The Robin Report - Issue 2 - November 2010 by The Robin Report

ROBIN REPORT The

Issue Two November 2010

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CHINA

Communists – Capitalists – Conquistadors

Dear Reader… As we head into the over-analyzed, all-important Holiday retail season, I’m having flashbacks to “the land of the rising sun.” However, my image gave way to a deflating sun, as Japan withered from its strong and rising number two spot on the global economic stage, brusquely shoved down to third place by the now blinding sun rising over China. There are two big time messages in this metaphor that should give pause to our economists and general business and financial communities.

This isn’t really an old Chinese Proverb. I composed it in 2004 to introduce a feature story on the opportunities and threats to be expected from China. Its suggestion, that China will forward-integrate and acquire American assets, including retailers and brands, is now even more prophetic than it was back then. China’s enormous and rapid growth has allowed it to recently surpass Japan as the world’s second largest

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Who’ll Blink First?

And How to Get Out of the “Value Vise” that Kills The light at the end of the tunnel is not what you think it is. It’s a train. And, it’s loaded with a bunch of stuff freshly made in China and elsewhere bearing, on average, a 10% cost increase, according to Li & Fung, arguably the world’s largest sourcing agent, at a recent Goldman Sachs conference. This rise in costs, according to L&F, will be driven primarily by higher raw material prices, cotton being the major one for apparel, as well as labor and transportation, to be tacked onto larger orders than last year (due to “shelf” replenishment going into the Holiday season.)

Who among the many players in this pipeline staring contest is going to blink first in accepting these higher costs? Well, just as with death and taxes, the only thing we can be sure of is that consumers will not be blinking at all, only nodding – and only at lower prices. Hanesbrands, VF Corporation, Jones, Carter’s and JC Penney have all declared they will be raising prices next year. Two words for them: good luck! > Continued on Page 4

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ROBIN REPORT I N S I D E t h is iss u e

Dear Reader…

• Dear Reader ……....................1

First, if you take my “Who Blinks First?” article to a potential end scenario, the U.S. economy could easily fall into a Japan type deflationary cycle. It’s pretty simple. Not only will consumers not “blink” first and give in to higher prices (due to inflating commodities, raw materials, labor and shipping costs), just the opposite is happening. More than ever, consumers are demanding lower and lower prices. I guarantee you, we will see one of the most promotional Holidays ever, which means that manufacturers and retailers will be forced to take the hit on their margins, which means they must find lower costs or take costs out of the product, which means they will give in once again to lower prices, and so forth and so on, a deflationary cycle.

pricing in the U.S., which our consumers will not accept.

However, regardless of the inflation occurring on the cost side, China will absolutely not allow their blinding sunrise to dim. They cannot. Because the sunrise is comprised of two components: one, a rising standard of living demanded by their people; and, two, the necessity to keep their manufacturing engine at full speed to generate the jobs, income and economics to support the rising standards. To fail on either of these components will result in social unrest, disorder and worse: a possible threat to the regime.

Ironically, in the end, the very deflationary cycle our government wants to avoid by, in part, pressing for a stronger yuan, may instead drive China to buy our country.

•C HINA: Communists Capitalists Conquistadors.................…1 Robin Lewis

• Who’ll Blink First?............... 1 Robin Lewis

• Q&A with rob sweeney……3 • The Daily Battle for Consumer Loyalty …………. 6 MasterCard Advisors Merchant Solutions

•B eyond The Merchant Prince ................ 7 Herbert Mines Associates

• ToVieFor is to die for ..…....... 9 • Homeless in Bentonville..................….…10 Warren Shoulberg

• fr om casual chatter to decider-in-chief...............12 Kurt Salmon Associates

• The Spa Treatment……....... 13 Dana Wood

• T hrowback in Need of A Makeover................…14 Pacco Underhill

•E XPORTS? WHAT EXPORTS?................… 18 Robin Lewis

• quotes to remember…….. 20

So, message number two is: China will do whatever is necessary to keep its lion’s share of Americans’ wallets. The conundrum, however, is how do they maintain low costs while increasing the Chinese standard of living, to say nothing of higher materials and shipping costs? Further, their currency, the yuan, is under pressure to increase, which would simply pile on higher

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How will this conundrum play out? “Next Stop USA,” a section in this issue’s China article, spells it out for you. For the Chinese to keep their sun rising, to lock in U.S. consumers’ wallets, and to additionally increase their own consumers’ spending, all with a strengthening yuan, China will acquire U.S. brands and retailers. Thus, by owning the higher margin market segment of the supply chain, they can better absorb pricing pressures. They can also export sought-after American brands more easily back to China. And, finally, they can begin seeking lower cost manufacturing sources around the world.

Read at your own risk.

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for Kohl’s Department Stores, and dozens of others. In addition to his role as Publisher and CEO of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology, where he teaches the thesis of his book, The New Rules of Retail, co-authored with Michael Dart, Partner and Managing Director at KSA. The book will hit stores later this year.

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Q&A WITH Rob Sweeney

Managing Director & Head of the Retail Investment Banking practice at Goldman Sachs Rob Sweeney answers questions about some big picture issues surrounding the retail industry, current valuations and the capital markets, and the industry’s attractiveness for activist investors. Rob explains why such investors, along with many private equity firms, are particularly drawn to the retail industry.

Rob, it seems to have been another very busy year for Goldman Sachs in advising retailers. In addition to your recently announced role working with JC Penney, your firm has also advised Gymboree in the announced sale to Bain, and Burger King in the sale to 3G Capital. Do you think there is a lot of private equity capital sitting on the sidelines?

A: Robin, I do think there is significant private equity capital

to be invested. That’s not a particularly controversial or insightful comment—a number of third party sources have published estimates on the aggregate dollars committed but not yet invested. Those numbers vary somewhere between $300 and $500 billion globally. When those figures are levered 4 or 5 or 6 times, the implied purchasing power is immense.

D o you believe the time is ripe for private equity investors to focus on retail? Why?

I believe there are a number of market factors, and a number of company specific factors, that favor increased activity. Of the market factors, the most notable is the financing environment. The cost of debt capital looks low relative to the cost of equity capital—so sell the debt and buy the equity. As you’ve probably read, across the entire ratings spectrum, companies are financing at historically low rates, tight spreads, and favorable structural terms (covenant “lite” loans for example). Our perspective is that the thirst for yield has lowered risk premiums being assigned to lower quality credits, to the advantage of issuers. With a debt market that is willing to lever retailers through 6 times EBITDA in some cases, public equity valuations look attractive relative to the private market. As to the sector-specific factors, many retailers have accumulated significant cash as square footage growth has slowed and margins have expanded. A number of retailers today have cash on hand that approaches an estimated 25% of market capitalization. Imagine the drag on earnings of carrying that much cash that’s generating zero or near-zero interest income. The pressure to return that cash to shareholders is likely to grow.

Q: So, do you believe we’ll see an acceleration of private

equity activity in the retail sector? And, in your opinion, can you cite some potential targets, and if not, some sectors? And, if so, why?

I believe we will see continued interest in the sector, from both traditional private equity and public equity “activist” investors. Not all interest will result in publicly announced transactions, obviously. In fact, I believe some of the activity may be more likely to spur “self help” actions such as increased repurchase or dividend payouts. I can’t comment on specific companies or sectors, but in general terms I think the focus will November 2010

be on companies who fit one more of the following: 1) display lower operating volatility, providing an ability to assign high leverage, 2) have displayed an inability to close a performance gap with a key competitor, resulting in lower profitability which could be corrected with improved management, 3) possess an asset that is under-appreciated by the public markets (e.g. international expansion or new concept or new channel), 4) display “actionability” (e.g. disgruntled shareholder base, or frustrated management team.)

O bviously, the investors’ ultimate goal is to make more money. However, can you describe the different strategies employed to accomplish those goals, both short and long term?

T here seem to be as many strategies as there are buyer for many of these situations, but some do seem to recur as themes. The first I would describe as basic retail blocking and tackling—i.e. simply executing better with the same assets. Often that involves changing management or changing cultures, as I would argue KKR and Rick Dreiling have successfully done at Dollar General. Second would be capital structure optimization or adjusting the ratio of debt to equity in a way that lowers the overall cost of capital without adding outsized risk to the equity. Private equity buyers have the advantage of investing across a variety of companies, further diversifying the equity risk. Third would be identifying undervalued assets within a company and realizing the value arbitrage by separating the businesses. There has periodically been significant focus on real estate as an asset to be monetized, or on credit card businesses, or on whole companies within companies, which was the rationale when we took Tim Horton’s public out of Wendy’s. Of the three themes, I would categorize the first as long-term and the second two as shorter term. The “activist” approach of advocating for the strategies above as a public shareholder is a relatively recent phenomenon. As public investors have gotten more aggressive and vocal in advocating for change, have had some success, and have had the support of some outside governance experts, managements have been forced to respond.

W hy do these retailers need to retain investment banks like Goldman Sachs to help them if in fact the investor’s intention is simply to improve the business?

I would never be so presumptuous to suggest a company had to hire an investment bank. What we have found is that our clients are experts in running retail businesses, but are not experts in responding to approaches from either friendly or unfriendly buyers or shareholders who are advocating a particular position. Responding to and evaluating the veracity and financial impact of specific proposals typically requires investment banking expertise. As you can imagine, the distraction and cost of mishandling such an approach can be significant, so the rationale to a board of directors for bringing in outside experts is compelling in many cases. In this business, experience matters. RR

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ROBIN REPORT Who’ll Blink First? And How to Get Out of the “Value Vise” that Kills > Continued from page 1

Go ahead and raise prices and observe how quickly your customers spot equivalent value for a lower price right across the aisle. Then observe how quickly your margins shrink as you put your stuff on promotion. In support of this rather obvious opinion is an American Pulse survey recently conducted by BIG research in Columbus, Ohio. First of all, 81% of Americans don’t think the recession is over, and 71% feel they are better qualified than economists to determine its end. 78% say they lost wealth in the last two years due to declines in the value of their home, lost jobs and declining interest rates on their savings. So, the final fact that 77% of them say they are not ready to start spending like they did prior to the recession is kind of a no-brainer. Also weighing in is Bruce Cohen, a partner at Kurt Salmon Associates, who commented that KSA’s recent consumer survey found “….consumers are saying pretty loudly that they are in no mood for price increases this holiday season given the economic and employment uncertainty. We know the industry will be under great pressure given this tough environment. Price increases, if they occur, will be made with surgical precision as opposed to being broad based, and will be quickly mollified by promotion if volume declines occur.” Therefore, while Terry Lundgren, CEO of Macy’s, commented at the same Goldman Sachs conference that sometimes a little inflation is a good thing, referring to the possibility of raising prices slightly, I found myself blinking in disbelief several times at his unabashed optimism. Instead, I’m betting with William Simon, head of Walmart’s U.S. stores, who said during the same meeting: “We expect a very, very competitive and aggressive Christmas and holiday selling season, price-focused. Customers are focused on their savings, and challenged by

unemployment close to a 26-year high.” He’s clearly blinking ahead of the pack. And he is likely blinking into 2011 as well. On the other hand, and perhaps with a wink, Manny Chirico, chief executive of Phillips-Van Heusen Corp. (owner of the Calvin Klein and Tommy Hilfiger brands), told the Wall Street Journal: “Everyone’s talking about raising prices.” He also said costs are up 5% to 7%, and that he hopes to recoup some of that by increasing prices 3% to 4% starting late this year. I’m guessing that wink will turn into a full-blown blink before too long. Finally of course, as the currency issue and its effect on trade continues to heat up the debate between China and the U.S., I find myself shaking my head about the paradox the U.S. seems to be setting itself up for. It wants China to increase the value of the yuan so U.S. goods will be cheaper, thus increasing exports and putting people back to work. Blink, blink, indeed! I ask: what is it we actually produce today? (see article on pg.18). And, how much of it would we need to export to make a dent in our economy? And, the paradox arises out of the fact that as the yuan increases, it further raises the prices on their goods which will completely alienate already priceconscious consumers in the U.S., who just happen to account for 70% of GDP, which itself is gasping for air. Talk about shooting oneself in the foot, the U.S. seems to be doing a lot of it these days. Returning to the question of who will blink first, the only blinking that will be going on will be between wholesalers and retailers, and there will be a lot of it, maybe even spasmodically, as they put their higher priced goods on promotion and watch their margins take the hit.

that if the gamble on “shelf” replenishment and higher inventories is placed on the wrong number, there could be a lot of blood-letting. And some evidence that this may be the case comes from The Ports of Long Beach and Los Angeles, which handle about 40% of all American imports. In August, when holiday shipments arrive, they had about 710,000 containers, which was more than in the same month during 2007, when the economy was vibrant. So, if the consumer only nods at promotion-mania, leaving trainloads of stuff on the shelf, a lot of CEOs will find bags of coal under their trees, and no job to go back to after the Holidays. Is This a “One-Off?” or a “Keeper” So, is this pesky inflationary build one that so small and insignificant we’ll be able to “toss it back in,” or is it a keeper? Is it going to stick and possibly get even stickier? It’s not only going to get stickier, the ability to find low-cost producing countries that can meet the complex requirements of today’s giant retailers and wholesalers of response times, logistics, quality, and other operational and distribution standards, is going to get tougher, eventually hitting a wall. And when it does, a ton of small and medium sized businesses are going to disappear. Only the biggest ones, those with margins fat enough to absorb the higher costs, will survive.

And, to add further potential fuel to the fire, since retailers and wholesalers had been so good about controlling and cutting inventories to the bone, thus enjoying a decent run of higher profitability, the issue has been raised

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The only blinking that will be going on will be between wholesalers and retailers, and there will be a lot of it, as they watch their margins take the hit. Maybe this is when we will finally see a purging of the excessive wasteland of stores and stuff across this country. You know I’m not betting on that one. Somebody will prop up the losers, hoping to preserve an “iconic brand” or somehow to magically turn it around, or, if “too big to fail,” there’s always the government (read: us, the taxpayers). I digress. Even now, the narrative around inflation, particularly in China and particularly among the big players, is that even though Vietnam and Bangladesh are lower cost producers, there are now all those other requirements mentioned above, that have become “baked into the cake” so to speak. So, for giants like Nike, Walmart, VF Corporation, Jones NY, and many others, to move their production for lower costs alone would not only be enormously disruptive to their current businesses, but the costs, time and effort required to re-establish the “in the cake” operating standards they’ve grown to expect from China would be enormous. Further, they risk the potential that such requirements may not be possible in these other countries. China is attempting to address the rising labor cost issue by replacing the manufacturing of lower-cost apparel, footwear and toys along its eastern coastal areas with higher-cost technology and electronics. They plan to move the lower-cost production further west, into the mainland, accompanied by massive highway and infrastructure construction in an attempt to maintain lower costs (additionally providing jobs), and to maintain a semblance of the service requirements expected by Western businesses, in order to keep them from pursuing another country. November 2010

The “Value Vise” That Squeezes Companies to Death and the Way Out Having said all of this, for as far as we can see into the future, pricing flexibility will continue to be squeezed. Market saturation in the U.S. will simply never go away for more reasons than I have room for here. This of course results in consumers’ refusal to pay another penny for something that’s no more valuable than hundreds of equally compelling choices right at their fingertips. And, horrifically, they will continue to demand more value for the same price, because that too, they can get. Why? Because, you, poor reader, (if you are a supplier), will jump through hoops to give it to them, knowing if you do not, you will soon disappear. This is what I call the “value vise” that ultimately squeezes companies to death. Because, the most direct knee-jerk reaction for most businesses is to relentlessly pursue lower and lower production costs, a treadmill that never ends, until the lower cost cannot be found. And then, it’s curtains. There are only three ways to address the “vise” for survival. First, regardless of the size of the business or sector (luxury included), one must relentlessly drive a competitively low cost model (across the enterprise, not just for production), combined with maximizing productivity, and constantly adjusting both. Second, rather than dropping the cost and productivity savings to the bottom line, they must be invested in innovation and/or raising the perceived value of the product, brand or services.

The innovation and investment must be in three areas: 1. developing new distribution platforms to gain preemptive access to consumers ahead of the hundreds of equally compelling competitors; 2. creating an overwhelming, neurologically connecting experience whenever and wherever the consumer is touched by your brand or store or website; and 3. the relentless pursuit of gaining control over your entire value chain to ensure the preemptive distribution of your addictive experience from creation all the way through consumption. Unfortunately, this daunting scenario, with the consumer in the catbird seat never having to blink, does not describe a future of outsized profits and growth, happiness and bliss. Rather, it’s a reality show that suggests joy can be found through the pursuit of quality over quantity, where size doesn’t matter and a nice tidy profit can put one into a nice quality of life. Sorry about the “bluebird of happiness” sermon, but hey, it truly is the small, entrepreneurial-centric century, which will ultimately consist of an infinite number of finite market segments, being served by an infinite number of finite brands, and distributed through an infinite number of distribution platforms. So mega-brands, start blinking. The entrepreneurs are coming. RR If you’re interested in learning more about Robin’s view of the future, and how to get out of the value vise, look for the book he co-authored with Michael Dart of KSA entitled The New Rules of Retail: Competing in the World’s Toughest Marketplace, to be released by Palgrave-MacMillan on December 7th.

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ROBIN REPORT The Daily Battle for Consumer Loyalty New Consumer Intelligence Tools for Tough Economic Times

Insights From MasterCard Advisors Merchant Solutions

In this tough economic environment, every retailer knows how critical maintaining customer loyalty is to being successful. As money has gotten tighter, consumers have become increasingly willing to shop around, breaking their traditional shopping patterns in the search for value. Digital media, social networking and the smartphone have also changed the face of retailing forever. When a shopper can find out about a new product, compare prices, or follow a blog about fashion trends - all in the time it takes for her to walk from the parking lot to the mall entrance – then nothing can be taken for granted about where she will shop once she enters the mall. The net outcome of these two trends is that customer loyalty has become a more and more precious commodity in the modern retail landscape. To manage customer loyalty effectively, of course, you must first be able to measure it precisely and consistently over time. A robust loyalty metric needs to do more than simply monitor the value of your customers’ spending at your stores or website – it needs to help you to understand how much those same customers are also spending with your competitors. In short, you need to be able to measure your ‘share of wallet,’ as well as your share of the market. Driving strong differentiation is then the key to increasing that customer loyalty – and for this, you need truly deep and granular insights into not only the profile of your customer segments, but the behaviors of those segments as well.

valuable behavioral insights, but also about keeping those insights fresh, relevant and actionable in this fast changing world. Given this, relying on periodic or survey-based insights can seem like a slow and cumbersome process, as well as being prone to the biases of any self-reported data, especially in such challenging economic times. Yet most retailers’ appetites for ‘real time’ behavioral data have only become stronger as a result of the explosion in web analytics, and the (sometimes overwhelming) quantity of data and insights that this can provide. Getting to a place where behavioral insights about the loyalty and spending patterns of your customer base can be gleaned, in as ‘real time’ a fashion as possible, and in a way that spans both store and online channels, is now the key focus for many retailers. Monitoring performance is only part of the story. Customer insights also need to help us explain behavior - to reveal “the why behind the buy” through profiling key segments. Understanding your best

customers’ behavior by examining only what they spend with you is – let’s be frank – taking a somewhat narrow view. And while appending sociodemographic and lifestyle variables to your house file can certainly help, the outputs are really only as good as the surveys from which the data has been extrapolated. And besides, particularly in this volatile environment, just how useful are geo-demographic attributes at explaining (much less predicting) actual consumer behavior? Understanding the behavioral profile of your different customer groups - segmented on the basis of their actual spending in your category and by their loyalty to you – can add a whole new dimension to your insights. What is it that makes your most loyal customers different from those who shop with you only occasionally? And by comparing the behavioral profiles of these segments with those of your competitors, you can really start to tease apart what exactly it is that makes your customer base different from people shopping elsewhere.

The quest for such ‘customer centricity’ as a driver of loyalty has been a key pillar of strategy for many a retail CEO over the past few years – some executed more successfully than others. But with shopping behaviors changing so rapidly, the challenge is now not only around measuring loyalty and developing

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One major retailer cancelled a major promotion and saved millions of dollars when our share data revealed that, despite falling sales, they were actually outperforming the competition and gaining share in what was a shrinking market. This kind of insight can start to really unlock the key dimensions of differentiation and thus open the route to winning increased loyalty. The billions of transactions that MasterCard processes as a payments network creates a very rich and granular data set from which powerful aggregated insights into loyalty and shopping behaviors can be quickly and accurately derived. Over the past year we have been helping a growing list of retailers and travel/ hospitality merchants stay ahead of fast-changing consumer behaviors by providing them with an ongoing flow of timely, detailed information and analytical insights. For some, the focus has been

on understanding changes in the level of aggregate consumer spending in their sector – and the outlook for demand in the months ahead. For others, it has been about quantifying the impact a new store format has had on customers’ spending at competitive locations within that store’s trade area – or using real behavioral data at very loal geographic levels to optimize new site selection. Given volatile markets, many have seized the opportunity to monitor their market share more closely, as well as benchmark their performance on key metrics like average purchase frequency and average ticket against a cloaked competitive set - right down to individual metro areas. One major retailer cancelled a major promotion and

saved millions of dollars when our share data revealed that, despite falling sales, they were actually outperforming the competition and gaining share in what was a shrinking market. Such is the value of timely, accurate insight in today’s retail business. The new retail environment means that the battle for customer loyalty is one that has to be re-fought every day. Access to timely, granular data on actual spending behaviors can provide critical guidance in navigating this new landscape. Fortunately, there are some new information tools that can help merchants do just that.RR Andrew Woodward is Senior Vice President for merchant solutions at MasterCard Advisors. He can be reached at andrew_woodward@mastercard.com

Beyond The Merchant Prince Finding New Retail Leaders Has Gotten Tougher Than Ever

Reflections on The Corner Office from Herbert Mines Associates

Faced with seismic changes in the retail world, companies want leaders who can navigate through a complex, evolving market environment and create a vision for a company that captures the fast-moving customer. We talked with Hal Reiter, Chairman and CEO of Herbert Mines Associates, the go-to guy for C-suite executive searches in the retail, apparel and other consumer-facing industries. AS THE RETAIL WORLD EVOLVES, IS THE MERCHANT PRINCE STILL KING? What’s interesting about the present and future of retailing is that merchandising has remained the driving force

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with a storied past. The model CEO understands that what is paramount is drawing customers into the store, then getting them to open their wallets. WOULD YOU EVER ENVISION THE NEXT MERCHANT PRINCE COMING FROM AN ONLINE RETAILER? The young online entrepreneur may be the new merchant prince of now. But you won’t find the 30 or 35-year old founder leaving his or her business and going to work for a traditional retailer. Online retailing is a virtual experience, very different from the brick-and-mortar world. Someone running an online business, for

instance, has no idea where the cash goes out of the cash register at the Tyson’s Mall at the end of the day. There are lots of reasons that the old saw is true: retail is detail. SOME SUCCESSFUL RETAILERS BELIEVE THAT THE BEST WAY TO LEAD IS BY INTUITION. IS GUT INSTINCT ENOUGH? The CEO is a manager of managers. He uses intuition in everything he does—selecting people, merchandise, bankers, communicating with Wall Street bankers and stockholders. But gut instinct is not any more important than managing your inventory or > Continued on Page 8

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ROBIN REPORT with people, who have an instinct and passion about product and who think the retail business is fun. Their passion for apparel, for instance, is deep and broad, and it extends from fabrics and buttons to thread to simply watching people as they shop. Your merchant CEO has an appreciation for the product and it doesn’t matter if someone is selling tires or hubcaps or Hermès ties. HOW SAVVY DOES A CEO HAVE TO BE ABOUT SOCIAL MEDIA AND E-COMMERCE? CEOs certainly need to be aware of the importance of the Internet and the contribution it can make to the top line. It provides them with opportunities to share company views and financial information and interact with employees. But social media is still in its infancy. One recent study showed that 64% of CEOs from the world’s largest companies are still not using social media channels. > Continued from page 7

managing your balance sheet. You have to have good right and left brain instincts. As for other qualities, a leader has to be a good listener and communicator, have personal presence and charisma. A leader should also be able to generate a positive feeling about a company in the outside community. Plus he or she has to have a strong financial sense, particularly in today’s climate. IS IT TOUGHER TODAY TO FIND NEW RETAIL LEADERS? Right now, the industry faces a huge war on talent. But the demand for skilled leaders has always existed. If you go back and read the writings of Confucius, you’ll find that he talked about the “dearth of talent.” The number of people capable of running large, complex organizations are few. HAS THE BLURRING OF THE TRADITIONAL RETAIL-VENDOR RELATIONSHIP AFFECTED YOUR RECRUITING PROCESS?

We’ve seen manufacturers become retailers and retailers become wholesalers. The collapse of the boundaries of the selling channels means we’ve had to make some transitions. In the past, we would find a product development head for a wholesaler and now we’re finding the product development head for a retailer. Before we’d find a head of store operations for a retailer, now it’s for the wholesaler. For instance, Burberry now has a head of stores. Macy’s has a head of product development to create products that look like Burberry’s. Same church, different pew. IS AN MBA DEGREE A PLUS DURING THESE CHALLENGING TIMES? At the end of the day, an MBA isn’t important to run a business. You can hire plenty of people with business credentials to work for you. Merchants are not trained, they are born. You won’t find a lot of introverted engineers running retail companies. Instead you find people who are charming and good

WITH THE SEA CHANGE IN RETAIL, DO YOU HAVE ANY ADVICE ABOUT HOW FUTURE LEADERS SHOULD BE TRAINED? Future leaders need to grab as much knowledge as they can on the way up. It’s up to them to take responsibility for their own growth and development. The more they learn early on about various disciplines—planning, inventory, merchandising—the better off they will be in their ascension to the C-suite. RR Harold D. Reiter is the Chairman and CEO of Herbert Mines Associates, the leading executive search firm specializing in C-Suite, senior level and corporate board placement for fashion, retail, e-commerce, food, chain restaurant and consumer product companies. Hal and his colleagues at the firm have secured top-tier executives for an impressive roster of blue chip clients including Barneys New York, Wal-Mart, Avon, Macy’s, Starbucks, Rue-La-La, Chico’s and Pier 1.

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ToVieFor is to die for New E-Commerce Site Offers Luxury Goods, Vegas-Style numbers, you must bet on how low you believe the price of the bag can tick down to, at which point you hit the “buy” button. However, your low price guess (and bet), along with the bag, are lost if any of the hundreds of other members hits the buy button ahead of you (at a higher price). You also lose the credits, albeit at a buck or so each, it’s no big loss.

Sorry, we just couldn’t resist the trite sound bite! Unlike the timed flash sales of the Gilt Groupe, Ideeli and Rue-La-La, whose members addictively rush to the their sites daily to snap up luxury items ahead of other members at a given discount price, ToVieFor is a brand-new form of online luxury sales addiction with more than a little bit of Las Vegas type-betting risk involved in its limited-time selling events. Members can actually name the price that they’re willing to pay for handbags and accessories they’re dying to own! That’s right - instead of set discounted prices for an array of post-season or excess inventory items in the timed “fire-sales” of the others, ToVieFor posts a date and time for the sale of a limited number of a specific in-season, hot item, such as a Burberry knotted check sling bag. A member who is dying for that bag logs in to the sale at the prescribed time with one or two “credits” necessary to play (cost of 99 cents, cheaper in bulk). The auction starts at the full suggested retail price of the bag. Then as the clock starts to tick down, so does the price. The more members participating, the faster the price drops. Now it’s “white-knuckle” casino time. Just like dying for the ball in roulette to drop into one of your bet- upon red

November 2010

ToVieFor didn’t invent this selling tactic. The Dutch have been using the “clock auction” in their wholesale flower markets for centuries. However, this is the first time it’s being used to sell luxury goods, and so far, the concept is a huge success. Within two weeks of launching in October, the site had 2,000 members, and sold out of each lot in every one of its five sales within 20 minutes of the auction start time, with winners paying on average 40% off the full retail price. Future sales will occur daily, and include goods from partners including Marc Jacobs, Coach, Kenneth Jay Lane, Alexander Wang, Reed Krakoff, Richemont, and others. Don’t Let the Addicted Die Off Once ToVieFor develops addicted heavy users, they want to keep them coming back, and not lose them to the frustration of too many losses. So, just as Vegas wants to keep their high-rolling addicted gamblers coming back by providing airfare and free rooms, ToVieFor offers its frequent players some discounts and incentives such as a gift card for a price discount of the brand they may have lost out on, and Burberry may also follow up by emailing a coupon to the loser for 20% off. What’s the Take for the Brands? Obviously, the ToVieFor business model is also a great marketing tool for the luxury brands. First of all, as mentioned, unlike Gilt Groupe and Rue-La-La who buy excess inventory or post-season

merchandise, ToDieFor purchases only in-season, most popular items from such iconic luxury accessory brands as Valentino, Marc Jacobs, Ralph Lauren, Versace, Coach, Kenneth J. Lane, Burberry, and many others. And, since ToVieFor is only buying a very small number of items, as few as five or as many as fifty, which may be vied for by 200-500 members, the brands see scarcity in driving the losing players to the brand’s site or store where they might pay full price, or at least a coupon or gift card-discounted price. WHAT’S THE TAKE FOR ToVieFor? There are three revenue streams for ToVieFor. Members must purchase one to five “credits” to participate in each sale, (99 cents each as mentioned, and cheaper in bulk). Secondly, they keep the margin between their wholesale purchase of the items and what they sell them for. Initial gross margins have been around 60%, not including downstream commissions earned on any sales made to customers they redirected to the brand’s websites or stores, either through coupons, gift cards or other incentives. So, check out ToVieFor, but watch out! It could be habit-forming. RR ToVieFor and many other entrepreneurs are targets of FashInvest, a unique new service that fosters such entrepreneurs by bringing them together with investors seeking the next UnderArmour, Gilt Groupe or Tory Burch. Fashinvest will hold its first annual capital conference on December 15th at New York’s Fashion Institute of Technology (FIT). Keynoters are: Neil Cole, CEO of Iconix Brands; legendary designer Norma Kamali; and Rue La La Founder and CEO Ben Fischman.If you are interested in seeing breakthrough new business models across the retail, fashion and branded consumer goods industries and hearing from the entrepreneurs behind them, visit fashinvest. com for more information.

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ROBIN REPORT Homeless in Bentonville Will all due apologies to Bob Dylan:

“ Oh, Mr. Sam, can this really be the end, To be stuck inside of Bentonville With the home furnishings blues again.” Whoever would have thought it? The biggest big box of them all. The grand, high falutin’ retailer of the world. The mother of all megastores. And they don’t have a clue what to do about their home business. What’s a Walmart to do?

By Warren Shoulberg house brands, no brands and Brand X. And none of it has worked very well. Some of what’s going on in Walmart home reflects what’s going on in Walmart fashion. A consistent inconsistency has set in and the store just can’t decide what it wants to be. The problem with home is that, unlike in apparel where some of their key competitors have also stumbled around, many of the other players in this retail space have had their home acts together. Target, with the occasional misstep, has gotten this cheap chic thing down pretty pat in home and the customer knows what to expect when she shops there.

I have the utmost respect for Walmart. They are an amazing operation and they’ve changed not only the retailing world, but also the entire world by their very presence.

Kmart, when it was still a retailer, built its home department around Martha Stewart and it was an enormously successful endeavor.

Most vendors will tell you they are a stand-up operation: Tough negotiators upfront but never abusive or prone to cheap chargeback tricks.

Kohl’s has built a strong stable of private brands and they seemingly have a sixth sense about when to cycle out of one and bring in something new to the mix.

And they’ve cleaned up their public image a whole lot over the past few years, presenting a much more politically correct front to the world. I even think Sam’s Cola isn’t bad.

Penney has one of the strongest core businesses anywhere in home and even if some of its recent efforts have been less than terrific, it can live off its home reputation for at least another generation.

But when it comes to their home furnishings departments, the boys from Bentonville are pretty much totally lost. They have stumbled this way and that, steered up, gone back down, tried national brands,

Bed Bath and Beyond is a brilliant item merchant and while its soft home mix doesn’t measure up to the Beyond side of the store, it makes up for it with a broad selection and plenty of coupons.

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Som e of what ’s g o ing o n in Walmart hom e refle cts what’s go ing o n in Walmart fashio n . A c onsist ent inco nsiste nc y has set in and th e sto re just can’t decide what it wants to be. Even Macy’s is pulling it off, balancing its ever-improving private labels with the Ralph and Calvin crowd. But Walmart? Ask any home furnishings shopper and after they say something about low prices, you pretty much get a blank stare. What brands do they carry? I don’t know.

Which way is the ladies room? Right past the blankets. Walmart seems to be suffering from an assortment of maladies. It has percale paranoia about what Target is doing in bedding. It has electrics envy when it comes to Bed Bath’s small appliance mix. And it’s got a bad case of low-end fever over the dollar store’s opening price point cookware and tabletop.

What products are they really known for? I don’t know.

What’s a Walmart to do indeed?

Can I get some cool designs there? I don’t know.

First and foremost, Walmart has to pick a treatment method and stick to it. If it’s going to choose to go

with a collection of down-cycled national brands, as it did once with Springmaid, it has to remain with them and make them the enduring cornerstones of the department. If, instead, it wants to build its own brands, like Canopy, it really has to get behind them and make them true brands, not labels. And if it feels it needs a core personality as an umbrella for its total home assortment, it needs an A-list name, not some second-round dropout from Dancing With The Stars. What makes all of this even more difficult to understand is that in fact Walmart already has the vehicle in place to finally get its home department up to par. Several years ago Walmart licensed the Better Homes and Gardens name for home assortment and today it’s a solid part of the mix. But it can be so, so much more. Walmart needs it bad. But that’s not all. Still apologizing, I’ll leave it to Bob again to take us out:

“ Your merchant just knows what you need But I know what you want.” RR Warren Shoulberg is a business journalist who has reported on the home furnishings market for a long, long time. He is editorial director for Home Textiles Today and Gifts and Decorative Accessories magazines.

November 2010

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ROBIN REPORT From Casual Chatter to Decider-in-Chief Social Media Can Lead Your Way

Best Practices from Kurt Salmon Associates

How can a retailer strategically leverage social media intelligence into internal decision-making? Here’s an example. Evaluate a retailer’s current market research activities. Replace many of the costly and time-consuming focus groups, customer surveys and ethnographic research with social media campaigns to get the same information even faster. Banana Republic has taken a cue from software companies that pioneered the concept of taking advantage of their fans and followers to test beta versions before public release. Through a special portal for its invitation-only Insiders BR panel, the retailer solicits feedback on products, advertising and brand experience from thousands of its most loyal customers. In Kurt Salmon’s work with clients, we see increased focus on becoming smarter about customer trends throughout the marketing, merchandise planning and product development processes. Prior to product design, during the planning stage, merchandisers and planners have a chance to consider social media intelligence to inform their financial objectives and assortment strategies for the coming seasons. Hindsights from the past season, such as business recap, assortment analytics and store feedback, are traditionally used to drive future plans. This is gathered from store POS data and costly focus groups and surveys. Considering social media reports on what is happening at this very moment, rather than what happened in the past, it is a much more powerful source of trends, customer preferences and competitive intelligence, not to mention that it reaches a wider audience and is less expensive. Another operational area in which social media can inform decision-making is the product development process. Does a retailer have a dedicated “fast track” mechanism to bring product to market in a shorter timeframe? With nearly 12

unlimited reach and statistically significant data volumes, social media provides a venue for gathering customer insights on late-breaking trends and ideas that product development teams can quickly analyze and incorporate into next-generation products. External Decision-Making Many retailers overlook the important link between social media and customer service. Social media outlets are often used to air both positive and negative customer feedback, although most companies have not formally linked their traditional call centers to their social media hubs. Evolve a company’s call center so it can strategically leverage this organization to manage customer dialogue via social media. Updating this department to give a brand a stronger market positioning requires: •A n overarching communications strategy to determine protocol for initiating outbound communication and responding to inbound communication • One or more social media specialists or training for existing staff to ensure messaging is targeting the appropriate social media outlets and content is consistent with the brand •S ocial business software tools for information analysis and tracking metrics such as customer satisfaction, resolution time and product issues Connect relevant metrics to a product development process (trend research, planning, and assortment and product reviews) in a more robust approach to leveraging market intelligence. Why take advantage of social media’s power? Social media is not an end in itself. Like other media, it provides a forum for communication, both into and out of a company. The unique power of social media lies in its ability to quickly and cost-effectively amplify messages (good and bad) to hundreds of thousands of

people who care about a brand and the visibility of the data it leaves in its wake. The result is a rich resource to drive more effective decision-making. Use this checklist to evaluate a company’s social media savvy: 1. Does the company have a systematic process to gather customer intelligence through various social media platforms? Is it successfully using this information to ensure a more compelling customer experience? Is this intelligence connected to its product teams? 2. D oes the company have a firm understanding of how its social media efforts impact its business? Are they systematically and easily gathered and analyzed? Do they drive the types of results the company wants? 3. D o the company’s marketing, customer service and product teams follow competitors on Twitter, keep up with competitive promotions on Facebook, and are they incorporating those findings into their business? 4. Does the company have a dedicated social media specialist to serve as air traffic controller to ensure communications are internally synchronized across a company’s different functions? When used correctly, social media can be a powerful tool to increase brand visibility, drive internal and external decisions, gather customer and competitor intelligence and improve ROI across all marketing efforts. RR Brooks Kitchel, senior partner, and Monica Tang, senior manager, co-authored this article. They can be reached at brooks.kitchel@kurtsalmon.com and monica.tang@kurtsalmon.com.

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The Spa Treatment

By: Dana Wood By Dana Wood

Now Department Stores Beauty Brands Want a Piece of the Action Groups weren’t booking, occupancy tanked, and as a result, even if there was a great meeting coming into a hotel, you can be damn sure they weren’t booking facials in the spa. Particularly if they were a large company, because they didn’t want any negative press after what happened at the St. Regis. But it was also at that time that I started having much more contact with general managers of hotels. The GMs were really sitting up and taking notice of every aspect of their properties and saying, ‘Okay, how can we build revenue into everything we’re doing?’”

Since this past July, when he came on board as Clarins USA’s first-ever National Director of Sales in its Hotel & Spa Division, Barry McCaffrey has barely spent a single night in his Manhattan apartment. Hitting the ground running, he’s been racking up serious frequent-flyer miles on behalf of his new job. His last two-week jaunt, for instance, kicked off with a visit to the storied Miraval Arizona and a good scouring of the Tucson spa scene, followed by a trek to Global Beauty Exchange, a spa trade event at the St. Regis Monarch Beach in Dana Point — the site of AIG’s infamous 2008 post-bailout retreat. The St. Regis meet-and-greet was the second such powwow McCaffrey has attended recently; he characterized the other big meeting, SpaTec, held at the Langham in Pasadena, as “speed-dating for spa professionals.” Not that he’s complaining about either the traveling or the trade shows, because he’s certainly not. “Those meetings have been great,” he says.

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“Within a short period of time I’ve gotten really good exposure to top decision-makers.” With a mandate to lift Clarins’ profile in the $12 billion U.S. spa industry skyward (he won’t say how high), McCaffrey, who has a lengthy track record in the spa-product business with stints at Comfort Zone and Repêchage, said his new role is made easier by both the size of the French beauty behemoth (Clarins SA had an estimated revenue of $1.31 billion in 2009), and its well-deserved reputation for high-quality products. “Everybody I talk to,” he says, “has great respect and admiration for the brand.” The issue, McCaffrey says, is dealing with the economic fallout of the last few years. “The ‘AIG effect’ sent the resort and hotel business into a tailspin,” he says, referring to the pullback on corporate meetings in luxury locales. “Everyone’s business was down 20 or 30 percent.

Enter a major player like Clarins, which has the might, heft and infrastructure to support its spa partners in way that a smaller, mom-and-pop type brand might not. Clearly, in carving out this job for McCaffrey, Clarins is seizing this moment. Which isn’t to say that in the future, spa retail areas and “back bar” business (which refers to the liquids used on-site in the actual treatments) will be completely dominated by brands like Clarins, which already have massive footprints in department and specialty stores. In the 47 spas attached to the Equinox fitness clubs, for example, guests will find far cultier fare in the form of Skin Ceuticals, Lather and, in a handful of units, Phytomer. According to Nicole Vitale, Senior Director of Spa for Equinox, those three brands hew to her core philosophy about spa skin care: that it not only be effective, but also so simple and easy to wrap your mind around that you’re dying to use it at home, post-treatment, too. In other words, forget the 15-step regimen with the multi-syllabic, rocket-science-y ingredients. > Continued

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ROBIN REPORT > Continued from previous page “If it’s easy, you’re going to use it when you leave the spa,” says Vitale. “If it’s too complex, you’re going to buy it, look at it, hate me for making you buy it and never use it. And I’m never going to see you again.” In her role as President of SpaFinder, industry expert Susie Ellis has looked at the retail piece of this puzzle from every angle. Comparing revenue between services and retail, she says the conventional wisdom is that an 80/20 ratio is healthy. “The industry average hovers between 8 and 12 percent, depending who you ask,” she says. “SpaBooker, which is the cloud-based application that powers 1,600 spa management systems, reports that the average is around 9 percent for day spas.” Still, there are companies that capture a much bigger slice of this pie. Steiner

Leisure Limited, for instance, which owns the spa brands Elemis, Mandara, Bliss and Remede, routinely achieves 40 percent of its revenue in retail sales. As Ellis is quick to point out, however, a big chunk of Steiner’s business is done on the 150 cruise ships on which it operates spas. “It’s a captive audience and the spas are almost fully booked,” she says. “And while a model of 40 percent retail is impressive, there’s often a backlash that comes with it because the techniques and energy spent in the sales effort are, usually, pretty strong. Not every person is happy about spending $100-plus for a facial in which 15 minutes are spent on a sales pitch.” Given the lackluster economy, it’s hardly surprising that spa aestheticians are under the gun to sell, sell, sell. But presented the right way, it’s actually

a golden moment to purvey yummy, aromatic serums and elixirs that let you tap right back into the memory of your relaxing spa visit. “All the studies concur that the number one reason people go to a spa is to de-stress,” says Ellis. “And in a recession, there’s plenty of stress to go around. In some ways, our industry actually benefits as stress increases.” RR A beauty journalist for over 20 years, Dana Wood has served as Beauty Director for both W and Cookie magazines and has written for numerous national publications including Glamour, InStyle, Harper’s Bazaar and Self. She also spent several years in the Luxury Products division of L’Oreal as Assistant Vice President, Strategic Development. Her first book, Momover: The New Mom’s Guide to Getting It Back Together, was published in 2010 by Adams Media.

Throwback in Need of A Makeover

By Pacco Underhill

Why Americans Increasingly Ignore The Call of the Mall The overwhelming majority of American shopping malls were built more than 25 years ago. They were put up fast, and any design equity in the project was focused inward. Whether or not the registers on the inside are ringing, from the outside the American Mall is butt ugly.

something from a Gothic video game. Leaking roofs and weedy parking lots with broken lighting are hardly welcoming. The surrounding apron makes it look more like a war zone than the dominant anchor of shopping between Chicago and San Francisco.

Through the 1980s, malls were constructed to serve new markets. Following the development of suburban housing, builders had the pleasure of interacting with unsophisticated local government officials who were happy, based on the promise of increasing tax revenue, to let developers design and build with little more than safety and fire code supervision.

This American invention is stuck in a time warp. The tenant mixes are dominated by fashion and giftware. Only a handful of malls can bill themselves as the edge city centers their location might suggest. Books, sporting goods, and toys have

While many A malls have been renovated over the past twenty years, there are B and C locations that are more than showing their age. Mall of America, for example, looms across the horizon like 14

left the mall. Grocery and drug have never been part of the mix. Legend has it that the early mall moguls had a horror of shopping carts and feared alienating the department store tenants they felt were necessary for their projects. The prevailing wisdom was that the department store anchor generated the traffic that the rest of the mall fed from. In 2010, the idea that department stores drive mall traffic has been debunked. The more upscale the department store, the fewer customers it needs. I remember

Legend has it that the early mall moguls had a horror of shopping carts and feared alienating the department store tenants they felt were necessary for their projects. www.TheRobinReport.com

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walking into a new Neiman Marcus in Plano Texas that was completely empty on a Friday afternoon. I met the manager who had a big grin on his face. “Your store’s a ghost town bro, why are you smiling?” I asked. “Mrs. Garcia is in the dressing room” was his response. I’m told that some Neiman’s stores stay open based on the shopping habits of 200 women. At Selfridge’s in London, Holt Renfrew in Toronto and Saks in Beverly Hills, those A-list customers tend to slip in a back door and be ushered directly into a dressing room, carefully stocked by a personal shopper familiar with their tastes. The floor of the store itself is just expensive window dressing for the real action that happens out of the public eye, in a back room. The American Mall industry is struggling because since the late Eighties, they have been building malls not to serve new markets, but to steal market share from existing properties. Across the country are examples of properties that are forty percent vacant. In Texas, some of those troubled properties have been re-invented as “ethnic malls.” Le Grand Plaza in Fort Worth is one example; the mall has its own Mariachi Band. As American developers are scrambling to reinvent themselves, Whole Foods and

Target are much-courted tenants. Having a Saks at one end and Target at the other is no longer seen as inconsistent. Just as tony Madison Avenue merchants are not overwhelmed with gawking low-end lookie-loos, inappropriate shoppers tend to avoid the high-end districts in the mall. Outside of North America, the shopping mall continues to evolve. For more than a decade, developers have been making the pilgrimage to Portugal to see the Vasco Da Gama Center on the outskirts of Lisbon. Sonae LLC’s signature project, named after the legendary navigator, is an abstraction of a glass ship. Across the street from the commuter railroad, tied to a trade show center and as the anchor for a surrounding housing complex, it is good example of the “All, rather than Mall,” movement. An All tends be a complicated partnership between public and private money. It involves an urban planning process in which housing, commercial office space, hospitality and shopping are integrated. One basic precept is that the outside of the mall has to have a relationship to the surrounding community. At Vasco Da Gama, the soaring glass spaces are balanced by a food court with a view. The stores themselves may not be extraordinary, but the total package is. One of the problems the center has is getting all the diners off the property after midnight.

Steen and Strøm, the Nordic real estate developer, has reopened Sollentuna Centrum, in a suburb of Stockholm. They have made an interesting effort to feminize the physical design. One of the corridors has a gauzy canopy on the ceiling that floats like chiffon. It’s matched with a brocade-patterned red carpet. The effect is quite pleasing to both customers and tenants. The mall is tied into public transportation, has a very modern Lutheran Church attached, and gives priority to bicycle parking. Across South America mall culture has been driven by security issues. With unsafe streets pervading most urban and suburban areas, the shopping mall offers a secure and climate-controlled environment. The guards aren’t your fat rent-a-cop, but a well-dressed cadre that look like a cross between nightclub bouncers and the Secret Service. People dress up to go to the mall. The sound on the concourse isn’t the squeak squeak of sneakers, but the clatter of high heels. The people-watching opportunities at some Brazilian malls give Fashion Week in New York City a run for its money. American shoppers deserve better than they are getting. The Grove in LA may be cool, and Country Club Plaza in Kansas City deserves landmark status, but the rest is in need of more than a facelift. The prime asset may be the asphalt pavement that cries for a jackhammer and re-development. RR Paco Underhill is the CEO of Envirosell (www.envirosell.com ) a behavioral research and consultancy firm focused on commercial environments. His first book, Why We Buy was an internationally bestseller. Call of the Mall was released in 2004 is a humorous walking tour of an American shopping mall. His columns and editorials have appeared in The New York Times, Money Magazine,The Washington Post and The Wall Street Journal, among others. Underhill is the only foreigner to hold a position on the Board of Advisors at Hakuhodo—Japan’s second largest advertising agency. His latest book published in July of 2010 is entitled What Women Want. It is not a sex manual.

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ROBIN REPORT > Continued from page 1

CHINA

Communists – Capitalists – Conquistadors

economy, but has also caused internal and external growing “pains,” which have been exacerbated by the Great Recession. And, one of the major results that will come out of the economic and social issues attendant to such growth (and the necessity to maintain its momentum) will be exactly as the last line in my “proverb” suggests. Therefore, I felt it was timely and relevant to bring this prophecy front and center, which is exactly where I now think it sits on the “dragon’s” agenda.

TO “CAPITALISM ON STEROIDS” IN ONE NANO-SECOND; TO “GLOBAL ACQUIRER” IN TWO As has been said many times and in many ways, the big irony today is that the greatest capitalists on the planet are in Communist China. Perhaps an even bigger irony is the fact that China was among the first capitalist nations, if not the first, dating back over 700 years to Marco Polo’s trading era. Further irony can be found in the Shanghai-headquartered Hurun Rich List, which identifies almost 1,400 people in China with wealth of at least $150 million, and between 400-500 billionaires, compared to only 400 in the U.S., according to Forbes. If capitalism was indeed an original part of the DNA of China, it’s been reborn on steroids (albeit managed by the State). China’s steroids would be defined as entrepreneurship, flexibility, aggressiveness and speed. And when mixed in with the rest of their dominant cultural persona, let there be no mistake that China will be doing a lot of asset- acquiring.

In 2004, according to George Yeo, Singapore’s Trade and Industry Minister, China’s transformation, expected to take over a few decades to complete, would trigger significant shifts in the global balance of economic power, thereby diluting the importance of the U.S. He said: “China is likely to recover its position as the world’s largest economy, which it was for most of human history.” Beyond its cultural and capitalistic traits, there are other internal dynamics at work which are also driving the need for China to acquire U.S. assets such as retailers and consumer brands. First of all, as a result of its explosive industrial growth, China has a rapidly growing middle class which equates to an enormous consumer base, which by the way, needs more money to buy things with to continue fueling such growth, which in turn means they have to earn more money working for those growing industrial giants.

Herein lies China’s economic conundrum: it is locked into providing an ever-increasing standard of living for its people, while at the same time trying to remain the low-cost manufacturing base of the world. It is difficult, if not impossible, to do both. China is feeling tremendous external pressure to maintain low-cost-producer status as well. That pressure is coming from customers in the US and Europe, such as Walmart, Levi and Nike, and from low-cost manufacturers in other Asian countries such as Vietnam, Bangladesh and Indonesia. So what’s China to do to pull itself out from between the rock and the hard place? The additional pressure from the U.S. to increase the value of the yuan to help boost our exports simply exacerbates the conundrum.

Next Stop: USA Given their huge capital position and excellent business acumen, the Chinese will proactively address this enormous conundrum.

According to CIA World Factbook, China’s average annual household income increased from $3,870 in 2005 to $6,600 in 2009, a 70% increase. However, the quest for a better standard of living increases not only wages, but, also taxes, energy costs, and the need to build infrastructure as well.

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So why should China go to all the time and effort to counterfeit, knock off, or replicate OUR brands when they can just acquire them? As history’s original traders, they understand better than most that the greatest profits on the global value chain reside on the end closest to the consumer, that is, at the retail and brand level. And currently, of course, the country with the highest level of profitability, and the most robust markets, brands and retailers, is the United States. It’s also likely they will most aggressively seek assets in those industries that can benefit most from vertical integration, such as apparel, where China already produces about 35 percent of all product consumed in the United States. A leading example of this emergent strategy is Hong Kong—based Li & Fung, the world’s largest apparel sourcing agent, at $15 billion. Among the sixteen brands it has so far acquired are Emma James, Wear Me, JH Collectibles, Tapemeasure, Simply Vera by Vera Wang, Hannah Montana, Intuitions, and Zeeland and Rosetti handbags. And China has publicly committed to continuing this strategy, which will provide both vertically-integrated control and increasing access to the more profitable U.S. marketplace. From a timing perspective, the iron is hot, as many U.S. brands and retailers have failed or were weakened during the recession. And though the apparel industry may be the “low-hanging fruit,” we believe that

November 2010

China will leverage its experience in that sector to examine every industry, with an ultimate focus on the retail end of the chain. So, instead of continuing to buy U.S. Treasury bills, China will be buying assets. Vertical integration not only provides China greater profits, thus fueling its rapidly growing economy and standard of living, it also provides total control over both its value chains and markets. For example, China would be the major consumer market for its own products, and would have the power to put pressure on all its former lowcost competitors for even lower costs. With ownership of globally recognized brands, and total control of its value chains, China could market them at home as well as throughout the world. Furthermore, given their lack of homegrown brands, their inherent impatience and aggressive fast-moving business style, and a higher valued yuan, (making U.S. assets even cheaper), the world can expect the Chinese to accelerate their conquest of our brands. As observed by Kenichi Ohmae, a consultant who used to run McKinsey’s consulting operation in Japan, most Chinese businesses are broad rather than deep, preferring to diversify rather than concentrate on a core business. While providing more money-making opportunities, it also reflects their lack

of patience. He says, “I see very few Chinese managers excelling in one area. They will never spend five or ten years developing a smaller, faster component — it is not in their mentality.” Thus, the time and patience it takes to build the consistency, quality and, ultimately, the consumers’ trust in a brand, is not yet part of the Chinese management style. So why should China go to all the time and effort to counterfeit, knock off, or replicate our brands when they can just acquire them? You may say “that’s a long way off, if it ever happens, and I’ll be long gone.” Don’t count on it. Chinese companies have already purchased the Hummer and Volvo automobile brands, Hoover vacuum cleaners, and the iconic Frisbee and Hula Hoop toy businesses, not to mention countless industrial brands. And they’re hungry for more. “Well,” you might then add, “even if they do move downstream and buy up all the great brands, they’ll need American marketing and management talent to manage those branded businesses.” That’s right. So don’t worry, they’ll probably keep you on as the hired help. RR

The

ROBIN REPORT EXPORTS? WHAT EXPORTS? Swapping Value Creation For Consumption

And, of course, as the obsession for all things material, aka greed, has become imbedded in the DNA of our modern culture, an MBA could be an acronym for “Money Boat has Arrived.” In other words, the stairway to big bucks is through Wall Street and big business. THE THREAT: BYE, BYE, STANDARD OF LIVING Much has been written about the “Walmartization” of America and the trading in of higher for lower paying jobs. So, too, Dr. Richardson adds his perspective: “…science and technology drive the economy. It’s not people suing each other or making hamburgers. The wealth of the country, I believe, is based on the invention of new products. That can only come from a thriving scientific community. I worry that this manpower gap can compromise our standard of living.” Echoes from the near-past are so strong they are physically vibrating my brain. In the “Who Blinks First” article on page 1 I questioned the notion that if we could only get China to increase the value of the yuan, it would make our goods cheaper, thus boosting our exports. o which I asked: what is it we actually produce today? Well, I dug up a great report written by Nobel Prize winner and scientist Dr. Robert C. Richardson, who discovered a new state of matter, and in 2004, he and his sub-committee weighed in on yet another measure of the diminishing level of value creation in the U.S. Richardson, also a professor at Cornell University and chairman of the National Science Board, cited the declining number of young Americans seeking careers in science as a threat to our standard of living, to say nothing of the resulting decline in the pool of anything exportable. He attacks the very argument made so often by so many economists, politicians,

historians, and business experts, who posit that as the U.S. loses its manufacturing base it will simply move up the food chain, creating wealth and higher levels of value through innovation, technology and science. Richardson’s subcommittee, in its Science and Engineering Indicators Report, debunks this popularized notion with such sobering facts as the declining trend in scientific manpower since 1970. DUMPING SCIENCE OUT OF BOREDOM, LAZINESS OR GREED? Try All of the Above Richardson echoes the lament of doomsayers when he claims that our youth view a math and science education as boring and tough, with too little encouragement from teachers that the exploration and discovery of new can be fun and exciting. Even worse, the portrayal of science and math types among the young is largely “uncool” or “geeky.”

In my opinion, it already has and continues to worsen. WHY NOT JUST IMPORT ASPIRING SCIENTISTS? In the 1970s, the U.S. ranked third behind Japan and Finland in the percentage of our students who became scientists and engineers. In the Richardson report of 2004, the U.S. ranked 23rd. For those 30 years we “imported” a large number of highly motivated, aspiring scientists from countries such as China and India who studied and settled in the U.S. Today, about half of our graduating engineers are foreign-born. However, according to Richardson, even that infusion of talent is drying up, for several reasons. He points to post-9/11 policies established to delay and prevent students and scientists, including visitors in tech fields, from entering the U.S. Policies included a combination of demeaning interviews and an exaggerated screening process for potential terrorists. It is Richardson’s opinion that the U.S.

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also tightened its visa requirements for those from countries who were considered potential economic competitors, such as China and India. In the year 2000, the U.S. gave almost 300,000 temporary visas to people working and studying in scientific and technology fields. It was down to half of that by the time of Richardson’s report, four years later. IF THEY CAN’T JOIN US THEY JUST MIGHT BEAT US Well, if we can’t interest our own “home-grown” to pursue higher levels of value and wealth creation, and we won’t let outsiders eager to fill those needs join our country, then those outsiders will simply stay home and create such value and wealth for themselves. And, of course, this is exactly what is

happening. China alone is graduating 300,000 engineers annually, 5 times the number in the U.S., and installing high-tech R&D centers at a faster pace than ours, just to cite a couple of the “dragon’s” moves.

brainpower. This observation also gave me a chilling flashback to a recent New York Times editorial by Thomas Friedman who pointed out that the one great obsession in the Roman Empire just prior to its collapse was security.

If this continues, how long will it take before we will have lost both the low and high ends of the value chain? And what will be left? Flipping burgers, greeting customers at Walmart, and getting obese on consumption are a few things that come to mind. Certainly, it does not bode well for a major increase in exports.

Richardson suggests that our policy makers have twisted security objectives into a kind of 19th Century protectionism of intellectual property, believing that, “We’ve got to keep all those foreigners from stealing all our secrets and beating the pants off us.”

A final and chilling observation was made by Dr. Richardson about the seemingly misguided and paranoid attitude of our security process stifling the positive importation of much needed

Oh, my! If that is only partially true, I fear the foreigners those policy makers are referring to will just simply “beat our pants off” faster. RR

November 2010

The

ROBIN REPORT quotes to remember “Always forgive your enemies – nothing annoys them so much.” Oscar Wilde

TO ALL MY ENEMIES: I’M SORRY – I REALLY, REALLY AM!

ON KEEPING THE PEACE... “Happiness is having a large, loving, caring, close-knit family in another city:” From the inimitable George Burns.

A TIMELESS QUOTE FROM “CHAIRMAN RALPH” Lauren HIMSELF ON CONTROLLING HIS BUSINESS, TELLING IT “HIS WAY”… “I lived in this world all my life. There isn’t one competitor. If business is good, it’s good. The difference here is we have total control. We set the tone, the marketing and the shops. Anything I’ve had under my own supervision has been successful.”

SECONDED BY NO ONE LESS THAN “MICKEY DREXLER,” CEO J. CREW: “I don’t ever want to be in a business where I don’t control my distribution, period, end of sentence.”

A SOMBER OBSERVATION BY THOMAS FRIEDMAN IN HIS NEW BOOK, HOT, FLAT AND OVERCROWDED 2.0: “While our parents’ generation earned the American dream by leveraging their own hard work and education, the Grasshopper Generation tried to secure the American dream with financial leverage – by borrowing more and more money and making bigger and bigger bets with it.”

JAY LENO ON PRESIDENT OBAMA ADDRESSING THE U.N.

“While he was at the United Nations, President Obama called on the other countries in the world to help us to track down and eliminate radicals and extremists. But they told the president, ‘Hey, the Tea Party is your problem, buddy.’”

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