spend around 200bn rupiah on its business expansion plans. In 2003, the company's sales rose 24% to IDR3trn. However, falling margins at supermarkets reduced the retailer's operating income to IDR43bn from IDR48bn. The company closed some loss-making shops last year and opened new ones. The new shops include several hypermarkets, pharmacies, and convenience stores.
Write; by LuisB
Date; June 04
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SUPERMARKET SECTOR - JAPAN MARKET

Japanese supermarket chains post 2003 revenue growth
A total of 30 listed supermarket chains in Japan posted year-on-year growth in revenue for the fiscal 2003/2004, ending March 31, 2004, the results of a survey carried out by Japanese credit research company Teikoku Databank Ltd, showed today. The survey was carried out among 51 listed supermarket chain operators with an annual revenue of over 30bn yen each. The overall revenue of the 30 supermarket chains marked an 8.4% year-on-year increase in fiscal 2003/04. Japanese supermarket chain operator Aeon Co topped the sales volume ranking, followed closely by Ito-Yokado. Supermarket chain operators Daiei, Uny and Seiyu were also among the leading retailers in terms of sales in fiscal 2003/04.
Source;Teikoku Databank, June 04
Write; by LuisB
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SUPERMARKET - AUSTRALIA MARKET

Woolworths struggles amid fuel competition
Woolworths is believed to be facing another set of soft supermarket sales numbers in the fourth quarter, as it struggles against a revived Coles Myer and a slow rollout of its linked Caltex petrol sites. One market source said Woolworths was "hurting" because of the slow rollout of its petrol offer and that sales were "soft" because of competition from the fully realised Coles-Shell petrol alliance. The speculation follows a 4.9% rise in third-quarter supermarket sales.

After that result in April, chief executive Roger Corbett said improvements would come in the fourth quarter when the Caltex petrol agreement was finalised. The final agreement was signed two weeks later and the more than 90 Caltex sites were expected to be converted "immediately". At the time, Caltex had converted 41 of more than 130 sites slated for the alliance. A spokesman declined to comment on the sales figures. But he said that since the agreement was finalised, Woolworths had co-branded about 40 of its 310 Petrol Plus sites to Caltex, and was aiming to convert between 10 and 12 Petrol Plus sites a week.
Source; Local economical sources, June 04
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RETAIL – COMPANY OVERVIEW

7-Eleven U.S. May Merchandise Sales Up
Convenience store operator 7-Eleven Inc. said on Wednesday that merchandise sales in U.S. stores open at least a year rose 7.8 percent in May.
Total sales rose 16.8 percent to $1.09 billion in the month, helped by a 37.6 percent rise in gasoline sales.
The average price of gasoline was $2.01 in May, up from $1.53 a year earlier, the company said.
Write; by LuisB, June 04
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RETAIL – GROCERY

Deal$ Increasing Grocery Selection
Deal$-Nothing Over A Dollar is expanding its grocery selection at 21 of its area stores, according to a report in the St. Louis Business Journal.
The expanded selection will include private label and national branded frozen foods, dairy products, packaged meats, and produce all at $1 or less.
According to the story, the company said the expansion is part of its commitment to offer "extreme value" to customers, providing convenience and savings by combining general merchandise and groceries.
Deal$ is a division of St. Louis-based Save-A-Lot, which is in turn a division of Eden Prairie, Minn.- based Supervalu and runs 1,150 grocery stores in 36 states, generating more than $4 billion in annual chainwide retail sales.
Source; St. Louis Business Journal, June 04
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FOCUS

ECONOMY – LATIN AMERICA

Latin America's Stunted Growth
Latin America is headed toward an unhappy anniversary: 25 years of failed attempts at economic growth. The world has no comparable period of failure anywhere else in at least the last century, including the Great Depression. From 1960 to 1979, these economies grew at a decent rate, chalking up an 80% gain in income per person. In spite of Latin America having the world's worst inequality in income distribution, this was enough to substantially improve living standards for the vast majority of the population, including most of the poor.
But then something went wrong, and it has as much to do with policies advocated by the "Washington consensus." From 1980 to 1999, per-capita income grew by only 11%. The 1980s were known as Latin America's "lost decade," when the region's income per person actually fell. The 1990s produced only modest growth, and the first decade of the 21st century is now looking like it might also count itself among the missing. Using the International Monetary Fund's [IMF] projections for 2004, the first half of the new decade [2000-04] shows a gain of about 1% for the whole five years.

Mexico’s malaise; Amazing, isn't it? One would think that after 25 years of reforms - opening up to international trade and investment, privatization of state-owned enterprises, enforcing budget and monetary discipline, and other measures that have caused quite a bit of pain and dislocation to the region's citizens - these countries would have something to show for it.
The fact that this problem has received so little attention is even more astounding. Remember, 2004 is also NAFTA's 10th anniversary. And while a number of press reports have hailed the huge increase in trade and foreign direct investment that Mexico has experienced over the last decade, few mentioned how low the growth rate has been.
This is comparable to evaluating a professional baseball player without including his batting average. He may be a great fielder and a good team player, but if he bats .125, can he make it in the major leagues? That's a fair analogy to Mexico's economic performance during the NAFTA decade: less then 1% annual growth in gross domestic product [GDP] per person - not even a quarter of what was achieved in the decades prior to 1980.

Economic growth - not tariff reduction or a balanced budget - is what determines whether people have a higher standard of living than that of their parents or grandparents. And when the economy grows, it's at least possible to direct a larger share of the new income and wealth to people who are less well off. When the economy doesn't grow, it means that any gains at the bottom must come at the expense of someone else.

Lackluster at best; When pressed, defenders of the "Washington consensus" reforms say we really shouldn't count the 1980s, since there was a lot of hangover from over-borrowing during the 1970s. They also say the growth in prior decades was unsustainable. But Latin America had decent growth for 30 years, going back to the 1950s, so the idea that it isn't sustainable is hard to fathom. South Korea maintained a per-capita growth rate averaging more than 6% annually - much higher than Latin America at its best - for four decades. And whatever Latin policy mistakes were made in the 1970s, it's a bit of a reach to keep blaming them for economic failure into the 21st century.
And it's fair to use 1980 as a dividing line for looking at Latin America's economic performance, because 1979 was a business-cycle peak for the U.S., which is the destination for about two-thirds of Latin America's exports. But even if we restrict our focus to the 1990s, the region's growth performance was lackluster: just 14% for the decade. If this is the best that can be done while the U.S. is enjoying its longest-running economic expansion in history, something is very wrong.
It's not hard to see what that might be. Look at Brazil, which once had one of the fastest-growing economies in the world. From 1960-79, its per-capita income grew by 160%. If that growth had continued, the country would today have living standards approaching those of Western Europe. But it has grown at about one-eighth that rate since 1980. And in 2003, the Brazilian economy shrank.

Wrong prescription; Yet Brazil's central bank is currently keeping short-term interest rates at 16%. With inflation running at about 6%, this means a real interest rate of more than 10%. That's terribly high for an economy struggling to come out of a recession. For comparison, the U.S. Federal Reserve has kept short-term rates at 1% more than two years into an economic recovery. Imagine if it had chosen 11% or 12% instead. There wouldn't have been much of a market for home mortgages or much chance of an economic recovery.
Brazil has also upped its primary budget surplus to 4.25% of GDP. Again, this is the opposite of what the U.S. does in response to a slow economy. America went from a budget surplus of 2% of GDP to a deficit of more than 4% - a stimulus of more than $6 trillion dollars - since the economy slowed down in 2001.

These kinds of procyclical economic policies are often promoted by the IMF, which is dominated by the Treasury Dept., and its partner, the World Bank. Nobel Prize-winning economist Joseph Stiglitz likes to joke that the IMF made a mathematical "sign error" on the blackboard back in the 1950s - writing a minus instead of a plus - and hasn't corrected it yet.
More independence and departures from the "Washington consensus" will be needed if Latin America is to resume a normal growth path. And they probably will be forthcoming. But it would help if more policymakers north of the Rio Grande were at least willing to recognize that they may not know what's best for their Southern neighbors.
Date; June 04
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BUSINESS STRATEGIE

Companies Must Learn to Achieve the Price Advantage (or Pay the Price)
Pricing, the intersection at which untold numbers of buyers and sellers meet every minute of every day, lies at the core of any business - large or small, old or new, Rust Belt or high-tech, local or global. Yet pricing remains misunderstood and poorly managed, according to The Price Advantage, a new book by three consultants at McKinsey & Company. Even executives at highly successful companies may not fully appreciate how small changes in price can lead to large changes in profitability.

Several software programs have been developed in recent years to help companies strengthen their pricing capabilities. But the authors – Michael V. Marn, Eric V. Roegner and Craig C. Zawada – argue that companies can truly achieve the price advantage only by making deep and lasting changes in their organizations. Such a major shift takes time, they say, but the effort can pay big dividends. Wharton marketing professor David J. Reibstein recently spoke to Marn, a partner in McKinsey’s Cleveland office, about the major themes that he and his co-authors discuss in the book. Over the years, Marn has developed some of the most widely used analytics for identifying pricing opportunities.

Reibstein: Mike, a good place for us to start is with you defining what you mean by the price advantage.

Marn: When we talk about the price advantage what we mean is not that a company has a product with a low price relative to competition. We’ve got a much more holistic definition. We think of price advantage as a superior capability to use price as a source of real competitive advantage that at the end of the day makes your company more successful. You’ll often hear companies talk about their other advantages. They’ll talk about a purchasing advantage or a cost advantage or an innovation advantage or a distribution advantage or a service advantage. You never hear them talking about having a price advantage - that they price better than their competitors do.

What we’ve observed over the years, and one reason we wrote the book, is that we had so many clients that worked so very hard to create advantages in other areas only to give them away because they didn’t have the price advantage, because they didn’t know how to price to make sure that the advantages they created really delivered benefit. Why bother to work so very hard to cut your costs if you’re just going to pass it on to your customers without taking anything for yourself? Why bother to work as hard to innovate if you’re just going to charge the same price for the old product that you’re replacing? Why bother working so hard to be a high-service provider if you’re going to match the price of a low-service provider in the marketplace? In a lot of ways, the price advantage is more than just an advantage unto itself. It’s an advantage that enables companies to realize the benefits of the other advantages they work so hard to create.

Reibstein: My understanding of a cost advantage is that I have lower costs. My understanding of a distribution advantage is that I have easier access to distribution. But you’re not talking about a higher price or being able to command a higher price or charge a lower price than the competition.

Marn: No. We're talking about having the capability to come up with the right price more consistently. I would insist that the mistake most companies make, if you look at it over time, is they typically price too low. They have real benefits for which they don’t charge appropriately. The error bias is much more toward companies under-pricing. But at the same time, having the price advantage would let you know when you are indeed pricing too high and appropriately adjusting downward when that makes sense. It’s not about always being too high or too low. It’s about understanding the power of having the right price for as many transactions in the market as you can.

Reibstein:You make a strong point in the book about how you can leverage a small price change into big profit changes, and I think you articulate that pretty well. I’m curious how you see the tradeoff between price and market share, where the price advantage happens to lead to more of a short-term profit advantage versus going for market share, which might gain you a longer-term advantage in terms of distribution or, ultimately, lower costs.

Marn: That’s a good question. I think you have to read The Price Advantage in the context of overall strategy. In other words, what we’re talking about in most cases is, against the backdrop of the strategic decisions you make, how can you manage pricing? If indeed a management team says, ‘We need to have 35% market share or more in this particular market to survive, to support our infrastructure, to run our plants at adequate capacity,’ then we would suggest that even if you pursue that 35% market share, there are things you can do to maximize your price that will likely improve your profitability.

Reibstein: Is the issue of price critical across all industries? Let me tell you why I’m asking that question. I was looking at the numbers that you threw out for where a company gets leverage on price and it’s more the case for companies that have very high variable costs. I was wondering about industries where the variable costs are quite low, such as the airline industry or software. I was wondering how critical you think the pricing component is in those contexts?

Marn: I would make the case that the pricing lever is crucially important in all situations. What you often see happening in high fixed-cost, low variable-cost businesses is that, despite the fact that gross margins are very high, it’s not uncommon for actual operating profits, or earnings before interest and taxes, to be relatively thin. So the leverage of improving pricing is just as high on the bottom line. The way it trades off versus volume might be a bit different. But, that said, the upside of improving pricing is still equally powerful. Quite frankly, I think the one time I would take care about backing away from a strategy driven by understanding very carefully the tradeoff between price and volume and margin, would be a situation where you think your market is growing very, very quickly -- in other words, situations where early penetration into a market or development of markets is crucially important. But any market that has grown to maturity where growth rates aren’t wild and where competitors have settled in – the payoff of doing this well, whether you have a heavy fixed cost or heavy variable cost structure, is extremely high.

Reibstein: What readership do you envision for the book?

Marn: We wrote this book for individuals in businesses who have a role in pricing. We believe there’s a role for the general manager, the CEO. There’s a role for the VP of marketing. There’s a role for the product manager. There’s a role for the sales manager. There’s a role for the salespeople. We wrote this book for the whole range of individuals up and down the hierarchy of most organizations who play a role in pricing decision-making.

Reibstein: What was your motivation for writing the book?

Marn: At McKinsey we’ve been doing pricing work as a major part of our marketing efforts for the better part of 20 years. It’s one of the largest single function areas of marketing in which we help clients. The thing that’s amazing is, you would think that after 20 years there would be a bit of a collective awareness of the pricing opportunity and of the basic frameworks and tools to create price advantage in organizations. It continued to amaze us that we would go into some business units of very good companies, Fortune 1000 companies, companies all around the world, and start talking about pricing as if we just turned on the light bulb for the first time. Our thought was by writing this book we could give managers a practical way of understanding and capturing this still-elusive opportunity for so many companies. Twenty years ago, I would have thought, golly, there wouldn’t be a need for a book like this because everyone had signed on to the powerful ideas around pricing. But we’re sitting here in 2004 with 50% of companies not being good at this. It’s one of the biggest surprises of my professional life.

Reibstein: Actually, I share in that amazement and, frankly, some disappointment that industry is not moving along a lot faster.

Marn: When you find a company that is really good at pricing, it goes beyond doing the Excel spreadsheets. Courage is required to really nail this. A lot of companies don’t do a very good job of creating the institutional courage to price right. It’s easier not to price well. It’s easier to cave in when customers ask for low prices, or competitors lob a low price into a situation. It takes a lot of intestinal fortitude to do it well. I’m wondering out loud if that behavior has prevented this from catching on like other more cut-and-dried management function improvement processes over the years.

Reibstein: Are there some industries where you think achieving price advantage is more developed than others?

Marn: I cannot point to one industry and say 80% do this well. It comes down more to individual players in a variety of industries.

Reibstein: I’ve been surprised to see how well the chemical industry does it.

Marn: I think a few chemical companies have really stepped up their game in pricing in the last five years or so. But I cannot point to a single industry where the top five players all do pricing well. Typically, you find zero or one in an industry that do it really, really well. Or maybe two. And that, to me, is what’s so exciting about pursuit of the price advantage. It’s not something everyone has already. It is still an advantage that can really cause you to stand out in terms of your performance. This is not about playing catch-up. This is about getting out ahead and investing in creating an advantage that most others in your industry probably don’t have already.

Even industries that invest tens of millions of dollars in pricing processes and systems don’t do it all that well. Look at the airlines. For all the sophistication they have in how they price, the performance of airlines today is not that great. You wouldn’t put a big part of your investment portfolio into airlines. In the specialty chemical industry a couple of players do it really well. In consumer packaged goods there are a couple that do it well and a bunch that don’t. You look at service industry and there are a minority that do it well and most don’t. You go right down the list and there’s no one industry you can point to and say across the board this is one industry that’s got it really nailed.

Reibstein: I want to pick up on something you said earlier - that there’s always a temptation to cave in. Where do prices really end up being set in a company? You talk in the book about how pricing departments have sprung up in companies in the last 10 years. But it’s one thing to have the price set at corporate and another thing when you get down to the front line where the salesperson is talking to the customer. First of all, how much of whatever ends up happening concerning pricing really happens on the front line rather than at corporate? And, second, how much leeway should you give the sales force in determining prices?

Marn: That’s a very rich question, and it’s one that I think is misunderstood by a lot of companies. I have seen companies price exceedingly well with very centralized pricing processes and very decentralized pricing processes. By centralized, I mean all price decisions are made at headquarters. By decentralized, I mean there is considerable discretionary authority to discount price out in the field. Now, I think the mistake a lot of companies make is they say, ‘You know, my sales people have no price discretion. Any price discount that they want to grant customers, they need to get approval from the “pricing desk.’” One would think with that control, or lack of field discretion, that they would have the pricing process under control and that nothing bad is going to happen. But that’s exactly the wrong point of view.

No matter whether your pricing authority is centralized or decentralized, something very crucial happens at the salesperson/customer interface. Even without pricing authority, what you’ll find is the best salespeople, the ones who really understand customers well and know how to sell value, will actually end up charging higher prices. And their customers end up, even if the pricing is centralized, going back to the central pricing desk with fewer price-discount requests. So I would suggest that whether the salesperson has field pricing authority at a high or low level, it doesn’t matter. He or she is always going to be a crucial cog in the creation of a price advantage in an organization. That would be point number one.

Point number two builds on the idea that companies can be successful at very centralized and very decentralized pricing. The connection to make is this: The more decentralized your pricing process - that is, the more pricing authority you push out to the field, be it to regional managers, district managers or salespeople - the higher level of pricing skill you need to build in those people. You also need a higher level of monitoring of their performance. And you need a higher level of incentives tied to pricing in their compensation plans. A lot of companies push pricing authority out to the field, but they’ll fail to create those three conditions for success.

Reibstein: I think that’s an excellent point. I’m particularly intrigued by your observations on technology’s role in pricing. Do you want to talk a little bit about what you see as the role of technology today and where you see it going?

Marn: What you’re seeing now is a number of software companies filling that gap that existed maybe 10 years ago or so when companies were trying to get their pricing processes supported by systems. It turns out that a fair number of viable software alternatives out there today support the pricing process. We have felt for years that investing in this kind of software for most companies usually does make great sense.

Reibstein: Which software systems are you thinking about?

Marn: Some 30 or so are decent. But if I mention one, I risk endorsing it. There are several that are very good alternatives. The point is that the payoff for doing even a little better in pricing, even a half a percentage point or a percentage point, is so high that it makes sense to have systems that let you deal with the issue at that level of precision. By the way, we’re not taking about rocket-science software. It’s simple software that makes very visible to salespeople and sales managers and market managers and product managers just what the real economics of a customer and a transaction are.

Reibstein: Rather than mention any companies, can you talk about the class of software you’re referring to?

Marn: There’s a class of software called administrative software that helps you figure out what the so-called price waterfall looks like for a customer or a transaction. So when it’s time for you to make a decision when a customer is negotiating with you on next year’s contract, you can at the press of a button see where my discounts are but not the waterfall. What’s the bottom line, pocket price, and pocket margin? Was that realized for that account during the last year? What changed? Are they taking more cash discounts? Are they taking longer to pay? A system that adds it up together for you properly on a real-time basis can be hugely beneficial at times when you’re negotiating with customers.

[Editor’s Note: Many companies use an incomplete metric for transaction pricing, such as the list price or invoice price. Pocket priceis simply invoice price minus all the off-invoice discounts that occur after invoice price, including items like cash discounts, volume bonuses, freight allowances, promotional allowances and cooperative advertising. Pocket price represents the real dollars and cents that are left in a business’ pocket as the result of a transaction. A business does put list price or invoice price in its pocket, but it puts pocket price in its pocket to cover costs and ultimately contribute to margin and profitability.

The pocket price waterfall is simply the graphical representation of pocket price.
The format is a set of vertical bars, the left-most one being list price and the following bars being the discounts subtracted from list price to get down to invoice price. From the invoice price bar, all of the off-invoice items mentioned earlier are subtracted to get down to pocket price. The picture ends up looking like a waterfall with dollars and cents "leaking away" with every bar down to pocket price.

When a product is custom-made to individual customers -- for example, not a standard packaged product for each consumer -- or if there exist important cost-to-serve items that vary widely by customer or transaction, then pocket price itself can be an inadequate representation of the attractiveness of a transaction. In such situations, Marn and his co-authors often suggest the extension of pocket price down to pocket margin. Hence, pocket margin is pocket price minus standard costs and minus any special costs-to-serve that a company might incur. The pocket margin metrics allows the comparison of transactions where the product is not standard or the cost-to-serve is highly variable. The pocket margin waterfall is the graphical representation of pocket margin.]

The second class is what I call optimizing software, which tries to provide some intelligence on how to price. This software looks up past transactions and tries to judge at what price level you’ll get an optimal price/benefit tradeoff for a certain category of products.

There’s a third category of price-testing software that I find very exciting. These products let companies that either sell online or sell through call centers on a real-time basis test price levels. If you are a computer company selling personal computers online, for every 20th PC that you sell in a certain class you might bump the price up 3% or bump it down 5% when you quote it. If you do this on a regular basis, if you have enough of a high-volume transaction stream, you can get a sense, with this real-time testing, how sensitivity to price is changing over time.

Reibstein: I’m a big believer in that.

Marn: That’s some of the most exciting software that’s come out in recent years, and I think companies are just beginning now to reap the benefit of that real-time understanding. The idea is that you always have a price test going on. You always have your thumb on the pulse of how price sensitivity is changing for products all the time.

Reibstein: Mike, is there something I haven’t asked you yet that you’d like to mention?

Marn: I’d like to say that all too many well-intentioned companies approach price improvement as a project, as something you can knock off in six months or a year and then go on to the next thing you need to fix. When you look at companies that have really created the price advantage, it’s not that way at all. This is at least a medium- to long-term journey. To get it right in most companies, you have to potentially touch hundreds, even thousands, of people. You have to change their day-to-day behavior, change the tools they use, change the way they think about price versus volume versus market share. It’s more work than you think. It’s a larger investment than you think. But the good news is that it’s worth it.

We’ve seen clients that have stuck with this over the years and they keep accumulating benefits over time, in terms of stretching out their margins on a year-over-year basis. But there’s almost a change in the feel of the culture of the company. If you go into a company that has created the price advantage, you see a couple of things. You see people who really are customer focused. They understand that they can’t create the price advantage unless they create value for their customers. And, you see workers at all levels who understand, ‘If I work hard to create an advantage for my customer or an advantage for my company, I know we’re going to get a payoff for it. My hard work at a company where the price advantage exists always has a payoff. It’s not going to be given away to the market. It’s not going to be frittered away in a temporary volume increase.’ There’s a certain spirit in companies that achieve the price advantage. It’s a long-term cultural change.
Source; Wharton School of the University of Pennsylvania, June 04
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RETAIL – GROCERY

Giant, union join to keep Wal-Mart out
Montgomery proposal would impose strict zoning regulations
Giant Food and the union that represents local grocery store employees have joined forces in support of a proposed ordinance aimed at keeping Wal-Mart supercenters out of Montgomery County.
While other Washington-area jurisdictions have imposed restrictions on "big box" stores, legislation sponsored by Montgomery County Executive Douglas M. Duncan is aimed more narrowly at Wal-Mart Stores Inc.
The measure would impose tough new zoning restrictions on stores that are larger than 120,000 square feet and devote at least 10 percent of their floor space to groceries. It would exempt stores that do not sell food, such as most Target stores and Home Depot, and it would exempt club membership stores such as Costco.
Wal-Mart, based in Bentonville, Ark., has one standard-size store in Montgomery County, in Germantown, and no plans to expand in the county, said Mia Masten, Wal-Mart's community affairs manager for the eastern region.
Still, Wal-Mart opposes the measure. "We think it's anti-competitive and anti-consumer," said Masten. "It not only affects us, but other competitors who want to come into Montgomery County and offer consumers one-stop shopping, which is what consumers say they want."
The alliance against Wal-Mart reflects the shared interests of supermarkets and Commercial Workers Local 400, which recently reached a four-year labor contract after weeks of preparations for a strike.
Across the country, the nonunion discount stores have been a serious competitive threat to established supermarkets and their unionized work forces.
During the contract talks between the chains and the union, supermarket executives noted increasing competition from Wal-Mart and other nonunion retailers as the impetus for proposed benefit cuts.
"We have spoken to coordinate lobbying the bill," said Barry F. Scher, Giant vice president of public affairs.
"We are supportive of the concept," said Safeway spokesman Greg TenEyck, although he said his chain has not taken an active role in lobbying for the measure.
A Local 400 official confirmed that the union is working with Giant to push the bill. "We are communicating about it," the official said.
The pre-emptive move in Montgomery County did not surprise industry experts.
"A grocery store cannot compete against a supercenter," said Jason Whitmer, an analyst at FTN Midwest Research Securities. "The logic is to fight Wal-Mart before they come, rather than when they come."
FTN Midwest found that within a year of opening, a Wal-Mart supercenter takes 11 percent of grocery store business within three miles.
It's not clear whether the proposed ordinance will win approval from the Montgomery County Council. Uncertainty remains about whether singling out combination retail stores - those that sell food and general merchandise - would survive a court challenge.
"I don't think we've been provided with enough information to draw a circle around something called a combination retail store and have it pass legal muster," said council President Steven A. Silverman.
Source; The Baltimore Sun, June 04
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BUSINESS – CORPORATE OVERVIEW

Lean Times for Unilever
Busy shrinking a vast and unwieldly slew of brands, the consumer-staples giant was way late to the low-carb party
For too long, analysts say, Unilever the consumer-staples giant behind household brands such as Lipton teas and Dove soaps, thought the low-carb diet craze was just that -- a craze. Its stock is still paying the price for that widely publicized miscalculation. Now, the Anglo-Dutch outfit that manufactures Slim-Fast diet products has got the low-carb religion, replacing the head of that division and preparing to roll out a slew of low-carb products.

Meantime, while Unilever's performance continues to lag, peers like France's Danone and Switzerland's Nestlé have seen revenues and stocks rise nicely this year. Unilever squeezed only a 1.3% revenue gain from its leading brands - a key sales measurement - in the first quarter of 2004 amid a variety of challenges, including increasing competition.

Analysts had forecast at least a 2% boost, and the figure was a far cry from Unilever's 3% to 5% long-term growth target for leading brands such as Knorr soups and Surf detergent. Its stable of leading brands, which make up nearly 95% of sales, rose 2.5% in 2003.

Star-studded cupboard. When the latest results were announced on Apr. 28, Unilever's American depositary receipts (ADRs), which trade on the New York Stock Exchange, dropped more than 7%. (Each Unilever ADR represents one share of Rotterdam-based parent Unilever NV. Although Unilever operates as a single company, a separate London-based parent company, Unilever PLC, trades on the London stock exchange.)

Since then, the shares have recovered some. Trading around $66 as of June 14, the stock is up about 3% so far this year, vs. a 2% gain for the benchmark Standard & Poor's 500-stock index, of which Unilever ADRs are not a component.

Unilever shares have been resilient because many of its brands, including Vaseline and Ben & Jerry's, to tick off a few more, are recognized around the world. Unilever is also highly profitable, boasting some of the fattest margins vs. its European rivals. First-quarter operating margins were a rich 14.9% before exceptional items and amortization of goodwill and intangible assets (BEIA).

Faltering strategy? In fiscal 2004, Unilever is expected to have 4 billion euros ($4.8 billion) in net income (BEIA), 3% higher than in 2003, on revenue of 42.3 billion euros ($51.2 billion), according to Michael Steib, executive director with Morgan Stanley in London. Steib's revenue forecast is about 1.4% lower than last year's number, mainly because of currency translations.

"They have strong brands, and they have strong value," Steib says. "Bottom-line growth and margin improvement have been impressive." Still, Steib remains neutral on Unilver, rating it equal weight. And his 58 euro price target for shares trading on the Amsterdam exchange suggests only 5% or so price appreciation in the next 12 months. "They need to demonstrate through innovation and change in brands that they intend to have a pickup in top-line growth."

Unilever management has its work cut out, analysts and company watchers say. "Growth strategy appears to have sort of faltered," says Lex Werkheim, a partner at Eureffect, an Amsterdam asset-management firm which owns Unilever shares.

Slim-fast’s slow switch. Unilever says it's nearing the end of a five-year "Path to Growth" launched in 1999. It's on track to trim brands to the most profitable 400 from a once dizzying 1,600 worldwide, it says. It also has cut more than the expected 3.9 billion euros ($4.7 billion) from manufacturing and other operations as part of the growth initiative.

And Unilever PLC has had a change at the top. Chairman Niall FitzGerald, 58, is leaving to become chairman of British news and information company Reuters. In keeping with tradition, Unilever PLC has picked an insider to fill the spot. Patrick Cescau, a 55-year-old director of the firm's global foods division, takes the helm later this year.

But analysts want to see more progress before becoming more upbeat about the stock. First, Unilever needs to do a better job of managing its brands, analysts say, especially Slim-Fast. "In early June of last year, Unilever was still saying low-carb diets were a fad that was going to go away," says London-based J.P. Morgan analysts Arnaud Langlois, who has an underweight rating on the stock and believes the price could actually decline. Slim-Fast products traditionally have included foods such as shakes and meal bars that serve as low-calorie - but not necessarily low-carbohydrate - alternatives to regular food.

On the scent. Someone finally got the message. At the end of last year, Unilever rolled out five low-carb Slim-Fast products. And in its Apr. 28 earnings release, the big news was that the low-carb newcomers are already accounting for about 20% of Slim-Fast revenues.

But it also said in the same note that Slim-Fast's low-carb debut "has not yet compensated for the decline in share of the traditional products." Seventeen more low-carb products are going to be launched, the company said. And on June 4, Unilever said the president of the Slim-Fast unit would be leaving, to be replaced by a food-division exec.

Slim-Fast isn't Unilever's only struggling brand. There's also the Prestige fragrance division, which sells Calvin Klein Obsession, Eternity, cK, and other designer names. "Other companies have been quicker to launch more products," Steib says. "With fragrances, consumers are on to new things very quickly." Those twin problems with Slim-Fast and fragrances have hit Unilever particularly hard in North America, which represented 23% of revenues in 2003, and where first-quarter sales fell 4%.

In an e-mail response to BusinessWeek Online, company spokesman Trevor Gorin said consumers have not had any "significant change in taste" when it comes to Unilever fragrances. Rather, marketing the scents became tougher, as consumers became more selective in their discretionary spending. The division, Gorin says, is under new leadership and expects to see the benefits from a restructuring plan in the second half of 2004. As for Slim-Fast, Gorin says Unilever forecasts "a return to modest growth as we rebuild consumer loyalty" in 2004.

New focus. Unilever also has more work to do in getting rid of underperforming brands, analysts say. As the prime target, most investing pros singled out the frozen-food business in Europe. Increased competition from discounters and others is making pricing tough there, analysts say.

Unilever has already identified 10% to 15% more frozen-food products as noncore, according to Gorin. "Actions are being taken to rationalize the portfolio and focus on higher growth segments," he says.

The company has also been criticized for not returning more of its cash on hand to shareholders, says Julian Lakin, an analyst with brokerage firm Pereire Tod in London, who rates Unilever accumulate. Cash flow in the first quarter grew 18%, to an impressive 970 million euros ($1.2 billion). Proceeding with special dividends to shareholders or stock buybacks are two methods of increasing investor interest, Lakin says.

Check-out line. For now, Gorin says Unilever is focused on trimming debt to 10 billion euro ($12.1 billion) from the current 12.5 billion euros ($15.1 billion). After that, he says surplus cash generation "will be used to enhance shareholder return."

Since Unilever's founding in 1930, it has posted average annual earnings per share growth of 8%, Gorin adds. Over the same period, that bests the Dow Jones index of industrial companies by 20%, he says. And few doubt that Unilever is a formidable company. Even Langlois, who is negative on the stock, says "management needs to be given more time" to improve the situation.
It's also true that Unilever faces multiple challenges, including growing competition in its traditionally high-margin and high-profit emerging markets. Still, investors hoping to see quick returns may want to consider giving Unilever more time before putting its shares in their shopping carts.
Date; June 04
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BEVERAGE SECTOR – MARKET STRATEGIES

The cola wars are back
Not that Coca-Cola and Pepsi ever stopped competing against one another. But with this week's almost simultaneous launch of Coca-Cola C2 and Pepsi Edge, both containing 50 percent less calories, carbohydrates, and sugar than regular sodas, the two soft-drink manufacturers will once again heat up their decades-old rivalry.
The difference is that the stakes are much higher and the competitive landscape much different since the debuts of Diet Coke and Diet Pepsi during the 1980s. Coca-Cola and Pepsi have been desperately searching for ways to jump-start stagnant soft-drink sales as consumers buy more energy drinks and bottled water.
As obesity becomes a more serious health concern in the United States, critics are lumping Coca-Cola and Pepsi with the likes of Big Macs and Oreo cookies. Foodmakers ranging from General Mills Inc. to Kraft are scrambling to jump aboard the low-carb bandwagon before the phenomenon runs out of steam.

Whether C2 or Edge succeeds or simply fizzles out is anybody's guess, analysts say. For years, the companies have tried unsuccessfully to bridge the gap between diet and regular sodas (remember Pepsi One?). Soft-drink manufacturers also are not known for their innovation skills (remember New Coke?).
But Gary Hemphill, senior vice president of Beverage Marketing Corp., a consulting firm in New York, credits Coca-Cola and Pepsi for trying to shake things up. Until now, Coca-Cola and Pepsi have been content to develop flavor extensions such as Vanilla Coke or Mountain Dew Code Red, a less risky strategy that generates more sales "but does not create heightened demand for carbonated soft drinks."
C2 and Edge "are significant departures from the flavor innovations that the industry has pursued the past several years," Hemphill said.
"It makes a lot of sense to focus on more functional [health] needs," Hemphill said. "There's greater potential here for longer term growth."
The industry could use a boost. Carbonated soft drinks sales increased only 0.4 percent last year, according to Beverage Marketing Corp. figures. Per-capita consumption dipped to 53.8 gallons from 54.2 gallons in 2002, the fifth consecutive year of such a decline. Flagship brands Coca-Cola Classic and Pepsi both lost market share. Only diet sodas showed strong growth.
To fight what industry observers call "cola fatigue," both Coca-Cola and Pepsi are heavily hyping C2 and Edge. Coca-Cola spent an estimated $30 million to $50 million to promote C2, its biggest product launch since Diet Coke in 1982. In addition to television and Internet ads, Coca-Cola gave a million cases of C2 to employees, a new initiative called "Ambassador Sampling."
With consumers interested in health and wellness products, C2 hits retailers at the right moment, said Jeffrey Laschen, vice president and general manager of Midwest Coca-Cola Bottling Co. in Eagan, whose territory includes the Twin Cities.
"Timing is everything and the timing is right now," Laschen said. C2 "is a great platform to bring back people who left carbonated soft drinks for one reason or another. ... There are a whole segment of consumers looking for a diet beverage but don't like the taste."
Laschen thinks C2 could create a new category of soft drinks, similar to the way Anheuser-Busch positioned Michelob Ultra as a premium low-carb beer. C2 could play particularly well in the Twin Cities, Coca-Cola's largest market for diet sodas, he said. The question is whether C2 will attract new customers or siphon existing sales from Diet Coke and Coca-Cola Classic.
"Although C2 will cannibalize Coke and Diet Coke, the company is reasonable ... in expecting the brand to draw from noncarbs, as noncarbs, including water, have benefited from consumers' search for lower-calorie alternatives to regular soft drinks," Mark Swartzberg, an analyst with Legg Mason, wrote in a recent research note.
For Pepsi, Edge represents its latest attempt to fill the gap between diet and regular soda drinkers. The company estimates 60 million Americans are dual users -- they drink both regular and diet sodas.
In 1998, Pepsi rolled out Pepsi One, which contains only one calorie, but it never caught on.
"Maybe it was ahead of its time," said David DeCecco, a spokesman for Pepsi-Cola North America. Pepsi One "never found the scale nor the following we would have liked it to have."
With 20 grams of sugar, 20 grams of carbs, and 70 calories, Edge will appeal to consumers who want to make only gradual changes to their diets and lifestyles, DeCecco said.
"This isn't about just one product," he said, "but a fundamental change in how people drink soft drinks. ... People are paying more attention to what they eat and drink. We hope Edge helps people rediscover the soft drink aisle."
Not everyone is convinced. Tom Pirko, president of Bevmark, a consulting firm in Santa Barbara, Calif., said Coca-Cola and Pepsi are looking for a market that doesn't exist.
"To be honest, they are really wasting their time," Pirko said. "Consumers want either a full-flavor soda or they want to lose weight. C2 and Edge don't solve obesity issues at all. This piddling, little bit of this, little bit of that approach only confuses consumers. Pepsi One was a much more full-flavored soda, but it didn't work."
And by releasing C2 and Edge at the same time, Coca-Cola and Pepsi will only cancel each other out, he said.
Harry Balzer, vice president and food analyst with NPD Group Inc., thinks the market is large enough for C2 and Edge to make their case. The brands will get consumers' attention because soft drinks are "a high-interest category," he said.
"I'm sure people will try them," Balzer said. "But will they have staying power?"
Source; Startribune, June 04
Write; by Thomas Lee

Picture; Cola wars - Glen Stubbe

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