Friday, January 30, 2009

Rental Car Firms Caught in between Two Tough Realities

Original Article: Rental-Car Firms Seek a Bailout (Read Original Article)


1) The Public is traveling less in the current economic climate

2) Auto values and lack of credit are freezing used car market values

3) Holding onto rental fleet cars longer only short-term fix


The Automobile rental business is getting hit on both sides, a demand reduction as leisure travelers and now, even "Road Warrior" businesspeople travel less in the current economic climate.
This is affecting top-line revenues a these firms in a direct and negative way.

Then, the automobile market has essentially imploded, leaving the steady stream of new autos, financed with help from the automakers like Ford, GM, Chrysler and Toyota in doubt, and the ability to make money when disposing of the favorably purchased vehicles disappearing as demand in both the new and used auto markets slow down.

The are caught in between declining revenues from rental demand, and declining used car values. Also, the automakers may not be a position to give te large volume discounts the rental car firms are used to running their revenue models from.

Hertz, Avis, Dollar, Enterprise, are all actively discounting rental rates, but as the fleets age and demand stays down for the foreseeable future, they are locked into expensive arrangements in airports, when the entire rental customer model may be switching away from that for now.

It's going to be a tough few years for the rental firms, I think a program to help them weather this is in order, and will also give an indirect boost to the automakers.

Home Depot Cuts: Getting Back to Core Business Good Idea

Source Article: Home Depot will cut 7,000 jobs, exit Expo division (

(Read Source Article)


1) Home Depot has been "De-conglomerating" itself since Nardelli departure

2) Back to "Category leader" business model instead of trying to be next GE

3) Emphasis on core DIY business, better service will yield dividends down the road


Home Depot built itself to the leader in the Home-Improvement and DIY field by being a very good retailer who followed a focused and simple business plan: If people felt as though they could do things themselves, they would attempt to do so if they knew they could get help and advice. The Corner hardware store, "Supersized" as it were.

The purchase of builders supply firms, infrastructure suppliers, and branching out into high end home decor just subtracted from the focus that had made them successful. Diversification, on the consumer perception side, has its limits. The shedding of the acquired businesses and non-core retail concepts will allow THD concentrate on the standard stores and customer experience there.

McDonalds can sell you a salad or a chicken sandwich with relative ease, but they don't try to sell you cedar-plank salmon or chateaubriand. Even if the restaurants could prepare them successfully, it's too much of a stretch for consumers to be comfortable with.

Home Depot is back to being what is has always successfully been, the leader in home-improvement retailing. The renewed emphasis on in-store experience, which had slipped in recent years, is good for both for now and down the road.

Lowe's impressive growth has shown people wanted a good alternative to THD, and they have taken leadership in items such as appliances.

Home Depot shedding the rest of the "distractions" and getting down to retailing again bodes well for the firm in the long run.

Trying to be a new version of GE wasn't a good strategy; being what they were when they grew the financial strength and market share to attempt to emulate GE IS a good idea.

Wednesday, January 21, 2009

Brand Equity During the Economic Slowdown

In general retail, Circuit City liquidating, in the convenience field, Flying J in reorganization, replacing their CEO (a 30 year employee) with a founding family member, RBS announcing a $40+ billion loss on inauguration day; the hits just keep on coming.

Which brings us to the main topic for our blog entry: Brand Equity, and what it consists of. How do you support it in dire economic times? You will see in another posting we discuss Macy’s taking a $3+ Billion dollar write down on the “Goodwill” it acquired when the purchased May Dept stores in 2005.

Goodwill’s definition, as described by, is:
Assumed value of the attractive force that generates sales revenue in a business, and adds value to its assets. Goodwill is an intangible but saleable asset, almost indestructible except by indiscretion. It is built painstakingly over the years generally with (1) heavy and continuous expenditure in promotion, (2) creation and maintenance of durable customer and supplier relationships, (3) high quality of goods and services, and (4) high quality and conduct of management and employees. Goodwill includes the worth of corporate identity, and is enhanced by corporate image and a proper location. In other words, Brand Equity.

In times of reduced consumer spending and economic uncertainty, of the 4 items that define what goodwill consists of, one is always controllable by current management, can be changed for the better in a hurry, and is something you owe your customers, in any case: and that is number (4) High quality and conduct of management and employees. Maybe you can’t advertise like you did a couple of years ago, maybe your suppliers aren’t as generous with the discounts and promo allowances as they once were, maybe you need to be a little “tighter” with promotions and discounts to your customers… BUT, it’s your store, and you CAN control how you treat your employees, and how your firm as a collective whole treats your customers…

We must strive to make every customer interaction a positive experience for the consumer, and make sure the connection between treating customers right and keeping the revenue flow where you need it to be is clearly understood by everyone on the team. The customers are living with the same news you are, make sure they understand that your firm truly appreciates their patronage.

Branding is so much more than a flashy logo or beautiful store designs, those are an adjunct to a solid system that keeps out-of stocks to a minimum, fulfills customer needs, and motivates your associates to take a sense of ownership in how your customers feel about purchasing in your stores.

Condevco has created and rejuvenated brands for many different clients in many different retailing fields, let us help you make it through. Contact Ron with your consulting inquiry.

Goodwill Writedown on Macy's purchase of May makes sense

Source Article: See Article

1) Macy's admits it overpaid for May merger

2) Why was goodwill valued where it was, when Macy's plan was to change all the regional nameplates to Macy's?

3) Do it now; make the move while reduced investor expectations are in place.

Macy's expected move to write down over $3 Billion of goodwill from the May Dept Stores merger/acquisition makes sense in light of the current economic climate and the performance of the firm.

Macy's admits it overpaid for May, but 2005 was a completely different economic climate than they are operating in now. One question about the merger, though; if you were going to take the stable of respected regional Department Store brands nameplates that May controlled (Burdine's and Marshall Field as examples), and then change the name to Macy's to create a National Department store chain, shouldn't you have looked at the goodwill valuation a little more critically?

Macy's was purchasing goodwill, and then spending to rebrand and reposition the assets that they paid to acquire the goodwill for. They "Double-dipped" on the goodwill, overpaying for brand goodwill and continuity, and then paying to remake the "overvalued" brands into Macy's.

In order to put it all behind them the writedown should be as soon and as large as they dare. Retailers, and department stores in particular, are suffering in the consumer spending slowdown. The faster and larger the adjustment made, the better position Macy's will be in to benefit from any uptick in consumption.

Thursday, January 15, 2009

Circuit City Management is Finally in a Hurry

Source Article: Circuit City Ask Court for Auction Read Article:

1) Circuit City(NYS:CC) is pushing Court to move very quickly

2) Threatening they be forced to "Liquidate" if auction isn't approved.

3) Is this about recovering shareholder value or a "Fire Sale" so it's over for current management team?

Circuit City(NYS:CC) is back in court, asking for approval to hold a "Two Party" auction within a very short time frame, in order to survive as as an ongoing concern, or something resembling an ongoing concern.

Well, it seems as though the Management team at Circuit City(NYS:CC) is finally in a hurry. They weren't in a hurry when they lost the "leading national consumer electronics retailer" title to Best Buy(NYSE:BBY), they weren't in a hurry to adjust their clearly noncompetitive retail offering after the last store update made them into a poor imitation of a Best Buy(NYSE:BBY), and they weren't in a hurry as the firm's financial results spiraled downhill.

I'd be very wary about them being in a hurry to dispose of the firm now, if I were one of the bidders or the court.

With the news this morning that Bank of America(NYSE:BAC)(NYSE:BAC) is going back to the TARP for MORE money to absorb the Merrill Lynch(NYSE:MER)(NYSE:MER) acquisition, it seems a wise course of action with all these "troubled" firms that everyone should step back, take a breath, and engage in real research and investigation of what is actually being bought and sold in these rapidly constructed purchases.

You would think a bank should be able to read the balance sheet and critically examine what the assets they are purchasing are worth. In a retailing firm, there are many more "Gray areas" to look over. The Court's obligation is to the shareholders, so we'll see what they decide.

Wednesday, January 14, 2009

Hertz Would take on Additional Risk if they start Hedging Fuel

Source Article
Hertz Looks Into Fuel Hedging to Lock In Prices, Control Costs - (See Article)

1) Fuel Costs are an easily passed-though item to the consumer

2) Hedging increases potential losses in exchange for incremental expense control

3) This is an unnecessary complication to a straightforward expense model

Hertz's announcement that it's going to look into fuel hedging as a way to control costs makes very little sense from an operational point of view.

One of the most widely known and publicized consumer price categories is "What a gallon of Gasoline costs". This should be an easily passed-through to the consumer expense.

Instead of predicting usage and betting on which way the price is going to move, it seems Hertz would be better served by making an advantageous national fleet deal with a supplier. Hertz could take a set discount from retail, or a % markup over "Rack" prices in the specific markets.

It's easy, you still get a discount as opposed to the consumer, and you can pass the costs through at the prevailing retail costs to the customer. Easy and predictable.

Additionally, the oil and Motor Fuels markets have not been behaving in easily predictable ways, certainly not in response to traditional supply and demand curves. Even distribution firms who are in the market with experts every day haven't been able to win at hedging this past year.

It seems fuel hedging is a complication that Hertz should try to avoid.

Thursday, January 8, 2009

Down Only Slightly, Retail Volumes Mask Markdowns Damage

Source Article: U.S. Retail Sales Fell 0.8% in Week After Christmas | (Read Article)

1) Big Markdowns mean it took additional goods to get to volumes.

2) Sales Weakness through the month kept encouraging more markdowns

3) Consumers aren't going to pay full price for goods in this environment.


The retail numbers are out for December, and to no one's surprise, it was the worst season on record. The volumes would have been even worse, except for the drastic markdowns taken by retailers as the traffic and sales tanked.

While the volume numbers are weak, the profit numbers will be nonexistent. "Buy one, get two," and "65% off" are a recipe for balance sheet meltdown.

Retailers decided to push inventory now to minimize the "Hangover" from the bad season, created by the lack of consumer confidence and the crisis in the financing mechanism people traditionally use to "splurge" at Christmas. Saks(NYSE:SKS), Macy's(NYSE:M) and Target(NYSE:TGT) were actively promoting markdowns early, Wal-Mart(NYSE:WMT) went low on toys pre-Thanksgiving.

The problem with that, while it's taking the drastic medicine now, is that consumers start to get used to the "Big Sale" and extra Savings as a course of habit.

It takes long to reestablish margin than it does to regain volume. As the retail roster begins to shake out, and operating results are reported, I guess we'll see who comes out on top.

Costco(NAS:COST) reported a 4% gain, we'll see where their margins were.

It's going to be a tough time for retailers. Let's hope these markdowns were able to be tolerated by the businesses that offered them.

Wednesday, January 7, 2009

Tobacco - The Regulatory Cash Cow

Source Article: Coming Down on Tobacco - NY Times
(See Article)

1) Tobacco regulation has not reduced number of smokers
2) Increased taxes a key feature of regulatory schemes
3) Global rules are to benefit who - governments or smokers?

Tobacco contains a highly addictive ingredient, nicotine. This is why regulators treat it the way they do.

Once people become addicted to anything, be it legal tobacco or alcohol, or legal or illegal narcotics, one of the key regulatory themes of the agencies charged with controlling these substances is the financial component of taxation.

Smoking is clearly a self destructive and unhealthy habit, and within the last few days, we have extended our tobacco awareness to include "Thirdhand" smoke; it is becoming clear that the toxins from tobacco smoke can effect surfaces and materials negatively long after the smoke itself, either of the "Secondhand" or primary (directly inhaled) variety, is gone.

It is clearly good public policy to regulate tobacco sales and consumption, and the fact that an essentially worldwide consensus on how to treat tobacco has been reached, well, this is a great step towards trying to reduce use even further. This remains the ultimate regulatory goal.

Taxation of "Vice" goods is wielded over the users of the "bad" or addictive, substances. They are made to pay for the oversight and regulatory mechanisms that are to protect them, but never are the taxes set to the point where a legal market becomes a prohibitively expensive way to consume the product, making it into a contraband substance that would be subject to criminal penalties.

That's what "Coming Down" on the Tobacco firms would really be...Taxing the consumer market for tobacco products to the point of making legal consumption too expensive for all but the most wealthy.

Prohibition didn't work very well as a social experiment here in the US, so lets figure that completely prohibiting tobacco sales is a non starter, for good reason. With all that being said, the number of regular smokers hasn't dropped in the US in some time, although cigarette consumption is down. Maybe making the habit more expensive is controlling the rate of consumption, but it isn't deterring people from using.

So with a regulatory mechanism and hierarchy in place that can really set worldwide rules for how the tobacco firms can act, it should make it harder for children to be targeted for marketing, which needs to be the primary focus of any regulatory scheme.

And, at the same time the governments continue to milk the cash cow of tobacco regulation. But it's not the tobacco companies who pay, as always, it's the consumer.

Tuesday, January 6, 2009

Global Economic Downturn Primary Reason for Drop in Fuel Prices

Source Article: Drop in Gas Prices only Temporary - Colorado Springs Gazette
(See Article)


1) Basic Transportation infrastructure hasn't changed
2) Investment in alternative fuels needs to continue
3) Current volatility in supply costs has wiped out ethanol industry in US

$4.00 a gallon gasoline this summer, $1.65 a gallon now. OPEC supply cuts don't cause an immediate price spike. Even with lower prices, US fuel consumption dropped 2.7% in December. What the heck is going on?

The worldwide economic slowdown has caused disruptions in major industries across the board, but nowhere does the average US consumer see and feel it so personally as at the gas pump. Prices coming down over 50% in three month in a major consumable should be cause for celebration, but the consumers are still shell-shocked from the price run-up.

The consumer now has to face the stark reality of their position in the energy supply chain...not just end user, but end user who is locked into a consumption pattern they cannot readily change!

Auto loans kept getting longer and longer, now the norm is 5 years, and with what's been going on the consumer credit and automobile markets, the consumer was (and is) driving what they own, or rather, what they are paying on.

Similarly, the vast majority of "Suburbia" was developed on the premise that there will be affordable personal transportation to service the layout of the built-out post WW II US residential infrastructure.

You can't just sell your house to move somewhere with good public transport. You can't reasonably expect local governments to instantly deliver transportation solutions to a population that hasn't wanted them, and until recently, needed them. Funding for public transportation outside of major urban areas hasn't been a particularly important or urgent item on most taxpayer's radar screens.

The prices of motor fuels have been so volatile, that the current low ebb has had another unintended result. The ethanol business in the US had every expense and revenue assumption they based their business models on wiped out in the price swoon of oil. Corn prices and most other agricultural commodity prices have headed down as a result, hammering the farmer and ethanol producers alike.

You couldn't have planned for a more cautionary tale to be told about "alt-fuel" investments. Every time the non petroleum fuels movement picks up steam, it faces the reality that it's own market penetration creates the seeds of it's downfall. The less oil thats consumed, the lower the oil prices go.

The infrastructure and extraction costs of oil are low in comparison to creating an entirely new stream of biofuel or alternative fuels, with the build out of distribution and consumption systems to go with the renewable supply.

Corn ethanol was clearly a misguided effort, "Cellulosic" (non food product feedstock) ethanol seems to be a step in the right direction, but you are building an industry with 21st century dollars and real production costs to compete against a business with 20th century costed and built out infrastructure and extraction costs as the production cost component. The oil that is "Produced" by the oil business is really extracted.

While the US model is for private oil firms to control the supply, in most of the world state-owned oil firms have no incentive not to "Overpump" to achieve revenue targets to support their governments, and not worry too much about per-barrel profits or ROI of the investment made to get the oil. They are revenue, not profit driven, in the main. A petro-economy like Venezuela uses PDVSA as a cash flow device, not an instrument to create return on investment.

So as increasing biofuels production reduces demand for oil, the inclination of the state-owned firm will be to "pump more" to maintain cash flow, and lowering the market price for crude, and consequently, motor fuels.

This is why there needs to be a more rational program at the Federal level here in the US to encourage alternative fuel sources. Whether that's the new "Petro-algae" engineered microbes converting biomass to fuel, or "Switchgrass" ethanol programs taking marginal food production land and using it to grow the ethanol feedstock, the investors in these technologies and businesses need to know they have a "floor" price, guaranteed legislatively, that allows them to plan for a return on the investment needed. If the floor price doesn't activate, it's cheaper than subsidies. If the floor price does activate, it should be for a finite period, so it doesn't foster inefficiencies in the "new" fuel supply chain.

The global economic slowdown has shown how the oil markets will act in a period of reduced consumption. In order to develop a secure alternative fuels industry, the pioneers in that business will have to be insulated from "supply shock" to prices as consumption would drop.

The economic situation with the slowdown is temporary, but the investments in alt-fuel need to be long term. Prices are going head back up as the world economies recover, but action now will help mitigate future shocks to the system.

Friday, January 2, 2009

The Ghost of Christmas (Just) Past

The Ghost of Christmas (Just) Past

1) Retailers are going into extended period of struggling to survive
2) Consumer credit, the primary spending mechanism for mid and big ticket items, is broken
3) "Trading Down" is the consumer trend for 2009

This analysis was written for Gerson Lerhman Group and published Jan 2, 2009

Source Article: Retailers' holiday sales drop at least 5.5 percent (view article)

With a wink and a nod to the esteemed Charles Dickens...

The dismal sales numbers are starting to leak out from Christmas Season 2008, and once the numbers from the major retailers are announced on the 8th, it will be official: The "ghost" of this Christmas just past will be haunting retailers for a long, long time.

There is going to be excess inventory of high-end goods no one will purchase right now, regardless of how desirable they are. Cashmere sweaters are being pushed at a Buy one, get TWO free deal at the Off 5th Saks(NYSE:SKS) Outlets. What do you do to recoup your inventory investment in luxury goods when no one wants them?

Marginal store locations are going to be become cash flow drains on retailers with viable and previously successful business plans. Using Circuit City(NYS:CC) and Office Depot(NYSE:ODP) as examples of this, as the store count comes down, their corporate overhead gets split over fewer and fewer locations, increasing the pressure on each remaining unit to perform while cutting potential ability to advertise and market against their healthier competitors, in these specific cases, Best Buy(NYSE:BBY) and Staples.Pulling out of markets is a short-term and drastic solution if you aspire to be (or continue to be) a nationwide leader in your category. This solution doesn't address how they ended up at a competitive disadvantage to begin with, another "Ghost" that has to have a reckoning with some upper management at various firms.

Linens N Things(NYS:LIN), Mervyns; they are just the beginning of the shake out in retailing specialty and Department store chains. If you aren't nimble and financially strong enough to be able to both pick "Hot" value slanted goods and then price them right, you are in for rocky times with the consumer moving forward in the near term. This next year plus is going to be a "Survival of the Fittest" scenario for retail across the board. Consumers are wary of spending on anything but necessities, and will be until the housing and credit market meltdowns are on the way to being solved, and unemployment, a lag indicator, starts to improve.

Retail won't see things loosen up until the consumer credit mechanism is repaired in a way that allows people to be confident in their ability to spend more than is in the checkbook. Anecdotally, we saw Costco(NAS:COST) cut the price on a 60' Sharp(BSE:523449) LCD HDTV, featured at $3,999 at the beginning of December, to $3,499 the week before Christmas. Under normal circumstances, the $3,999 was a great, almost unbelievable, buy.

Electronics retailers have to be sweating, most people are thinking that 2 year old laptop isn't quite as in need of replacement as they thought it was.

Trading Down is going to be the consumer trend of 2009. Getting the car fixed instead of looking for a new one. If you need a vital appliance like a stove or washer that breaks, maybe taking a "Short-term" contract from a "Rent-to-own" company instead of hitting the local appliance store or Sears.

People are so unsure of the economic climate going forward, even a great retail concept with non-vital goods to market is going to need to work extra hard. Wal-Mart(NYSE:WMT) may be the king for quite some time to come.

Like Jacob Marley warning Scrooge he needs to change his ways, let's hope this season of despair leads to a fresh way of thinking about and solving the challenges ahead for the retail sector.