September 2004

Nobody asked me, but… By Stan Pohmer

The retail sales environment…Recent government indicators show that consumer confidence, the usual barometer of the consumers’ faith in the future (including job security, political stability and the economy) and a predictor of future spending behavior has reached its highest level since just before 9/11…and that’s a real good thing.

But separate studies show that recent consumer spending is down, or at best flat, from last year. Add to this the fact that major retailers have lowered their sales forecasts for the upcoming months, citing lousy weather (see, we’re not the only ones who blame poor sales on weather that’s not “normal,” whatever that is), high gas prices that siphon off available consumer spending dollars and being compared to exceptionally excellent sales in the second half of 2003.

Why the conflicting reports and contrary indicators? Part of the problem is that, though the job market is recovering, it is happening at a slower rate than expected, and the jobs being added are lower-paying, second-tier manufacturing jobs without benefits, not the higher-paying, managerial jobs that fuel an increase in disposable and discretionary income — dollars that become available to spend on the deferrable categories like our products are in. Another factor is that our nation has become almost ridiculously cost conscious, putting more focus on price value than ever. Not only does this put pressure on profits, but it makes the ability to achieve comp sales more challenging. (i.e., if you sold 100 items at $4 each last year, and this year you’ve reduced the price to $3 to be more competitive, you’ll have to sell 133 this year just to meet last year’s sales dollars. With today’s consumer spending slowdown, in many cases this just isn’t a realistic assumption.)

What’s this mean for us in the second half of 2004? I’d be cautious about putting too much faith in consumer confidence reports, where high confidence normally equates to higher consumer spending. There’s just too much uncertainty right now with the speed and direction of the U.S. economic recovery, the volatile price of oil, the continued threats and warnings on domestic terrorism, the upcoming elections, and the global challenges that have an impact on our security and economy to correlate confidence and spending predictors.

From my perspective, it’s going to be a challenging second half. And history shows that fourth-quarter sales performance is a pretty good indicator of what’s in store for us in the first quarter the following year. I sincerely hope I’m wrong, but the sun, the moon and the stars just aren’t aligning correctly right now to predict a pretty picture. Business as usual won’t deliver the success you might be expecting, and price value focus will only compound the problem, so it’s time to get creative and aggressive. Kmart…

Those of you who had a higher threshold for potential pain than I did and bought the new Kmart stock when they came out of Chapter 11 bankruptcy protection in May 2003 have had some of your dreams realized — from an initial offering price of about $15 to a high this year of $84.50. (This still doesn’t offset the financial hit many of you took when it filed and cancelled your receivables.) However, if you’re currently selling to them, I’d be cautious about the future.

Kmart continues to experience mature store decreases, which I find somewhat baffling. Didn’t it close about 1?3 of its weaker performing stores? This should have resulted in a stronger store base that should be generating better numbers. But management is saying that it is focusing on profitable sales, not just the top line and targeting much of its efforts to proprietary brands.

I have to admit that its marketing initiatives are making a lot more sense. It’s upgraded its circulars, cutting back on the number of items, and TV ads now support the themes that are advertised that week (novel approach!). But it’s bolstered much of the bottom line improvement by cost savings at store and HQ levels, and it hasn’t invested much in its stores and operations to demonstrate much change from the past.

But the big question is what the future holds for Kmart. There’s speculation that, based on some of the recent store/lease sales it has made to other retailers, the company is building its future as a real estate player; one analyst went so far as to say that based on selling off the lease locations, the stock is worth over $150 a share (a primary driver of recent stock price run up). My guess is that Kmart will continue to sell off locations to build cash reserves; how many stores will remain, as an on-going retail base, is uncertain. And what the company will look like if it uses the proceeds to invest/acquire new businesses remains to be seen. Bottom line, if you’re selling to them now, be forewarned that, over time, you’ll have fewer Kmart’s to sell to.

For more information on the recent happenings from Kmart stores visit www.gpnmag.com in the news section.

Scotts and Smith & Hawken…

The Scotts Company is more than just products; its brands are equally important to its image and position in the industry and to the consumer.

In purchasing Smith & Hawken’s 56 retail stores, catalog, Internet and store-within-a-store sales base for $72 million, it also acquired new product categories, product lines, distribution, category expertise and a premier, high-end brand that can complement its existing and very strong brand family.

If I were a betting man, I’d wager that the Smith & Hawken brand will become the umbrella for Scotts to build its independent garden center platform on and the vehicle to become a broader assortment, one-stop-shop provider to the IGC channel.

For the full story about the Scotts/Smith & Hawken merger see News on the Grow on page 10.

Martha Stewart…

Talk about a brand in flux! Building a brand around a celebrity is always a risk, and Martha Stewart Living-Omni Media is a case study of what can happen when the spokesperson takes a hit. I’m not about to discuss the merits of the personal legal proceedings against Stewart, but the ramifications on her company are enormous. The brand erosion resulting from her problems has caused advertisers to bail out on her TV shows and magazines, cancellations of her TV shows in many markets and a marked slowdown in retail sales of her labeled products. Can the company survive? In some way, shape or form it might, but it will be a shadow of its former self. Like I said…nobody asked me, but…