Home Depot focuses on Retailing

Results Better Than Expected

Home Depot's better than expected results, given the fact that the economy really isn't growing, shows that the management focus on it's core retailing base is starting to pay off. The forays away from the core home retailing business are over.

The home improvement and "DIY" sectors of the economy have taken a big hot, along with the housing market and decrease in home values. People are fixing what needs repaired or replaced, but really aren't, in most markets, making the big home improvement purchases right now.
Lowes and other home improvement retailers and suppliers are all experiencing the downturn in the housing market firsthand.

There's too much uncertainty in the future course and timing of economic recovery for people to feel comfortable about big discretionary expenditures. So, going back to the basics of good service and knowledgeable associates to assist their customers will pay off in the long run. Working on improving the in store experience for their customers is a great strategy.

They have closed the Expo design centers, are serious about cost controls, and management is really concentrating on being the best home improvement retailer they can be. As long as they continue to look at efficiencies and increasing per square foot sales, the things HD’s management can control, it bodes well for future results.

As long as they stay focused on that very worthwhile goal, HD will come through the balance of the recession poised for renewed growth.

Starbucks asking for Rent Reductions Good First Move

Source Article: Starbucks Pushing Landlords for 25% Cut in Cafe Rents | www.bloomberg.com (view article)

Implications:
1) Cost reductions pay off every month over term of lease

2) Opportunistic move or readying for Market Share battle?

3) Cost Reduction good Defence, what about adjusting to competition.

Analyis:

As reported, numerous landlords have received letters from Starbucks asking for rent reductions of between 20 and 25%. This is a good tactic, and the resulting reduced costs are good for operating results every month.

My question is, is this an opportunistic way to reduce overhead, and admission that they were paying too much for sites when times were better, or are they getting ready to defend market share, as the QSR's lead by McDonald's and Dunkin Donuts, takes a bead on the market Starbucks has dominated for so long? Maybe a combination of the three.

The rent reduction initiative is a good defensive move, but is just another admission that the "Fat times" are over for Starbuck's unless this move is followed up with some "offense."

In other words, pushing back in a big way against the Fast feeders coffee push. Otherwise, at some point, Starbucks will hit the point where a reduced market share cannot be covered by cutting costs.

Innovative advertising, a new food product or two, sharper pricing and promotions, and a real competitive challenge to the upgraded competitors are the real key to long term survivability for Starbucks.

Coffee Wars: Is Starbuck’s in McTroublé?

This article was written for the Examiner.com

Can Starbuck’s maintain in the face of competition from McDonald’s, Dunkin Donuts?

Summer is a great time for a cold coffee drink. This year, consumers have more choices than ever before. McDonald’s (NYSE: MCD) and Dunkin Donuts (Dunkin Brands - Franchisor - Privately Held) pushing coffee products means it could be a long, hot summer for Starbuck’s (NASDAQ: SBUX).

The McDonalds marketing push for the McCafé line of cold coffee drinks, and their upgraded premium coffee program could really cause a shift in served coffee consumption patterns in McDonalds favor. Even more outlets than Starbuck’s and a lower price point could put a real dent in Starbucks revenue.

Starbucks rollout of an instant coffee product this spring is a puzzler to most watchers, and they are really pushing it in stores. This isn’t a competitive response to a larger and deeper pocketed competitor crowding your market. The sputtering food choice upgrade program hasn’t helped Starbucks to craft a response to QSR encroachment into their space.

Dunkin Donuts has been running a campaign featuring cold coffee drinks and also a renewed emphasis on doughnuts. They are a large store count (6,300+) competitor that Starbucks needs be aware of also.

So as the summer coffee war heats up, the question is: Is Starbucks in McTroublé? The consumers will vote with their wallets this summer, and then we will see.

Costco is Rock Solid for the Long Run

Source Article
Costco Net Falls on Litigation, ‘Higher-Ticket’ Sales Decline | www.bloomberg.com (article)

Implications:
1) Costco's results impacted by Litigation settlement

2) Fuel Price declines drove revenue Dip

3) Still a Great Retailer

Analysis:

Costco showed declining profits this quarter, but 40% of the decline was caused by a litigation settlement.

Costco, having the highest member demographic of the warehouse club type retailers, was most affected by the dip in consumer discretionary spending, but it will also be the best positioned to bounce back.

Costco treats its customer-members quite well, has a liberal returns policy, and sells high-quality goods at excellent prices. The fact that income only dropped as much as it did is a testament to this customer friendly philosophy.

Sourcing items at Costco is one of small businesses biggest cost savers, and as has been said many times in the general and business press, small business will lead the way out of this recession.

They are a major volume gasoline retailer now, and the revenue decline is what all the oil companies and distributors (jobbers) experienced, but Costco sells large volumes of gasoline per site, and as prices have firmed back up over the past 6-8 weeks, this bodes well for the revenue bounceback, too. Plus they are ultra competitive in pricing fuel for members, so higher prices help them that way, too.

Sam's Club and BJ's(NYSE:BJ) product mix is skewed more to consumables, so they were better able to get through the quarter, but that is a long-term strength for Costco, not a weakness.

Costco may have had a rough quarter, but they are a model retailer who will only benefit as the recovery starts, whenever that may be.

Home Depot and Customer Service haven't gone together for awhile

Source Article: Home Depot Retrains Cashiers, Shelf Stockers in Turnaround Push | www.bloomberg.com (view article)


Implications:
1) Home Depot grew from it's inception by using skilled associates

2) Service became a lower focus as they grew

3) Focusing on being a retailer again is good long-term strategy


Analysis:

Home Depot focusing on Customer service is a good thing both for the customers and the firm.

As the economy stays in the doldrums, more and more people who wouldn't have dreamed of "DIY" before will be thinking about doing things around the home and garden themselves. A Customer Service emphasis and associates who can provide knowledge for nervous novices is where this company can really take off.

This is where Home Depot originally grew, and where they need to be again to get the business growing in these troubled times.

THD strayed far from it's retailing roots under the prior management, led by Mr. Nardelli. Concentration on doing all the little things right, keeping the stores in stock on promo and fast moving items, making sure there are enough associates with knowledge available to make the customer experience a pleasant one.

Lowe's has been winning the customer in-store experience recently, so to see a momentum swing back to Home Depot, in a tough retail climate, shows the tough initiatives and focus on retailing are starting to bear fruit

Waitrose brings Upscale Convenience to Hurried Consumers in UK

Source Article: Waitrose to open in motorway service stations | www.retail-week.com (article)

Implications:
1) This format has worked well in the US

2) Foodservice component accelerates consumer acceptance

3) A good way to practice "Brand Extension" without getting too far from core offering

Analysis:

Waitrose testing two smaller-format stores based on Highway traffic / Petrol linked traffic as the primary driver is a very, very good idea. The idea of high-quality prepared foods and better fare than generally found in a "C-Store" setting is a winner when done correctly.

Whether in the US, UK or the rest of the EU, people are in hurry and feel rushed for time. The tradeoff of good quality "home time" with the family can still be a good offset to guide an expenditure decision, even with consumer confidence at a low.

As long as there's no discernable quality drop off in service and merchandise from the "traditional" Waitrose Stores, this should be a real winner.
We helped develop a store and Brand some 15 years ago that worked straight along the same thought processes- High Quality food in an upscale convenience setting, and it worked quite well and was very profitable. We were considered quite groundbreaking at the time with the “NexStore” concept developed and built when I was the COO for Knight Energy in Boca Raton FL.

Great Service, uncommon food offering prepared by Chefs, a few hours a day of full service fuel at no additional cost, selection of mid-priced and fine wines, frozen yogurt, it was a real frontrunner in it’s time and day.

The long-term success of concepts like this by Waitrose are all about execution. You can’t just “talk a good game” or look upscale, you need to deliver on those promises. If you do the payoffs are good and long-lasting. It's a good move fo the Brand

Discretionary Spending dip Hitting Casual Dining Sector

Source Article: Hard Times Are on the Menu at Restaurants | www.usatoday.com (article)

Implications:
1) Discretionary Income is Being Spent more Conservatively
2) Adjusting Menus to "Fair Value" propositions key to traffic
3) Keep Signature Items as alternative to "promotional" menu to keep ticket prices fairly normal

Analysis:
Casual Dining is under attack as consumers adjust their spending habits. The dip in consumer confidence was certain to be followed by a dip in discretionary expenditures of all kinds.

Casual Dining, to most people, is one of the most discretionary of spending categories. The fact dinner has seen the biggest drop-off shows it's the family market making the biggest adjustments.

A Menu adjustment to feature "Value" items promotionally is the best way to drive traffic into the casual dining houses again. Whether you can "upsell" your seated customers back onto regular menu items will be the key to how successful the promotions are.

Cutting price across the board on the standard menu, or running "2 for 1" specials would be a more expensive, and more damaging to a quick bounce back when the economy turns. TGI Fridays is taking that approach. Once customers get used to your standard menu at half or reduced price, it's tough to drive them back to paying full markup again.

A chain with an extensive menu, like Cheesecake Factory(NAS:CAKE), really has to feature promotional specials to prevent a costly menu rebuild after the business comes back. Applebee's idea to bring out a new menu is a good alternative strategy.

As fast as the decline in same store sales occurred, a quarter or two of solid consumer sentiment will bring the sector back again. It's how the slump gets handled strategically now that will portend how fast each of the players recovers.

Capitalist Communist Regulators Block Coke's Bid

Source Article: China Blocks Coca-Cola’s $2.3 Billion Huiyuan Bid | www.bloomberg.com (article)

Implications:
1) Chinese Regulators Thinking Short-Term
2) Coke will invest and grow organically in China
3) Huiyuan Shareholders get Disservice from Regulators

Analysis:
The Chinese Blocking Coca-Cola(NYSE:KO) Corporations acquisition of juice-maker and rival Huiyuan just speeds up organic growth in this sector by Coca-Cola, which will become inevitable.

The regulators blocking the acquisition are not only engaging in protectionism, but will now "force" Coke to grow market share organically in the chinese domestic market through their own branding and products. This they will do, and eventually control the market share they were going to purchase through the acquisition.

Carbonated Soft Drinks are a slow growth portion of the packaged beverage business. It is a mature market, and in order to push volume and revenue growth, Coca-Cola must distribute and market other categories of packaged beverages.

Juices and juice blends, Teas of all flavors, energy drinks and bottled and flavored waters are all experiencing greater percentage gains in consumption annually than CSD's.

Coke, if the acquisition is ultimately denied, will need to emphasize these other categories of products in China in order to maintain volume growth, so all this move really does is give the Huiyuan shareholders a formidable competitor rather than a premium buyer for their shares in the product category.

The denial of this purchase is a short-term and short-sited move on the Chinese regulator's part.

Starbucks Instant Coffee Move a Curious One

Source Article: Starbucks has high hopes for its instant coffee | www.marketwatch.com (article)

Implications:
1) Is Move to Instant a "Value" Play
2) Detracts from Barista-prepared "Core" premium offering
3) May Cut In-Store Visits if Successful - Reduce retail profitability
4) Is this the beginning of migrating the Starbucks(NAS:SBUX) business model to become a CPG firm?

Analysis:

Starbucks(NAS:SBUX) introduction of it's "Via" instant coffee product is a curious one for a company struggling to improve performance at it's retail stores.

Is bringing "Via" to Costco(NAS:COST) and Target(NYSE:TGT), and eventually Wal-Mart(NYSE:WMT), a shrewd way to increase overall corporate revenues, or a way to begin to migrate the company model from a retail coffeehouse-based chain to a CPG company?

Starbucks(NAS:SBUX) retail locations have been the driving force behind the firm from it's inception. To make a move to deemphasize any focus on retail is a bit of a head scratcher.

If Via is Starbucks(NAS:SBUX) move to a "Value" product in response to the current tough consumer spending environment, then introducing an expensive alternative for a category (Instant Coffee) considered to be an inferior substitute in their primary North American markets is a tough sell to make.

Is this a more strategic and long-term plan to deemphasize retail and become a premium coffee purveyor through traditional retailing channels? That makes more sense, and putting a premium instant in as the transition begins would be a way to expand those channels and get customers looking at Starbucks(NAS:SBUX) products that would have never considered the brand before.

There's no way to know yet if this is the eventual direction of the business, but the new Starbucks(NAS:SBUX) initiatives to bolster the retail side have been underwhelming, up to this point in time.

The Starbucks(NAS:SBUX) experience was and is about good quality brewed coffee or coffee/espresso-based drinks, excellent customer service and ambiance at the sites. With the margin that coffee delivers, it's hard to imagine that they cannot retool margins and still deliver a retail experience that addresses the current consumer sentiment.

Is Via a misstep, or the beginning of Starbucks(NAS:SBUX) migrating to a new business model? Only time will tell.

Don't Just Stand There, Do Something!

Originally published as feature article in "The Meter" Condevco's newsletter in the March 4 Edition

As we have watched the last month unfold in our little corner of the petroleum field, we have seen:

1) Jobbers filing for bankruptcy, of both the chapter 11 and 7 varieties.

2) Store chains being sold either in whole or in part, and

3) Stations going up for sale with prices that do not reflect the reality of the markets, either in real estate or retail convenience and gasoline.

Here’s a recent conversation I had with a friend who shall remain anonymous.

Ron, “Hey, did you get those listings you were talking about from that client?”

Friend, “No, I went and looked at them but the client is in them upside-down. The businesses aren’t making money and poorly managed, and what they need to get won’t work in this market, so I didn’t take the listings.”

Ron, “Well, do they want to fix the businesses so they can get more down the road?” (I had sent them over a consulting proposal at this friend’s request)

Friend, “They don’t want to spend any money on the business right now”

Ron, “OK, so they aren’t breaking even, can’t sell the stations for what they paid for them, and they don’t want to work on fixing the business”

Friend, “That’s right”.

While I find that a hard to believe conversation, but that’s not the only thing I’m seeing that makes me think the “fight” is leaving lots of folks in the business right now.

In a different time, I guess the owners could figure someone would rescue them by “purchasing the problems” before too long. I have to say, I don’t think that’s the case now. If you have assets that aren’t performing, hoping isn’t the way to go. It’s time to become a retailer again.

Jobbers are going into bankruptcy with no apparent plans for coming out. If you want to be broken up, just skip the Chapter 11 step and get yourself dissolved.

That means pricing your motor fuels as competitively as you are able to, keeping your stores clean and stocked with current and timely product, and making sure your Customer Service Associates are doing all they can for your customers as they walk in.

Condevco is the Customer Service Training and Store Merchandising authority, we can help you freshen up your stores and employees without major expenditures. Be sure to watch for Darcee’s first feature article for The Meter, “Eight Easy Ways to Freshen your Store and Energize your Employee’s Customer Service”

To ask Ron and Darcee for Consulting Help, visit our web site! (Click here)

Starbucks: Soluble or Instant - This New Coffee is a Revenue, Not Brand, Driver

Source Article: Starbucks Takes Plunge Into Instant Coffee | online.wsj.com
(View Article)

Implications:
1) Instant Coffee has downscale Connotation in US
2) Does it "Cheapen" experience of Barista-Brewed beverages
3) Is the "Starbucks(NAS:SBUX)" Coin-op machine next?

Analysis:
The news that Starbuck's is introducing "Soluble" coffee seems to come from left field for a firm as tied to it's Brand Image as Starbucks.

It's as though they are saying "we can't fix the retail experience for our customers any further, so brand extension is the next step."

The news that Starbucks was adding breakfast sandwiches to the store lineup makes sense, It's a competition driver and complements the core premium site-prepared coffee product.

This one doesn't make much sense at all. No matter how good it is, it's still instant coffee. AND, it isn't price competitive at all with current instant coffee products. Perhaps they've researched and found an underserved "Premium Instant Coffee Drinker" niche no one else is aware of.

Instead of brand extension, improving quality of product and retail experience, along with providing some sort of value offering in a "Combo" promotion with brewed coffee and one of the new sandwiches will do more for the business in the long run.

If "Via" is to become the "Value" coffee offering for Starbucks, which is what they seem to be positioning it to be, then they don't truly grasp the competitive challenges that lay ahead for premium consumer brands right now.

If getting Starbuck's coffee for under "A buck a cup" means eliminating the water, then that seems like a strategy gone backwards.

McDonald’s is a chain for the times

Source Article: McDonald’s Profit Falls as U.S. Dollar Hurts Sales | www.bloomberg.com (See article)

Implicatons:

1) McDonald’s Global reach and Marketing muscle will allow increased share

2) Both operating profits and Revenues will continue to grow.

3) The “Wal-Mart” of Fast feeders – low-cost and well-run

Commentary:

While McDonalds profit may have fallen vs. last year’s quarter, they were up in terms of income from operations. Revenue was up, and the future looks bright. McDonalds, much like Wal-Mart has itself positioned to ride through the current economic climate and emerge stronger financially and holding even greater market share.

The “Dollar menu” has forced all the other players to feature dollar and value items, and upped the ante on efficiency and volume. The Wednesday and Sunday .49 Hamburger and .59 Cheeseburger promotions shows the muscle the McDonalds system can deliver. Even as they feature value, they are grabbing share and driving traffic into the restaurants.

The whole “Strength of the dollar” decreasing profits, while true, is a macro situation that McDonalds cannot control. As long as they continue to operate in the manner they are now, they are going to be a consistent and dependable earner who can continue to grow their business.

Consumers are looking for relief from the daily drumbeat of economic downturn news; unemployment and layoffs soaring, auto firms on the ropes, Wall Street bailout questions… here’s the antidote for middle America, and McDonald’s has it.

You can still easily feed a family of four at McDonalds for under $20.00, even if no one is taking advantage of the value items. If you’re watching your money closely, it can be done for $10.00/$12.00. The kids might not get those Happy Meal toys at that expenditure level, but you’re still having dinner out.

The time of reckoning is here for most families in the working class; they may not be facing economic disaster, but there is very little comfort in what the future holds at the moment. Most people have little confidence that things are going to rapidly improve with the nation’s economy.

That’s where an iconic brand and offering like McDonalds can make a big market share move through operational efficiency and value instead of fighting a marketing war with advertising dollars and giveaways.

Burger King, Wendy’s and the Yum brands are all offering value. Wendy’s 99 cent menu was really the first of these regular value offerings way, way back, but the store count and ability to deliver food at a low cost that McDonalds can offer will mean the others can’t be the driver in this competitive sector.

Denny’s Grand Slam giveaway was just completed an hour or so ago; while it’s tough to beat a “Free” offer, it’s not a sustainable competitive position, just a promotional gimmick. McDonalds can sit at the value menu prices as along as it needs to, and continue to earn just fine.

Home Depot Cuts: Getting Back to Core Business Good Idea

Source Article: Home Depot will cut 7,000 jobs, exit Expo division (Bloomberg.com)

(Read Source Article)

Implications:

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


Commentary:

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.