Little Red(box) Riding Hood

Redbox, the in-store kiosk movie rental company has been blazing the news recently. Hollywood studios seem to hate Redbox or love it.

• Redbox is suing Universal studios (click here) and Fox (click here) for their attempts to instruct distributors not to supply Redbox for 30-45 days after a DVD is released.
• Meanwhile Sony (click here), Lionsgate (click here) and Paramount (click here) have signed multi-year contracts estimated to be worth hundreds of millions of dollars each, to get a share of the Redbox shelf and to ensure that used DVDs are not sold by Redbox

Its surprising to see Hollywood content owners vary so widely in their approach.

So I ask myself: Why are studios approaching this so differently? What is the right position a studio can take on this issue?

Redbox is taking revenue away from DVD sales for studios by offering daily rentals at $1. DVD sales are down 16% for the first half of the year according to Video Business Magazine (click here) whereas all other segments are growing. DVD sales account for more than 50% of all sales and rental revenue for the studios. Meanwhile Redbox quarterly revenues have grown to $189 MM (click here) and are doubling on an annual basis.

The real issue (other than rentals cannibalizing DVD sales) is that Redbox sells used DVDs at $7, often within a few weeks of the DVD being released. This has made price-sensitive customers buy recently-released used DVDs rather than shell out four times that amount for a new DVD. Electronics retailers like Best Buy are venturing into selling used DVDs and kiosk rentals (click here).

So Hollywood studios would like to limit the 'under-priced' sales of used DVDs and restrict the time when these are available to customers -- to be able to 'monetize' the time value of recently released content.

Sony seems to have played its cards well by getting a higher than representative share of the Redbox shelf and ensuring that its used DVDs are put out of circulation.

I personally think that Redbox can still rent Universal and Fox DVDs by sourcing them at retail prices and renting them at $2 instead of $1 (Note: this is not a legally informed opinion. Do not use this to make investment decisions) and selling used DVDs at higher prices. Consumers would still be attracted to the proposition.

Eventually though, I think the industry will be well-served if Universal and Fox can settle with Redbox out of court... and everyone can get back to the business of (profitably) providing compelling content to customers at the right-price in the right time window.

Turning around a newspaper

Apologies for not writing for so long...I had switched from the practice of writing a blog article to tweeting (or Re-tweeting) my thoughts in 140 characters. I am back now to the longer form of expression.

I had blogged a few months back(click here) saying that newspapers should examine putting a value on content.

I read a Newsweek article today (click here) that the Newport Daily in Rhode Island has started charging $345 for annual online subscription. The article also talks about the positive impact that this has had on print subscription cancelations. The newspaper is now planning to run its online division with a profit objective. Wow! Kudos to them for experimenting with pricing rather than sticking to the convention.

I am convinced more than ever that newspapers should consider charging for online content especially if:

• the content is local and no other publication would cover it (e.g. Newport Daily)
• the content is specialized and the publication is a must-read for a reader segment (e.g., Wall Street journal, Barron's, etc)

Interesting blog post on pricing

Sorry for being dormant for some time now. I have been busy for the past few days.

My friend, Sat Duggal and his colleague, Hunter Hastings, from the EMM Group, have posted an interesting blog post titled "Should you cut prices?".

I think it is a brilliant article... enjoy!

Kraft's turnaround plan and new brand identity: Will it win against store brands?

At a CAGNY conference in Florida, Irene Rosenfeld, CEO of Kraft Foods, highlighted the progress made by Kraft against the turnaround plan announced by her in 2007. The turnaround plan is based on organizational changes, category re-framing using the 'growth diamond', sales initiatives, retailer collaboration, cost reduction and quality improvements.


Kraft also unveiled a new corporate logo and brand identity (click here for Brandweek article). Their new slogan is "Make today delicious,".

The new Kraft logo consists of an upward, red smile exploding into an array of seven "flavor bursts," each of which represents a different division. The new logo was designed by Nitro after interacting with many employees and consumers worldwide on questions as: "What do you look for in a food company?" "How do you engage with food generally?" and "What are the moments of that relationship that are important to you?". The findings resulted in a corporate logo that is "more contemporary, the colors are more vibrant and it has a life to it," CMO, Mary Beth West said.

Kraft has seen significant organic growth in H1'08 but most of it was from price increases. In Q4, it had a volume decrease of 5.2%. This was partly due to inventory reductions (especially at Walmart, which accounts for ~15% of sales). Kraft USA is experiencing significant unit volume declines in cheese, coffee, crackers, nuts and salad dressings.

I ask myself: Is Kraft losing its battle against store brands? Will its turnaround strategy and its rebranding bring success ?

I don't think the Q4 volume declines necessarily indicate loss of ground against store brands. Most of the volume declines experienced by Kraft are more than offset by pricing increases. In terms of dollar share, Kraft has lost less than 3 percentage points in most categories. Kraft continues to be the market leader in sub-categories accounting for around 70% of its sales. So long as Kraft manages its pricing such that it does not lose further significant share, Kraft will likely continue to experience healthy organic growth.

The focus on quality is also paying off for Kraft. 65% of surveyed customers preferring Kraft products to competitor products (as opposed to 44% in 2006).

Outside the US, Kraft is enjoying record sales growth in the Developing Markets (coffee, biscuits, chocolate, Tang) and margin expansion in Europe and the Developing Markets.

Going forward, the new branding appears more colorful and contemporary to me. I hope it allows Kraft Foods to better differentiate its products from store brands (by driving home the taste advantage).

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• Profit Plunges 72% at Kraft Foods (nytimes.com)

Update on Pepsi rebranding effort

I had blogged in late November about Pepsi's rebranding effort (click here). I had said at that time:

" I think these are bold moves that will revitalize the CSD market as well as position Pepsi favorably in the non-carbonated beverages market.

Some of the products launched by Pepsi recently are very notable (Diet Pepsi Max, flavored AMP variants). As a traditional Diet Coke fan, I was surprisingly attracted to the taste of Diet Pepsi Max. I personally witnessed a free sample promotion for Diet Pepsi Max outside Grand Central station in NYC in mid-October and the reviews appeared good. Pepsi has opened up a new segment in the CSD market by adding ginseng to cola. This will attract consumers who want a rush of energy with few calories at a price point below energy drinks."

Pepsi launched a new website called "Refresh Everything". Its Superbowl ad and the theme song also carried the same theme. Compete.com's PRO Daily Reach report, which tracks online visitors based on their panel, has reported that the Pepsi website generated significant web traffic in January (click here).

Pepsi and Coca Cola have released their first quarterly results after the rebranding was launched. Pepsi Americas Beverages (click here) reported a 6% decline in volume, a 10% decline in sales and a 16% decline in latest quarter division core profit. Meanwhile The Coca Cola Company (click here) reported only a 3% decline in volume in North America, attributing its relative CSD outperformance to its 'three-cola' strategy and the success of Coca Cola Zero.

Does this mean that Pepsi's rebranding has gone off to a bad start? Not really. The newly branded products began shipping at the end of the quarter. The true impact of the branding should be evident in this current quarter.

cheers....

Customer lifetime value ... how can Vonage survive?

After writing last week about why Sirius XM is likely to end up in Chapter 11, from a customer lifetime value perspective, I was looking around for other companies in a similar situation (customer subscription business, facing financial difficulties).

Vonage (www.vonage.com) is an independent US-based IP phone services provider. I can vouch for the quality of their services, since I was a user for several years. Unfortunately, they have encountered losses for several quarters and have raised debt exceeding $500 MM.

Vonage is going to release its annual results in late February. Meanwhile I analyzed their Q3 results (click here) from a customer lifetime value perspective.

Here are the summarized customer lifetime value metrics:

• ARPU (Revenue per user per month): $ 28.96
• Direct monthly variable cash costs : $7.20
• Monthly fixed opex cash costs (excludes depreciation, interest, taxes), mainly SG&A: $9.82
  
• Subscriber acquisition cost: $ 301.4 (of which $48 is spent on equipment subsidy)
• Monthly Churn rate: 3.1% ; which implies an average lifetime of 32 months
• Capital (assets less cash) of $315 MM (which amounts to $120 per subscriber)

Each new subscriber generates $ 385 of cumulative lifetime cashflow (($28.96 - $7.20 - $ 9.82)*32).
This is barely enough to compensate for the upfront SAC of $301 per gross add and capital requirement of $120 per subscriber, after discounting.

I think Vonage can survive if they continue to improve their business in the following ways:

• Launch a proactive retention strategy (use predictive analytics to understand which customer is likely to churn, and launch proactive offers to retain them) to reduce the churn rate
• Reduce SG&A costs ($73 MM in Q3) by optimizing the salesforce
• Reduce marketing costs ($254 per gross add) by:

1. re-examining the channel strategy (using direct and other low-cost channels (e.g., referral) as opposed to distributors and retail)
2. continue reducing online advertising costs (click here)
   

• Increase ARPU (which currently is only a few $ more than the monthly unlimited subscription rate) -- by promoting services that generate incremental ARPU (international calling, faxing, virtual phonelines)

Would love to hear what you think...

Customer lifetime value ... why Sirius XM may not survive

It appears that Sirius XM, the satellite radio service provider, is close to filing for bankruptcy (click here). The company has been raking up losses for the past several years and is under a significant debt burden.

How can one figure out whether a subscription-based business is viable? The answer may lie in a concept called 'customer lifetime value'.

Customer lifetime value is the discounted value of all the expected net cash inflows from a customer over his/her expected subscription lifetime. Expected Net cash inflows are computed as Expected Revenue less Expected cash operating expenses less Acquisition Costs incurred (these can be estimated monthly and discounted). Expected subscription lifetime can be estimated using the current churn/attrition rate.

I ran some analysis based on the latest quarterly results of Sirius (click here).

• Their customers come from two major channels: Car 'OEM' companies (which install the radios in cars and offer a 3 to 12 month free service package) and Retail. Both channels account for approximately 50% each of the total subscriber base.
  
• On average, Sirius XM generated $10.74 per user per month in revenue (ARPU) and spent $3.2 per user per month on variable cash operating costs (revenue share with music companies, customer service & billing).Thus they generate $7.54 of cash per new user per month on an incremental basis.
  
• They also spent around $107 Million per month on fixed cash operating costs (Howard Stern's salary, content costs, satellite costs,etc). This does not include interest costs, taxes, depreciation, ESOP expenses, restructuring expenses or goodwill amortization (which are all substantial but not cash operating costs). This equates to $5.72 per existing subscriber per month.
  
• Their churn rate among paying customers is 1.7% per month. Thus the average lifetime of paying customers is 59 months.
  
• Their acquisition cost per new customer is $74. However given that 53% of OEM customers deactivate before becoming paying customers, the acquisition cost per paying customer is really $101.
  
• Sirius XM carries assets less cash of around $7.14 BN. That equates to $378 per existing subscriber.
  

It is simple math to see that $7.54 of monthly incremental cashflow per new customer is not enough to pay for $5.72 of fixed monthly cash expenses and for the upfront investment of $101, over a 59 month lifetime.

Note that I have not talked about generating return on the $378 fixed assets per subscriber yet. Even if Sirius XM declares a bankruptcy and brings down its asset (and liability) base down to near zero, the fundamental business needs to improve to be viable, post Chapter 11.

Here's what Sirius XM could do to make it's business viable, post Chapter 11:

• Renegotiate costs with Howard Stern and the record labels
• Increase prices (though its not the most popular move)
• Tiered pricing : higher pricing for ad-free radio and same pricing for advertising-supported service
  
• Increase the price of receivers
  
• Ask for donations from existing subscribers (the PBS model; maybe they can have Howard Stern making phone calls ;-))
  

Please don't use this blog as the basis for any investment decision. My comments are purely my personal views. Full Disclosure: I have been short SIRI for a few years now.

I would love to hear your views...

Can a private label manufacturer manage a national brand?...the case of Ralcorp and Post Cereals

In November 2007, Ralcorp Holdings, one of the biggest manufacturers of store brand groceries, bought the Post brand (iconic products such as Honey Bunches of Oats, Post Raisin Bran, Grape-Nuts, Spoon Size Shredded Wheat, Pebbles and Post Selects,....) from Kraft for $2.6 BN (click here) in an all-stock deal.

Many people, including myself, wondered whether a private label manufacturer like Ralcorp can handle a national brand in a slowing economy?

One line of thinking questioned the logic of a private label company, that is gaining share from national brands, in buying a brand at a high valuation (2.6 times sales). After all, the marketing activities (promotion, advertising) in selling a branded product are much different than those involved in selling a store brand to a store. Also selling a branded product with store brands creates internal competition. This is what had led Ralcorp to sell off its brands (Chex, Beech-Nut) many years ago.

What worked for Ralcorp is that private labels traditionally have had a small market share in the cereals market (around 13%).

Ralcorp announced their FY09 Q1 results last week (click here). The sales contribution of Post was $256 MM (which is nearly the same run rate as at the time of acquisition). I estimate the profit contribution of the Post brand was more than $50 MM in the quarter.

Hats off to the Ralcorp folks and to the Post guys to have posted such strong results in a recessionary environment!

Is gender a meaningful way to segment office products customers?

OfficeMax is now targeting working women (aged 28-45) according to this Ad Age article (click here). They have launched a new ad campaign called 'Life is Beautiful' (click here), targeted squarely at women.

OfficeMax is known for unusual promotions like it's hugely popular three-year old Elf Yourself holiday promotion, which allows customers to convert themselves (or their friends) into animated elves and send it to others. Their Back-to-School 2008 campaign "Power to the Penny" and their "A Day Made Better" program have been noticed by many business writers.

Officemax spends approximately half the money that Office Depot spends on advertising and only a fourth of what Staples spends.

Is this unusual way of segmenting the office products market (working women) a good idea?

I think this is a brilliant idea only so long as OfficeMax does not alienate the male buyers.

• None of the other major players (Staples, Office Depot) actively target the working woman, a significant portion of the working population.
  
• Research studies have shown that women hate shopping for office supplies
  
• I assume that mothers make a lot of buying decisions during Back-to-School season as well (for their kids).
• However the risk that OfficeMax runs is that men may not like to associate themselves with a store that is seen as 'feministic'.
  
• Also the purchasing departments of many corporates may not be affected by gender-specific advertising. (When is the last time, you as an employee told your purchasing department where to buy printing paper and office supplies from?)

Let me know what you think...

Is Woolworth's online rebirth a good idea?

Woolworth's, the iconic hundred-year old British retail store chain, was forced into administration in December. It had to shut its 800 stores after Christmas. Click here to get a wonderful series of blog articles on the history and trivia of Woolworths UK.

If you permit me some diversions, here are some interesting trivia:

• Woolworths was started in the US (Yes, the Woolworth building belonged to FW Woolworth). The first UK store opened 30 years after the first US store!
• Woolworth in the UK (also called the Woollies) is not related to Woolworths in Australia, NZ, South Africa and Mexico
• The remnant of FW Woolworths Company in the USA is Foot Locker, the sportswear store chain!
• Woollies continue to operate successfully in Germany

Yesterday, Shop Direct, UK's largest online and home shopping retailer (1.6 BN GBP) announced that it has acquired the Woolworth's brands in the UK and will relaunch it online (click here).

Is relaunching the Woolworth's brand online a good idea?

I don't know how much Shop Direct paid for Woolies, but going by this newspaper article, they would have paid a few tens of millions of GBP. I think it is a brilliant idea because:

1. Woolworths is a strong brand in the UK. many generations of Britishers have gone through the shopping experience at their local Woollies. Here's an interesting TimesOnline column on the big void left by Woolies demise.
   
2. They were rated as one the top 200 brands of retailing by Deloitte as recently as January 2008 (click here).

Woolies is dead. Long live Woolies !

Dell's smartphone strategy.....Are they dialling the wrong number?

The Wall Street Journal reported that Dell has been working for over a year on Android and Windows-based smartphone designs (click here). WSJ claims that Dell has been meeting component manufacturers, software vendors and handset manufacturers for its smartphone project.

CNet's Crave blog (click here) quotes Jeff Kagan, a reputed telecom analyst, saying that the smartphone market is likely growing at 10-15% after growing more than 50% till recently. The folks at Canalys even think that the US smartphone market grew more than 100% till Q3'08 (click here).

RIM, Apple and Nokia dominate the high-end of the smartphone market. Between them they account for 71% of the global smartphone market (Nokia 39%, Apple 17%, RIM 15%). All the other handset manufacturers (Palm, HTC, Motorola, Samsung, Sony Ericsson, etc) make up the remaining 29%. Incidentally the Windows and the Android platform account for less than 15% of the market.

I wonder: Is it a good idea for Dell to launch their own Windows/ Android smartphone?

I think it would be a difficult business case to pull off. Here's why:

• Buyers of an iphone, Blackberry or the Nokia E71 are brand sensitive and are not likely to be seeking the cheapest smartphone available. Dell will have to spend significantly in marketing and product development if it wants to have a serious chance in the high-end of the smartphone market.
• Unlike servers or printers, people who buy PCs are not likely to be buying mobile phones at the same time. Thus having a full product line does not give any strategic advantage. The last time Dell tried to establish a brand in the consumer electronics space (by making MP3 players), it ended up badly (click here).
  
• Dell's traditional strength has been online direct selling of PCs. Mobile phones are already being sold online and Dell brings nothing new to the table on that front. Moreover in the US market, Dell will have to deal with each of the mobile carriers to sell its smartphones (Apple has done that successfully but then they had a hotttt product and they had Steve Jobs).

I would love to hear your thoughts...

What's fizzing between Cott and Walmart?

Cott, the world's largest private label (retail brand) soft drink provider, announced that Walmart USA had informed them of a 3 year phase-out of its exclusive carbonated soft drink (CSD) supply agreement (click here) . This means that Walmart can source one-third of its private label soft drinks from other vendors in 2010, two-thirds of its requirement in 2011 and its entire requirement from other vendors in 2012.

Cott gets more than 30% of its revenue from the Walmart relationship (CSD, water, other beverages). Clearly a lot is at stake for Cott, which reported a $88 MM loss in its third quarter, coupled with a 9.5% decline in sales compared to last year. With only $21 MM of cash (Nov'08) and a debt/ equity ratio of 2.3, Cott is in a tight liquidity position, given that it had cash outflow of $17 MM in the first three quarters from operations and capex. Any decrease in Walmart business is likely to affect Cott significantly.

I stopped to think: Why would the world's largest retailer cancel its exclusivity clause for its fizz supplier (which has been a supplier for 10 years now)? What should Cott expect in terms of sourcing impact?

• Exclusive relationships are not common in the food & beverage market. Cott had managed to get an exclusivity clause in its agreement with Walmart in 2000 because Cott needed to make significant capex to support US domestic CSD supply to Walmart.
• Walmart may be creating the flexibility to source from other vendors, if Cott has sustained losses during the recession and may get operationally affected.
• Cott's conference call referred to Cott's extensive US domestic production facilities and its proprietary CSD formulas. It will be difficult for another vendor to replicate the exact taste of the Cott's products and to match the production facilities. As such, it will be difficult for Walmart to rapidly introduce a new CSD vendor with the same brand and different taste than their current product. Walmart may have to spend significantly to introduce new sub-brands in case they want to source from multiple vendors.
• While private labels account for more than 25% of bottled water sales, they account for less than 15% of retail CSD sales ( I don't know the figures for Walmart). Although private label share of the CSD market is increasing, the national majors (Pepsi, Coke) are fighting back strongly using discounts and promotions. In this scenario, it is unlikely that Walmart will want to change its private label sourcing strategy and experiment with the taste of its products.

In short, my assessment is that Cott has little to worry about if it maintains the quality of its products and improves the quality of its balance sheet.

Let me know what you think...

The french fries wars... who's the fattiest of them all !

There is an interesting column by Sarah Fuss in Yahoo! Fresh Picks today (click here) which compares the french fries of various restaurant chains. I found the article very interesting. So here is an excerpt of the article:

Sarah compared these seven restaurants:
-Arby's Curly Fries
-Burger King's French Fries
-Carl's Jr.'s Natural-Cut Fries
-Dairy Queen's French Fries
-Jack in the Box's Natural Cut Fries
-McDonald's French Fries
-Wendy's French Fries

Calorie-wise:

The Best
Dairy Queen wins with 2.69 calories/gram
Jack in the Box is close behind with 2.71 calories/gram

The Worst
McDonald's it is, with 3.25 calories/gram (21% higher than DQ)

But there are other stats to look at...

Here's the zero trans fat team:
Burger King
Carl's Jr.
Dairy Queen
McDonald's
Wendy's

This one is the trans fattiest:
Jack in the Box

How about saturated fat?

The Best
Dairy Queen (0.018g saturated fat/gram of fries)

The Worst
Arby's (0.037g saturated fat/gram of fries)

Also remember that a good deal in dollars, doesn't translate to your diet, and a "large fries" means something different to everyone:

Large Fries Serving Sizes
McDonald's: 154g
Carl's Jr.: 184g
Wendy's: 184g
Dairy Queen: 186g
Arby's: 190g
Burger King: 194g
Jack in the Box: 236g

Here are my two cents on this topic:

• Each chain seems to have its own positioning in the fries space:

1. McDonald's: No trans-fat, high calories per serving but much smaller serving size
2. Jack in the Box: Low calories per serving but much larger serving size ...and oh the trans-fat
3. Arby's: Eat the fries and please don't look at the trans and saturated fats label :-(
4. DQ: Low calories and fats; medium-size servings

• The positioning is interesting and tells you a lot about how well McDonald's is targeted at the mass-market. With smaller serving size and higher calories per gram, McDonald's can offer the lowest price per calorie.
  

• The FDA specifies 70 grams as standard serving size for french fries (click here). By that measure, the Jack in the Box 'large fries' are good for a family of three !!

Given all this information, I think I'll be more thoughtful when I feel like ordering the large fries ;-)

Domino's vs Subway: The sandwich wars

A few days ago Domino's ran an ad on Fox's American Idol, claiming that consumers preferred Domino’s new oven baked sandwiches over Subway's by a margin of two-to-one. The results were part of an independent taste test conducted on Domino's behalf.(click here for Brandweek article on the issue).

Subway's CEO, Jeff Moody, has complained (click here) to the National Advertising Division (NAD, an industry self-policing organization) that:

1. "They did the comparison against three sandwiches and have written the ads to suggest that the results are relevant across the whole product line."

2. "They did not compare the Domino's Philly Cheese Steak sandwich to Subway's Philly Cheese Steak (which we have as a national product) but rather to our Steak and Cheese. Philly Cheesesteak uses a shaved beef product which is completely different than our Steak and Cheese product so their comparison is invalid."

3. "Subway's whole positioning is that we make customized sandwiches, right before your eyes, with your choice of bread, meats, cheeses, vegetables and sauces. We believe that they made every Subway sandwich the same and based the build on our pictures which include all the veggies. The majority of consumers don't add all the veggies."

4. "The production and consumption conditions weren't reflective of the real world and were biased against Subway. Our subs are cooked one at a time and consumers usually eat them right away in the restaurant, or take them across the street to their office." If the subs were served cold they obviously weren’t as good.

A similar battle is being fought between Campbell's Prego and Heinz's Classico pasta sauce (read here).

I stopped to think: How effective is comparison marketing? Will it work in the Domino's case?

My 2 cents on this issue is that:

Domino's will definitely generate trial for its sandwiches, which would help it gain share in this new category. However long-term share will be driven by how much customers agree with the 'blind taste test' after they actually taste a Domino's sub.

If like-for-like Domino's and Subway subs don't have a significant difference, Domino's may actually lose credibility with its customers.

Let me know what you think...

Retail layaway programs revisited

I had blogged last month about the holiday layaway programs at Sears, KMart, and other retailers (click here).

I had said that layaway programs will definitely increase in popularity compared to last year. However many credit-strapped US consumers may not have the financial and mental discipline to take the offer.

Apparently I was wrong. According to this FT article (click here), Kmart said this month that its December sales "benefited from a year-over-year increase in sales made through our layaway programme". Sears will now continue its pre-Christmas layaway programme, which it said had met a “quite positive” response and “incredible” customer feedback.

Some other interesting perspectives:

• Tony Gao ( Northeastern University), says that layaway makes sense only when an item is scarce and consumers do not have access to adequate credit.

• Janet Hoffman, global managing director of Accenture's retail consulting practice, says for most modern retailers the practice is unlikely to make a return. Given its comparatively limited demographic appeal, she says, "lay-away has significant limitations as a strategic move ...". She also points out that administering a layaway programme presents challenges for modern retailers' inventory and sales management systems.

Let me know what you think...

Should Abercrombie discount?....Part Deux

I had blogged a few days back on whether Abercrombie should discount its apparel (Read here). In my opinion they should consider selective discounts on slow-moving seasonal inventory so that they don't have to conduct a fire sale at the end of the season.

Looks like the Abercrombie pricing issue is attracting more attention (click here).

Abercrombie warned on Jan 8 that fourth-quarter profit would fall significantly short of forecasts after reporting December same-store sales fell 24 percent. Abercrombie is " worst sales performer in December out of 35 companies whose results are tracked by Thomson Reuters."

Morningstar analyst Brady Lemos suggested that Abercrombie should consider more promotions at its surf-inspired Hollister stores, which has more stores than the main Abercrombie & Fitch chain and caters to a younger crowd. I like the idea.

Should retailers honour rivals' gift cards ?

In December, HH Gregg announced that it would honour gift cards sold by it's now bankrupt rival, Circuit City till the Super Bowl weekend (click here). HH Gregg checks the balance on the gift card and the balance can be applied for a 20% discount on merchandise only(click here).

Similarly, Toys'R'Us announced on January 12 that it would honour KB Toys gift cards (click here). They give a 15% discount coupon in return for the KB Toys gift card: "The gift card exchange can be made at Toys"R"Us stores' Guest Service Center. KB Toys Gift Cards must be surrendered at time of purchase, and only one 15% Toys"R"Us coupon will be granted per gift card surrendered. The 15% Toys"R"Us coupon cannot be combined with any other "R"Us offer for the same item and excludes"...certain toy categories with high-value toys. KB Toys had earlier announced that its cards would be honoured only at local toy stores where they were purchased.

The business question is: "Should retailers honour rivals' gift cards?

It seems to make business sense to allow customers to use rivals gift cards, especially if the face value of the card is only allowed for a 15-20% discount.

However there are many disadvantages to an exchange program which does not check the value of the rival gif card and offers a discount on a purchase. These include:

Gift card fraud: As this NRF link (click here) shows, gift card fraud is a big issue. There are various forms of internal fraud (perpetrated by store employees) and external fraud (such as use of fraudulent credit/debit cards, cloning of gift card, etc). Retailers use advanced analytics to recognize patterns in their fraud detection programs. However detecting fraud on a rival's gift card is extremely difficult. Also if the exchange program does not check the value of the card (like Toys "R" Us), expect a flurry of fraudulent activity.

There are many websites which trade gift cards (e.g., the Star Gift Card Exchange ). They buy gift cards at a significant discount to value (click here). I would bet that a lot of fraudulent gift cards get traded in these exchanges. However these exchanges are fairly savvy about not buying cards of bankrupt retailers.

Value to the customer: While the HH Gregg exchange program offers a fair value to the customer (one might consider swapping a $X free item at Circuit City for a $X discount at HH Gregg), the Toys'R'Us program offers no value to a genuine gift card holder. Why would you exchange a $X gift card (which is accepted at a local KB Toys store) for a 15% discount on one toy (from the lower-value categories)?

I would love to hear your thoughts....

A recession strategy for newspapers

On Dec 12, The Tribune Company, which owns iconic newspapers such as the Los Angeles Times, Chicago Tribune, Baltimore Sun, Sun Sentinel, Orlando Sentinel, Hartford Courant, Morning Call and Daily Press, announced that it was seeking bankruptcy protection (click here).

Circulation numbers for US newspapers have declined significantly (Sep'08) compared to last year.


Leading newspaper companies in the US (New York Times, Gannett, and Tribune) have witnessed significant declines in advertising revenue and slow growth/ stagnancy in circulation revenues in Q3 (ending November'08).
Industries that used to drive newspaper advertising (Real estate, Financial Services, Retail, Airlines, Autos) are not doing well. This has led to tremendous pressure on advertising revenues.

I can't help but think: How can newspapers compete (with other media, online players,etc) during this recession?

Here are my suggestions based on my preliminary analysis:

• Put a value on content. For several years, advertising has subsidized the price of a newspaper. Newspapers have even being giving content out free online and over the mobile phone (in the hope that advertising from these exciting new platforms will subsidize the cost of content). Newspapers need to reconsider that. They could consider publishing article extracts free of charge online and charging for entire articles. If the newspaper is against charging for online content, it should at least make readers register with full information (and make themselves available for better online targeting) to access full content.
  

• Optimize newspaper price. As the chart above shows, circulation revenue is reasonably sticky and inelastic. The New York Times has been able to increase circulation revenues even though it has increased its price. As shown below, most newspapers get less than 20% of their total revenues from circulation (NYT and WSJ are exceptions). Newspapers should consider increasing newspaper prices to maximize total revenue.
  
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• Save costs on international coverage: Newspapers (especially local/ community papers) should consider outsourcing international coverage through tie-ups with international papers. There is an interesting news-gathering start-up called GlobalPost that has 65 international correspondents who live in different cities globally and cover international news (click here).
  

• Consolidate national news coverage: Newspaper companies with multiple local/ regional newspapers (e.g., Gannett, McClatchy, New York Times, Tribune) should consider consolidating national news coverage and articles. The local newspaper could have access to all the national news articles written for the newspaper group and could focus on gathering and reporting local news.

• Divest unrelated unprofitable assets: I know this is a touchy topic.... But the Boston Red Sox, About.com, and some TV stations would qualify under this category.
  

I would love to hear your thoughts ...