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Friday, August 18, 2017

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Friday Morning Eye-Opener: Shoe Leather

by Kevin Coupe

Sometimes, faced with the choice of conserving the fundamental qualities of a brand and exploiting a brand’s success for a quick and easy buck, businesses will choose the latter. After all, one has to strike while the iron is hot.

At LL Bean, that’s never been the way. In recent years, its iconic duck boot has become an in-demand fashion item, its leather-and-rubber simplicity appealing to urban Millennials as well as to denizens of more rural locales. The boots always have been made in Maine, but the increased demand - 100,000 were sold a decade ago, but expectations are that 750,000 will be sold this year - has meant that an awful lot of customers have ended up on a waiting list.

There was, of course, a way to solve the problem - outsource production to some far off land, where the boots could be faster and cheaper. Such a move would allow LL Bean not just to keep all its customers satisfied, but even make more money on the deal. Win-win.

Except that this win-win was seen by the folks at LLBean as an ultimate loss - the company was convinced that the quality would suffer, which would hurt the brand by violating the core value proposition. Better to keep some customers waiting than leave all of them wanting something better.

The Associated Press reports now that LL Bean is opening a new 106,000 square foot production facility in Lewiston, Maine, that doubles its duck boot capacity, and it plans to hire more than 100 new employees to make the boots.

What is Eye-Opening about this, I think, is that it demonstrates not just an investment in people and real estate, but in core brand values that differentiate and distinguish the company. And it is a lesson to which more businesses should pay attention.

Walmart Reports Q2 Results, Offers View Of Its Future

Walmart yesterday came out with its second quarter results, saying that total revenue rose 2.1 percent to $123.4 billion, with US same-store sales going up 1.8 percent. However, Q2 net income was down 23.2 percent to $2.9 billion.

Meanwhile, CNBC reports, “Wal-Mart's e-commerce sales grew an impressive 60 percent in the latest period, on top of last year's 11.8 percent growth. However, this quarter's pace was slightly slower than the first quarter, when e-commerce sales rose 63 percent. But prior to that, in the fourth quarter of last year, online sales were up 29 percent.”

The Wall Street Journal writes that “the strong sales figures come at a time of stiff competition among retailers facing Amazon.com Inc. While U.S. consumer spending appears strong, according to July sales data at retailers and restaurants released Tuesday, some apparel and department-store chains are struggling with customers’ changing shopping habits. U.S. grocers, of which Wal-Mart is the largest by sales, are battling over prices.”

And, the Journal writes, “Wal-Mart’s U.S. gross margin fell and operating expenses rose 3.9% in the second quarter. ‘We are not at the place we want to be from an expense standpoint,’ Wal-Mart finance chief Brett Biggs said in an interview.”

There are numerous stories about Walmart’s past and future this morning:

USA Today writes this morning that Walmart says that it is “delivering online grocery orders from more than 900 stores with ‘strong results’ in the early going, as the company's rivalry with Amazon intensifies.” The retailer says it expects to expand grocery delivery to a total of 1.100 locations by the end of the year. The paper says that “Greg Foran, CEO for Walmart U.S., said that the retailer will ‘watch closely’ if Amazon ramps up its online grocery business. But he says he welcomes the competition, not only from Amazon, but from other potential rivals, such as discount grocery chain Aldi and German chain Lidl which are also expanding in the U.S.”

USA Today also quotes Marc Lore, CEO of  Walmart eCommerce U.S., as saying, “We're seeing that customers are coming into the store when they come to pick up items. And we're saving costs by not having to pay for last mile delivery'' to people's homes.”


• The Washington Post writes that Walmart said yesterday that “food sales had grown to their highest level in five years, as Walmart expands its grocery business both in stores and online by adding more organic produce.”


• In a separate story, CNBC writes that “Wal-Mart's second-quarter results make it crystal clear the retailer is committed to growing its e-commerce business, with Jet.com founder Marc Lore at the helm of it all.

“Faced with the threat of Amazon encroaching on its turf, Wal-Mart has been rolling out initiatives like ‘easy reorder,’ free two-day shipping with no membership required, and an online grocery service, which is slated to hit 1,100 Wal-Mart stores this year … Offerings like ‘ship-from-store,’ discounted pick up in store and Wal-Mart's associate delivery tests are (seen by analysts as) ’competitive weapons’ that will help the traditionally brick-and-mortar retailer steal a larger share of the online market.”


Business Insider reports: “When Walmart acquired Bonobos and Modcloth, confusion reigned over how these trendy, upscale brands meshed with America's no-frills most affordable retailer.

“Now, it's increasingly clear that these investments were geared toward its Amazon competitor - Jet.

“You'll likely never see a Bonobos or Modcloth product in a Walmart store or on Walmart.com. Bonobos and Modcloth will, however soon be offered on Walmart-owned Jet, according to a conference call with journalists to discuss second quarter earnings … This is a clear signal of how Walmart.com and Jet.com will diverge. While Walmart is a mass-market retailer that appeals to every demographic, Jet will be geared toward the urban millennial customer.”


• Not everybody is convinced, however, and the Los Angeles Times reports that “even Wal-Mart e-commerce communications Vice President Dan Toporek acknowledges that Walmart.com and its massive inventory of 50 million distinct products will not attract the cool kids who are — or were — shopping at places such as ModCloth … ModCloth and Bonobos are being cyberbullied by their fans online, who are making fun of the brands for what they see as selling out to the corporate machine.”

Walmart has been promising that while it may own these “cool kids” brands, it has no intention of meddling in their operations and management. “Bonobos and ModCloth will not get touched,” Toporek says. “They will operate the way they always have.”

KC's View: These stories are interesting on so many levels….

• It seems pretty clear that it is “game on” for Walmart’s battle with Amazon. I’ve been arguing here for a long time that this is destined to be a conflagration, with a lot of collateral damage. Virtually every other retailer needs to be aware of this, and preparing for it by establishing their own differential advantages.

• One has to wonder, based on these numbers, whether Walmart has started playing the same game as Amazon, in which it invests its profits in acquisitions and innovations, an approach that may have a negative impact on the short-term bottom line even as it makes Walmart more competitive with Amazon. If so, one then has to wonder how the public markets will react to such a shift.

• As better as Walmart has gotten about food, I still think there is a strong possibility that it buys a company like Sprouts … it is a Whole Foods-style play, albeit at a lower price point and with a consistency of appeal.

• I think it’ll be a cultural challenge for Walmart to adopt a bifurcated approach to the marketplace, with Walmart in one column and Jet in the other. It isn’t impossible, but it will require a strong resistance to the company’s traditional DNA which favors mass marketing, low prices, and middle America appeal.

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Why Amazon Is Financing Its Whole Foods Purchase With Bonds

The Washington Post has a story about Amazon’s decision to finance its planned $13.7 billion acquisition of Whole Foods with the sale of $16 billion in bonds, making it “the latest big name to dive into the corporate bond pool this year, joining AT&T, Tesla, Microsoft, Duke Energy, Aetna, UBS, Verizon and others.”

What this means, the story says, is that “Amazon preferred to borrow money at low interest rates over as long as 40 years instead of tapping its $21 billion cash hoard … So why did Amazon borrow when it could pay for the purchase with stock, or cash or with its $10 billion in annual cash flow?”

The story quotes Rajeev Sharma, director of fixed income at Foresters Financial, a saying that the decision is sensible because “Amazon is taking advantage of the fact that their debt profile is really manageable. They have a little over $8 billion, which is nothing for a company this size.”

And, “And Amazon.com most surely doesn’t want to use cash because having a ‘battleship balance sheet’ of $21 billion makes shareholders breathe easier and gives the company flexibility to make future acquisitions or endure downturns.

KC's View: I have to admit that the whole bonds-and-debt stuff is a little beyond my expertise. But what I did it interesting that Amazon has such a small amount of debt for a company its size, and that it is focused on having a strong balance sheet in case there’s a rainy day. Which there will be.

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How D-I-Y Stores Seem More Competitive With E-commerce

Business Insider has a story about how the home improvement business seems to be a retail sector that has been relatively unaffected by the Amazon juggernaut.

The reason? “Stores like Home Depot and Ace Hardware have three key attributes that can protect their market share from e-commerce giants: what they sell, service, and location,” the story says.

Business Insider explains:

“The nature of the products they sell lends itself to human interaction. Buyers still want to ask a person how things work, or how to mix paint, or which colors to select in the first place. And the more exceptional the service, the better.”

In addition, “Although free shipping is convenient, having thousands of stores near the neighborhoods that customers live in is also a big advantage … Ace Hardware, like other hardware retailers, has billions of dollars worth of inventory sitting in its stores across the country. One way to exploit that is by promoting online pick-ups (online orders that are picked up at a store), essentially blending online and offline strategies.”

KC's View: You wouldn’t think that the idea of better product selection, better service, and better locations would be such a radical notion. At some level that’s what every retailer needs to do to compete.

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E-conomy Beat

• In the UK, the Telegraph reports that Sainsbury has “launched a new service to let customers click and collect groceries within the hour. Customers will be able to order their shopping via a smartphone app and then pick it up from a store just 30 minutes later. It will make Sainsbury's the UK’s first supermarket to offer sub one-hour collection options.”

It is all part of an ongoing race: “In July Tesco has become the first retailer to offer same day grocery delivery across the UK, ahead of a planned challenge from Amazon,” the story says.

FastNewsBeat

• The Associated Press reports that a class action suit filed in federal court in Connecticut accuses Nestle Waters North America is deceiving consumers with its claim that its Poland Spring Water brand is “100 percent natural spring water.” The suit claims that the company “is bottling common groundwater that doesn’t meet the federal definition of spring water.”

The story notes that Nestle Waters says that its water “meets all relevant federal and state regulations for spring water,” and that the company “settled a 2003 Connecticut lawsuit claiming Poland Spring’s water was not sourced deep in the Maine woods.”

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Executive Suite

• In Canada, CBC News reports that Brandon Stranzl has stepped down from his day-to-day responsibilities as executive chairman of Sears Canada so that he can focus “on putting together a bid to buy the company and keep it going once it emerges from its current restructuring.”

Sears Canada is closing 60 stores and laying off almost 3,000 employees as it restructures its business.

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Your Views

…will return next week.

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OffBeat: Double Your Pleasure

It hasn’t been a great summer for movies, so it is with great pleasure that I can report to you that there are two new films in cinemas that are total pleasures, albeit in entirely different ways.

I’ve been thinking lately that Taylor Sheridan is one of the most interesting filmmakers working today. After having written the screenplays for the excellent Sicario and Hell Or High Water, Sheridan now has written and directed Wind River an absorbing thriller about a murder investigation on the remote Wind River Indian Reservation in Wyoming.

It may be his first directorial job, but Sheridan seems utterly confident behind the camera, using some of the same instincts for understatement that typify his screenplays. One of the things that impressed me about Sicario and Hell Or High Water was his use of silence … he seems to know when to let his characters and the plot breathe, which also allows the audience to think; in Wind River, he does the same thing visually. From the very first scene, in which a terrified young woman runs barefoot through the snow, till the final moments, in which the reasons behind her death are explained, Wind River is a character-driven mystery of the first order, using the emotional and physical remove of an Indian reservation as both metaphor and root cause.

Jeremy Renner is excellent as a US Fish and Wildlife Service agent who finds himself investigating the crime even as he mourns the loss of a daughter who died several years ago under similar circumstances. Elizabeth Olsen matches him as the sole FBI agent sent to aid the investigation. (It is great to see both of them in a a movie not produced by Marvel.) Also very good is Graham Greene as the local sheriff and Jon Bernthal as suspect in the crime.

Go see Wind River - it is a compelling piece of filmmaking.


Logan Lucky is equally good, if an entirely different sort of a film. It is, to put it simply, an utter hoot … a redneck version of Ocean’s 11 that chronicles a heist on race day at the Charlotte Motor Speedway.

I’m not surprised that it is so good, since it is directed by Ocean director Steven Soderbergh, in a return to feature filmmaking after a brief retirement. I also love heist movies, and Logan Lucky shows what makes them great - it is all about pace, visual acuity, and the occasional plot sleight of hand.

While Ocean’s 11 had a Vegas sheen complemented with what can only be called Clooney smooth, Logan Lucky has a trailer park vibe that never condescends to characters who are blue collar workers, hairdressers, car salesmen and bartenders.

Channing Tatum and Adrian Driver are wonderful as the apparently dim Logan brothers who nonetheless are able to plan and execute the robbery; they are aided by Riley Keough (Elvis Presley’s granddaughter!) as their sister, who may be the smartest in the family. The biggest theft in the movie is by Daniel Craig, who steals it un totally un-007 fashion as Joe Bang, an explosives expert who they must break out of jail in order to commit the crime, and then return to prison afterwards so he has a perfect alibi. Craig, with a platinum blonde brush cut and a thick Southern accent, is absolutely terrific - funny, savvy, and the hinge on which the whole robbery rests.

If I have one (small) criticism of Logan Lucky, it is that it seems familiar because of its familial relationship to the Ocean films, but I think in the end I found this to be reassuring … almost as if this is a kind of cinematic comfort food.

Like I said, Logan Lucky is a hoot - a perfect late summer entertainment.




That's it for this week. Have a great weekend, and I'll see you Monday.

Sláinte!!

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