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.
  
• 

• 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 ...