business news in context, analysis with attitude

We’ve been making disparaging remarks of late about the oil companies and how they seem to be ripping off the American public with the skyrocketing cost of gas. One MNB user disagreed:

Your usual voice of reason should not be added to the cacophony of media blathering about the high price of gas.

An article in the WSJ last week noted that consumers, as a percentage of their income are spending only 5% of their income on energy- including gas- cst, compared to 8% thirty years ago. At the same time, over 40% of California homeowners are spending over the recommended 1/3 of gross income on housing prices, and another 20% over 40% of income. Gas prices are not the crippler they are made out to be, and in the long run, higher prices will be good for all of us driving large Suburbans because we feel safer, or have the desire to haul more of our junk with us everywhere we go. The Arabs have to hate $3.00 gas in the states, as it threatens their economy more than it does ours. Absent good government programs, let the free market “drive” us to economy and efficiency.

When Starbucks reports sales of $4.50 per cup sales of lattes are down, then we will know that consumers are in a crunch. Meanwhile, don’t give into the hype. Higher gas is good for all of us. It’s like childbirth- painful, but the end result is worth it!

We would agree that one of the positives about the high price of gas is that maybe Americans will become more responsible about the cars they buy and drive. We buy cars as if oil were a renewable resource that will never run out, and forget that it is our role as citizens and stewards of the planet to not abuse this resource. (We count ourselves among this group – we have a lease on a Honda Pilot, and when it runs out we fully intend to turn it in for something smaller and more efficient to go with the Miata…)

But we would disagree about other points you make. First of all, it is a lot easier for people who make a decent living to absorb the increased cost of gas than it is for poor people who have trouble making ends meet, and who depend on their cars to get to work and take care of their children. (And that doesn’t even take into account the increased cost of heating oil and the impact that it will likely have on poor people this winter.)

We agree with New York Times columnist Tom Friedman on this issue – the United States needs a comprehensive game plan for being independent of foreign oil within 15 years, a plan that would be on the same scale as the race to the moon during the sixties or the building of the bomb during the forties. It would energize (no pun intended) the US science community, and revolutionize our economy by creating new sources of energy that would be available to everyone at reasonable costs.

Finally, there seems to be plenty of evidence that the gasoline companies are ripping off the American public. We heard one oil industry spokesman on the radio the other day saying that there would only be a gas shortage if Americans top off their tanks, and that people should wait to fill their tanks until they are close to empty – a comment that ignores the fact that waiting a day or two to buy gas can easily cost a couple of bucks, which a lot of people can’t afford.

Then he said something really amazing – that Americans will know they are being gouged when they are spending $4 a gallon. Which shows you exactly where they want the line to be drawn.

There’s a special place in hell reserved for folks like that (adjacent to the place where the tobacco executives will be residing).

We had a story yesterday about how Nestle USA has filed a civil suit against one of its top salesmen, charging that he used his access to promotional funds to support a gambling habit – to the tune of $6.3 million. The salesman, Henry Machinski, allegedly stole money from the company because he was empowered to write checks on behalf of the company in amounts up to $20,000 apiece for the purpose of rewarding retailers for promotions. Machinski was a high level salesman handled A&P, among other accounts for Nestle.

He allegedly opened a bank account in the name of "AP Food," and then wrote checks and submitted invoices to the company saying that the money had been paid to A&P…and then have lost it all playing craps.

One member of the MNB community wrote:

That item reminded me of other examples I have witnessed or know about at former employers. Companies usually do not publicize these "events" as Wall Street would punish them for lack of control.

In one case a headquarters manager set up a separate post office box and bank account to divert customer payments - the take was close to $2 million. An administrative assistant (in the legal department of all places) created and paid invoices to a fake supplier - the take was over $300,000. In another case, an employee faked travel cash advances that were not reconciled for many months - don't recall what the take was on that one. A sales manager faked reimbursements to his customers in one product program to fund growth in other product lines - the take was a much bigger bonus for him and his sales rep team. In each case the individual was caught and terminated. I'm aware of only one prosecution.

In a channel I have worked in (but not in this category): Staying within legitimate program rules and compliance, buyers have learned how to "beat the rules" among two competitive programs in a product category. Some buyers heavy up on company A's products and program in one year - by minimizing purchases from the other leading competitor
(call it company B). In the next year they heavy up on the on the other supplier (company B) and minimize the other competitor (company A). Flipping the purchase cycle back and forth between competing programs earned big incremental growth payouts for shrewd buyers. By the way, sometimes the programs require quarterly growth hurdles. In those cases the buyers flip loyalty on a quarterly basis.

And people wonder why and how the supermarket business is completely screwed up, with some people spending more time figuring out how to make this crap work in their favor than trying to satisfy the consumer.

One MNB user responded:

Who is watching the funds? NO ONE! While Nestle is upset, the real victim is A&P and someone there should get fired there too. I suppose it may be 'small change' to A&P, but for a company of that size to not even realize they have been short changed by $ 6.3 million should be a crime!

We don’t think we agree. A&P may have been shortchanged…but based on our reading, we don’t know how it ever would have realized that.

We continue to get email about Albertsons and how its CEO, Larry Johnston, is casting about for an endgame.

MNB user Jack Cavanaugh wrote:

Before joining the grocery business, I was in financial and general management positions for several large manufacturing companies around Philadelphia. I remember 3 times when the companies brought in "saviors" from GE even though they had no experience in our particular business. Each of them quickly alienated most of the staff, never asked questions, never visited our facilities or customers. They brought in some high priced consultants who told them what they wanted to hear. After several years of creating chaos and firing people and not producing improved results, all were fired! I am sure GE has some great managers, but the idea of thinking they can immediately save businesses they have no clue about is absurd and just an easy out for many Boards.

It seems like a lot of people that what former GE executives mostly bring to light is arrogance.

MNB user Sofie Wann wrote:

I worked on Albertsons private label dairy and ice cream in California back when Albertsons had just purchased Lucky stores. That transition was traumatic at best and I think that was the beginning of what we see today. I was discussing the "for sale" sign hanging over Albertson's shingle with a business associate yesterday and told him that I thought Kroger was the only player in a favorable financial position to make a viable bid. My business associate then looked at me and said "Wal-Mart"…ahhh yes! His point being that Wal-Mart is having such a tough time getting it's Supercenters into the west that this may just be the vehicle in which to do it. We shall see how this soap opera plays out.

MNB user Andy Casey wrote:

I find it interesting to see Kroger mentioned as a potential buyer of Albertson's Florida stores because Kroger doesn't have a presence in the state. That isn't because Kroger hasn't tried to build a Florida operation.

They tried at least twice but were just never able to gain a foothold against Publix, primarily. With Wal-Mart expanding rapidly throughout the Sunshine State, a Kash 'n Karry operation renewing itself as Sweetbay and Publix as strong as ever, I can't see things being any easier this time around.

Another MNB user wrote:

The root causes are 4 fold: power, greed, lack of personal continuity, and executives who do not understand retail and how easy it is to destroy customer loyalty.

We wrote yesterday that “we know a lot of people who think that at this point, the most important contribution Larry Johnston could make to the company’s end game would be to start drafting a letter of resignation, conceding that what a retail company really needs in the CEO’s office is someone who understands marketing and retailing in his or her bones.”

To which one MNB user responded:

Being an employee of Albertson's I couldn’t have said it any better than you just did...I hope he reads all this too....

Finally, one MNB user wrote:

I can’t help but see recurring themes in the articles you post with respect to the state of business today in America, at least where service businesses are concerned. The articles you posted today about Albertson’s and Giant seem linked at the hip as both are a result of the current business cycle of consolidation and merger mania. Both are classic examples of what the priorities are in many of today’s big companies.

Ahold is and has been preoccupied over the last few years by their efforts to consolidate their US operations into a company that operates as one rather than a collection of several regional companies operating separately under the Ahold corporate umbrella. While I am sure that there are several positives for that company resulting from that strategy, there are surely downfalls as well. Your article sites one very important one, and you ask a very good question: How can someone in Quincy MA. No matter their qualifications be a local consumer advocate for consumers in Maryland? What’s up with that? By the same token, how can the right merchandising decisions be made with the same formula?

As far as Albertson’s goes: what is up with this CEO? In reading his diatribe, one would gather that he is proud of his accomplishments and that they are right of track to help shareholders realize a fair return on their investment. How can that possibly be the case?

In both cases I believe we are seeing the result of companies run by processes, catch phrases, and a drive to find synergies, efficiencies, and of course consultants. Where is the customer in that mix, what about the operating and merchandising philosophies made these institutions formidable in the first place? What happens to the culture that made these companies successful?

This business cycle seems to affect everyone. I had lunch today with a banker friend that has just changed banks. While he was talking about the reasons for the change he spoke about the differences in working for a locally owned bank and working for a large bank with headquarters in another state. The similarities were striking. Too much red tape and not enough personal touch for customers. Customers become a number.

At some point retailers and leaders of other service organizations will realize that they serve communities, local communities that are different in what they like and how they like it served. When will they realize that it is much better to define processes and efficiencies around your basic service rather than put your employees in a position of trying to figure out how to service customers around policies, processes, and efficiencies developed by someone 600 miles away driven by a master other than the end customer?
KC's View: