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We had a piece yesterday commenting on the ongoing federal investigation of how promotional allowances are paid by manufacturers to retailers, and said in our commentary that anything that the federal government can do to rip the promotion money heroin needle out of the arm of the supermarket industry would, in the long run, be a good thing. It’d be tough to live with in the short term, but it is in our view the only way that food retailers can get themselves to the point where they really can compete on cost and price.

This prompted quite a bit of email. Excerpts follow…

MNB user Fred Horowitz found the placement of our story about slotting to be particularly ironic:

It was fascinating to me that you had the federal investigation of the institutionalized bribery system of slotting featured under the Wal-Mart piece. Although there were many valid points about how Wal-Mart leverages the lack of long-term thinking of local communities, the fundamental business opportunity that they have taken advantage of in the past 15 years is that the food industry thinks it is in the real-estate industry due to slotting, whereas Wal-Mart is committed to merchandising. Slotting is the heroin of the food industry. The best performers in the industry are “slotting” free. No matter how “even” the economic playing field becomes through local ordinances or labor law, Wal-Mart’s strategic advantage is that its competitors are not even in the same business.

And another MNB user wrote:

Don't you find it somewhat bizarre that Wal-Mart does exactly what you are preaching?

We don’t think it is bizarre at all, and as usual, we find ourselves in synch with Fred Horowitz’s thinking on such matters.

The fact that Wal-Mart makes money on the sell and virtually every major company in the entire mainstream supermarket industry makes money on the buy is one reason that we find it difficult to feel sorry for them in their battle against Wal-Mart. They handicap themselves with these payments, and refuse to do what is necessary to change the rules of the game.

And it isn’t like they’d get any resistance from manufacturers if they decided to eliminate slotting. Suppliers would, in fact, want to hold a parade. But they keep on putting their hands out for money, stocking stores with items that are attractive because of the allowances that come with them, and wonder why they have become largely irrelevant to the shopper.

MNB user Al Kober wrote:

This has always been my position as a Retail Meat Director. When retailers demand money from manufacturers, where does the manufacturer get it? They can't print it. The only place they get it is from the buyer. The money goes around and around, changing hands many times. The producer has basic costs, the cost of goods, the costs of production, and their profit, needed to stay in business. That's it. Then if a buyer wants additional money the producer has to add additional cost to the product.

That extra money goes through the distribution chain, all he way back through the system and then, maybe, back to the buyer, using many other channels, that have many different names. (Advertising funds, Bill backs, Promotional allowances, accruals, slotting fees, failure fees, trade funding, demo fees, introduction incentives, and many other phony names which do nothing more than make the system bog down and become less efficient)

This money changes hands many times and eventually, some of it reaches all the way back to the buyer. Any extra money the buyer gets is only his own money coming back to him, only he was without the use of it for several weeks and sometime several months. Many other hands benefit from the use of that money as it circulates through the system. When the buyer finally get the money back, he thinks he did a great job buying, when in fact all he did was provide additional funds for the system to use his money, gain from it, and then return it with no interest. The buyer would be better off to just put that extra money into the bank and at least get some interest.

The best and most efficient buying is on a net, net basis with a reputable vender. Determining true cost can be difficult, especially when the buyer and the seller do not trust each other. So it begins with selecting the right partner, building relationships built on trust, integrity and loyalty. Work on net, net, buying, allowing all the parties in the chain to stay in business by allowing each to make a reasonable profit.. It only works if every one in the entire supply chain wins. If any one loses, every one else in the chain will eventually loose too.

The days trying to be successful at the expense of others by trying to bleed them to death is over, (or at least it should be).

Another MNB user concurred:

I agree this has to stop. The retailers will and must change their habits now.

MNB user Bobby Thompson wrote:

I totally agree with the Feds getting involved, but isn't it too little - too late? Where were the Feds while promotional dollars were being shifted to the big accounts like Wal-Mart over the last 10 years?? That's where the Feds need to start…

We disagree. Wal-Mart doesn’t take promotional allowances. (Hell, the folks in Bentonville won’t even let you buy them a cup of coffee…) It just demands the lowest possible cost.

Y'now what’s telling, by the way? With all the email we got on this subject, not one person wrote to defend the practice of slotting or the integrity of the promotional allowance system.

Not one.

Which speaks volumes.

On to other subjects…

Your "hardly a part of the computer generation" commentator is full of it. Most of the innovation in the industry since 1984 has come from Apple, especially in user interface: overlapping windows, icons, the mouse, true multitasking, clickable menus, color. None of those things existed in the PC world until the Mac OS.

The best thing to come out of Steve Jobs' return as CEO was Apple's recommitment to design. Its machines and software do cool things and look cool. The Apple hallmark is the ability to make someone stop dead in front of a product and say, "WANT THAT." The Mac's core constituency remains the design/creative community, and they care about these things. You see it in the Apple Store as well.

I mean, I want a mini iPod and I already have a regular iPod.

User friendliness. Differentiation from the competition. Devotion to the needs of the core audience. Where have we heard this before.

Full disclosure: I'm married to the best Mac OS consultant in metro Denver, who has been in love with the Mac since the original 128 in 1984. So it's kind of a religious issue at our house. They make me use a PC at work, but I don't have to like it.

And another MNB user wrote:

If they didn't (innovate), who would?

We’ll never argue that Apple Computer will ever be Dell. On the other hand, nobody ever talks about Apple going out of business these days, thanks to Steve Jobs, who has succeeded in making Apple highly relevant to people’s lives and needs.

That is no small success.

On the subject of Safeway’s new prototype stores, one MNB user wrote:

In my opinion Safeway has a long way to go to try and catch up to Wegmans or Whole Food. I’m not sure why they would even consider spending money in that market…

And MNB user Glen Terbeek wrote:

Isn't this just another case of a big supermarket chain defensively reacting to a competitive threat from outsiders? Safeway was one of the market leaders in the DC area years ago; why didn't they do the remodels then to keep the competitors out?

Incidentally, I was in a Safeway store in an upscale area of Seattle last week, and it was the most unexciting store I have seen in a long while. Apparently, there was no land available for a competitive threat to challenge it! However, the "food oriented" independent grocery store in the next block and the independent meat/fish store down the road, look like they were doing very well, based on the traffic in their stores. Apparently, only other national chains are considered threats, maybe due to the fact that market share is defined at the city or regional level by financial analysts, not at the store level as defined by shoppers.

Regarding Roundy’s looking for traction in the Minneapolis/St. Paul market, one member of the MNB community wrote:

Not to worry, I truly believe that Roundy’s will conquer that market, I have been to Minneapolis, I have seen the stores “WOW” what a difference from what they were before Robert Mariano and his new team entered the picture. Remember if it was easy, Roundy’s would not have pursued this challenge.

And another MNB user wrote:

We have to give Roundy's a break on this one. Roundy's has had only 10 months to rebuild what Fleming spent years tearing down. However will Costco, Target, Aldi, Lunds Byerly's, and Cub continually adding stores while at the same time Roundy's closed 5, its going to take a while regain lost market share. Wal-Mart has its eyes on the Twin Cities also.

Look for Roundy's to build a couple of stores so the retail development community doesn't keep them out of the loop. Recent sales figures at Rainbow indicated they are still performing somewhat below the same level they were 18 months but the bleeding has stopped. Considering Roundy's bought these profitable stores for pennies on the dollar, even with sales in purgatory they should help the bottom line.

One MNB user wrote in about the Food Marketing Institute position on permanent repeal of the estate tax:

FMI's comment on permanent repeal of the federal estate tax echoes the improbable dream of the Republican party. The Democrats were willing to agree to a much higher threshold, say an immediate increase to $5 mil, but not total repeal. The Republicans were greedy and insisted on total repeal or nothing. I wonder how this is sitting with family businesses adversely affected by the $1,000,000 exemption for persons dying in 2002 and 2003, or the current $1.5 mil exemption for 2004 and 2005. Perhaps the Republicans really didn't want to forgo the revenue from a $5 mil exemption and used the all or nothing position to keep the revenue while still being able to place the blame on the Democrats.

Wasn’t it Shakespeare who once wrote, “There is nothing so rare as a Democrat at a food industry convention?”

In response to Kmart and Martha Stewart extending their marketing deal, MNB user David Livingston wrote:

Extending the pact until 2009 to me is meaningless. I don't think there is anyone who believes Kmart will even be around in 2009. With sales dropping at double digit rates, Wal-Mart opening stores on top of the best Kmart units, and all the free product Kmart got by filing bankruptcy disappearing, competition expanding while Kmart is stuck in the mud, etc., I seriously doubt they will be in operation for more than a couple of more years.
KC's View: