Eastward and Upward: Chinese Consumers Spend with Optimism and Open Wallets

A study in contrasts, China is showing signs that its rapid economic expansion may be  unsustainable, even as western companies continue to develop a presence there to woo a growing middle class.

Some on Wall Street are bearish on China, including Jim Chanos, who said in a recent CNBC “Squawk Box” interview, “If you looked at the performance of the banks over the last two years… they have been great shorts. They have been going down — they’re down 30 percent over the last two years.”

The country has targeted economic growth of 7.5% in 2012, representing a decrease compared to recent years, according to a recent article in IBTIMES. But China’s National Bureau of Statistics recently reported that the country’s GDP decelerated to 8.1% during the first three months of 2012, compared to the previous year, a figure that is lower than the 8.4% analysts had expected.

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Yet these economic developments have not slowed expansion plans for many western companies. From Levi’s to Louis Vuitton, and from Proctor & Gamble to Starbucks, the last eighteen months has seen a veritable explosion in companies looking to gain a foothold in China, eager to attract its booming middle class.
Just as in the U.S., where “middle class” is an ambiguous term, “middle class” in China also continues to defy classification. Many analysts peg it as those making between $6,000 and $15,000 a year, which represents about 350 million households. Based on international dollars, that figure is about one-third of the average spending power (GDP per capita) in the U.S. [Read more...]

The Omnipresent Retailer: Creating a Demand-Responsive Value Chain

Best Practices from Kurt Salmon

Many retailers are striving to better respond to changes in consumer demand, and it’s easy to see why: They’re pressed to reduce inventories and cut supply chain costs at the same time that the shopping patterns of American consumers have become virtually impossible to predict.

Making matters even more complicated, consumers now have unprecedented access to an infinite number of products and a virtually limitless number of places at which to buy them. They expect to be able to buy exactly what they want exactly when they want it, and if one retailer can’t make that happen, another one (or a dozen others) can.

That’s where a demand-responsive value chain comes in. By shortening cycle times and increasing collaboration across the value chain, retailers can ensure they have the right product, in the right place, at the right time.

1. Shortening Cycle Times

Many retailers are beginning to move production closer to home (leveraging data to inform smarter decisions on the best manufacturing locations) as a way to shorten cycle times. Shorter cycle times can improve responsiveness to demand and increase inventory effectiveness.

The global product margin metric measures the cost from each point of manufacture to each point of distribution and the unique retail price from that point of distribution. Keeping this number in mind allows retailers and wholesalers to optimize total margin by choosing the best manufacturing locations based on discrete costs from multiple points of supply to multiple points of distribution and the retail price at each point.

But after a retailer’s sourcing decisions have been made, there are still several steps that can further decrease cycle times. [Read more...]

The Coty/Avon Dance: A Train Wreck About To Happen

Avon’s sudden hiring of Sherilyn S. McCoy as CEO – almost certainly intended to thwart any takeover attempt by Coty – indicates that the smaller suitor will have a fight on its hands to acquire the giant direct sales company.

Coty would be better off letting this one get away. Its $10 billion offer for Avon is the biggest and most recent effort in its aggressive quest to become one of the world’s major beauty companies – in other words, to play with the big boys. The company has spent over $2 billion on acquisitions in the past two years, including $400 million for TJ Holdings, a Chinese skin care company, and a reported $1 billion for the skin care company Philosophy.  They also picked up nail color maker OPI and Russian brand Dr. Scheller Cosmetics.  Some industry leaders think they have seriously overpaid.  Are they about to do it again?

Avon is a disaster, but Coty (not to mention many on Wall Street) is focused on its worldwide network of 6.5 million sales reps and its big presence in Brazil.  Add some internationally known products to Avon’s product mix and the reps will sell them like crazy. The thought process taking place around that? Synergy, synergy, synergy.  The old school synergistic proponents are drooling.  But drool rarely translates into sales. It can, however, translate into paying too much for an acquisition.

There are questions about the distribution network Coty is so hot to get.  Some believe Avon has drifted off into the Amway multi-level marketing or pyramid model, which counts as revenues the products and promotional materials newly hired sales reps are induced to buy. So, why not hire more reps? A growing share of the company’s revenue, this might in fact be a strategy to offset declining consumer demand.  Avon is losing nearly half of their reps every year. This forces them to troll for and spend most of its advertising dollars for new reps instead of doing heavy consumer marketing to keep the Avon brand brightly lit. In the meantime, traditional Avon sales are slumping.

Coty obviously has access to a mother lode of money, so funding the deal will not be a problem. The banks reportedly still think Avon is a viable company and, if well-managed, can be fixed. The timing is right for Coty and a godsend for Avon.

It’s documented that Coty and Avon have been talking for a while. First it was going to be Avon owning Coty in a stock deal. Now’s it’s Coty owning Avon in a cash deal.

It looks like Coty announced its $23.25 a share offer for Avon to tease out any interest from a giant like Proctor and Gamble, or some large Brazilian company.

If not, then Avon will have to very seriously consider Coty’s offer.  Time is not on Avon’s side. As new CEO Sherilyn McCoy takes over from lame duck CEO Andrea Jung, she walks into a nightmare of bribery accusations in China and other developing markets, slumping sales, a weak senior executive lineup and massive legal fees that are bleeding company profits.

Given all of Avon’s current problems, a thorough due diligence of the company could be very interesting indeed. Imagine what could be lurking in the many closets of such a big, loosely-managed company with so many divisions!

Stay tuned.  As one industry observer said, “They are dancing on the porch now. However, Avon has had other suitors dancing on its porch before, and thus far hasn’t let anyone inside the house. ” Coty’s drive to become an industry giant could become a giant handicap if it results in the purchase of a very expensive, unfixable company.

Time to blow the train whistle long and loud. Hope it’s heard in the Coty executive suite.

How Green Is My Product Line? Measuring Sustainability Success

What is more vital to the survival of an apparel manufacturer or retailer today: commitment to environmental consciousness or keeping production costs low? Five years ago, the answer would have been strongly in favor of being green. Today, amid global debt crises and the rising costs of raw goods, labor and fuel, the emphasis has for many shifted towards the economic from the environmental. Perhaps a better question is: Can an apparel manufacturer or retailer be green while remaining in the black? The answer is “yes,” when a thoughtful, long-term vision fuels the actions.

Prior to 2010, U.S. consumers had enjoyed 15 years of deflationary apparel pricing. Big box retailers attracted an increasingly diverse consumer base, fueled by low prices for apparel staples and the addition of specialty lines by popular, high-end designers and celebrities. Marketers in the highly competitive apparel category seized upon being “green” as a saleable point of brand differentiation. Low-priced and high street brands began trumpeting new and niche ‘sustainable’ fibers within their mix.

The challenges arose, however, when these sustainable fibers proved unsustainable in cost, processing or both. Bamboo, for example, was embraced as a stellar textile fiber because it grew quickly and did not require pesticides for protection. However, the process to convert the bamboo from a plant to a rayon fiber was discovered to be quite chemical intensive. [Read more...]

Quotes To Remember

WARREN BUFFET’S Q&A ON THE MONEY-LOSING AIRLINES

Q. “How do you become a millionaire?”
A. “Make a billion dollars and then buy an airline.”

 

ABOUT OUR TREATY TO PROTECT TAIWAN IF INVADED BY CHINA:

“There’s only one problem with that: We’ve got to borrow the money from China to do it.” – Erskine Bowles, former co-chair of the national fiscal responsibility commission

 

MURPHY’S LAWS:

Friends come and go, but enemies accumulate.

After all is said and done, a hell of a lot more is said than done.

An expert is someone who knows more and more about less and less until he knows absolutely everything about absolutely nothing.

 

NEED WE SAY MORE ABOUT OUR NATION’S FISCAL MESS?

“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.” – Milton Friedman, Nobel Prize-winning American economistThe Robin Report - Quotes to Remember

Five Keys to Success with a Slimmed-Down Inventory

by Jon Mays and Brooks Kitchel

The growing emphasis on ever-leaner retailing means the days of hedging inventory bets with colossal surpluses are gone for good. The costs of inventory mishaps—both in terms of actual bottom-line economics and brand experience for customers—have driven many retailers to significantly reduce their inventories.

Meanwhile, it’s grown increasingly difficult to predict the actions of American consumers, whose intentions are less and less correlated to their actual behaviors since the recession.

While most retailers have cut their inventories accordingly, leading retailers are optimizing their remaining inventory to get the most bang for their buck.

1. Aggressively share inventory across channels

Truly sharing inventory across channels creates the opportunity for tremendous customer experience benefits and can help avoid having to mark down large amounts of leftover merchandise.

From a customer experience perspective, shared inventory increases the likelihood that a customer will be able to purchase a product in a particular size or color, regardless of channel. For small bricks-and-mortar locations, sharing inventory can open up a whole new array of choices for customers. [Read more...]

How One Smart Company Got It All Wrong

Suppose you’re the CEO of a successful, multinational food retailer. You’ve had good luck opening stores in numerous countries, many with cultures much different from that of your home country.

You’ve decided the time is right to roll out a fleet of stores in yet another country, this time one that has a culture quite similar to your own.
You’re confronted with many questions to be answered and decisions you need to make, such as:

Should you conduct consumer research, or just send a team of executives to the target country to examine the situation on the ground?

Will you develop a store format similar to the type of shopping experience in the target country, or a brand new format?

Will you source product for the new stores from a third-party distributor while the format is being fine-tuned, or will you spend vast sums developing your own distribution and production prior to opening a single store? [Read more...]

UNIQLO…A Gap Re-Run

There’s a lot of bluster coming out of Yadashi Yanai, CEO of Fast Retailing (parent of Uniqlo), about how his company is going to be the biggest apparel retailer in the world by 2020 at some $64 billion in sales, six times greater than its current size. He also says pretax profits by then will be 10 times what they are today. He plans to do so through a combination of acquisitions and geographic expansion into China, Southeast Asia, and the U.S. For Uniqlo, this is a necessity, not just an opportunity, given the fact that they are maxed out in Japan, totally ubiquitous, and that they suffered a decline in profits last year.

And, oh yes, they intend to “revolutionalize” how people wear clothes, part of which is to “revolutionize” mass retailing in the U.S. (I’m not sure how they’re defining mass retailing here. I certainly can’t imagine their New York stores stealing customers away from Wal-Mart, regardless of how low their prices are.) [Read more...]

A Case For Euthanasia? The Gap on Life Support

The Robin Report Gap on LIfe SupportI don’t care how much cash the Gap is sitting on or how much they generate on a daily basis. Just as Sears keeps pumping blood (cash), through its veins, Gap is, and has been for a long time, staying alive on “life support.” Essentially, the body (the retail business)is dying, but the nearest and dearest relatives (shareholders and the Board) obviously do not want to pull the proverbial “plug.” They all stand around the dying patient, hoping for some kind of miracle recovery, (metaphorically speaking, but bear with me).

Here’s what a long, slow death looks like. CEO Glenn Murphy was hired to resuscitate the business in 2007 following five years of revenue losses and a disoriented Gap brand that was flailing for relevancy during the reign of CEO Paul Pressler, who was hired in 2002. Pressler had also been charged with reversing the declining business, which had begun to suffer during the last two years of the twenty-year reign of the prince-of-all-merchant-princes, Millard “Mickey” Drexler.

Drexler was responsible for Gap Inc.’s meteoric and now storied sales growth from around $480 million, when he arrived in 1983 as President, to almost $14 billion in 2000, an amazing 2,400 percent increase. Unable to right the ship when it started to sink, Drexler retired in 2002.

So, Mr. Murphy, the former head of Canadian drug chain Shoppers Drug Market Corp., and a Canadian bookstore chain prior to that, is now (sticking with the metaphor) Dr. Murphy, the chief plastic surgeon operating on a patient dying of internal and external hemorrhaging. Since picking up his scalpel in 2007, he’s tried procedure after procedure, seeking one that will work, as the patient continues to hemorrhage, suffering through four years of declining sales.

The Gap brand is the heart of the dying patient, its 1,100 North American stores having lost almost a third of their sales –almost $2 billion – since 2004, more than the $1.6 billion drop in total Gap Inc. sales during the same period. And, as has been said by many retail experts over the past decade, if the Gap brand dies, the entire enterprise comes unglued.

Well, rather than slapping an oxygen mask on the walking dead, would we (the industry) be better off allowing Schumpeter’s theory of “creative destruction” to take hold, and simply help accelerate the demise of companies that arguably are diminishing in value more than creating it? After all, in an over-stored, over-stuffed world, huge dying businesses such as Sears and the Gap simply lower “all ships” by taking cash away from both the healthier, growing businesses and the emerging entrepreneurial businesses. By the way, during Paul Pressler’s disastrous tenure, Wall Street had in fact nicknamed him “dead man walking.” I have not heard that moniker transferred to Mr. Murphy. Not yet, anyway. [Read more...]

Reverse Globalization: The New Dollars and Sense of Near-Sourcing

Best Practices from Kurt Salmon

Near-sourcing, or producing products closer to where they are ultimately sold, is growing in popularity. As more companies bring production closer to home, they’re putting a new twist on globalization, or in some cases, reversing it altogether. Kurt Salmon retail strategist Vinod Rangarajan discusses this increasingly popular trend and how retailers can make the most of it.

Q: What’s driving the increase in near-sourcing?

A: Several factors, the first being supply chain inflation. The cost of producing products in China has been steadily rising as labor rates increase. So the response of many retailers was to move to other Asian and Southeast Asian nations, like Bangladesh and Thailand. But transportation costs are also rising, spurred by higher oil prices. This drove some U.S.-based retailers to look for locations closer to home, like Central and South America.

Q: But there’s also a customer experience element to near-sourcing, right? [Read more...]

You Talked Back!

Issue Seven’s “From Inflation to Stagflation to Deflation” prompted the following reader responses:

Excellent article, Robin – frightening to read,but so important for all to recognize…To me it seems like the middle class (world-wide) will continue to be the punching bag in this never ending cycle. The banks (I think it is a cabal of 6 now?) wil continue to perpetuate their feast or famine lending and banking practices – currently famine to SMBs and homeowners. What to do?? To start, lift the veil of mystery off the derivative markets – hopefully that will help institute some basic checks/balances on commodity speculators, etc…

Enact “real” banking oversight and regulations – bring back the Glass-Steegal act or something like it! Sorry Jamie Dimon!

You are absolutely correct that the social/consumer marketing tech bubble will not be able to catapult entire economies around the world. China just built a 26 mile bridge connecting a major port and growing city – I have twitter/facebook/Pandora/linkedin on my android phone – what is more important to job growth and trade!! Granted I can know instantly what Kim Kardashian is up to…

Where did the 50% of the QE money end up?? In my opinion debt and lending is the key to unlock the demand side of this awful equation. But that would mean the banks would have to make one or two points less on their margins in the coming quarters – like that would happen! But Dollar General is willing to, hmmmmm…..Thanks for keeping us thinking!

Ray Hewins – Director of Sales – Doneger Creative Services

 

Robin -

I was wondering if you had ever considered a cross-promotion with either Gillette or Schick? After reading your latest piece, I believe that offering a free pack of razor blades with each subscription would show that you’re really anticipating the needs of your readers. It can be a little messy, but properly securing a rubber hose to your tailpipe is just so damned time-consuming.

Seriously, though – after the continual pummeling from the market and the resulting fluctuations in business, as you point, out there’s a real risk that we — on a national, business, and personal level – become punch drunk and unsure which way to turn.

Although painful, it’s worth being reminded that accepting this as the “new normal” only ensures that it will be.

Bennett S. Gross – President  – Callydus Group

Want to weigh in with your opinion? Email us at Robin@TheRobinReport.

Quotes to Remember

WARREN BUFFET’S OUTLOOK ON THE ECONOMY:

“There’s always a new normal.”

YEAH, SURE WARREN – AND, DO YOU WANT TO DESCRIBE IT, AS IF IT WILL AFFECT YOU ANYWAY?

PEGGY NOONAN ON CHINA’S VIEW OF THE US:

“Those inclined to take an unfriendly view toward us increasingly see us as a paper tiger, because they hold our paper.”

SHE’S GOT THAT RIGHT.

AND, HERE’S CHINA’S TAKE ON THE “GOLDEN RULE”:

“He who has the gold sets the rules.”

AND SINCE WE LOVE CHINESE PROVERBS, HERE’S ONE FROM 400 BC THAT STILL WORKS FOR OUR TIME:

“When the music of a nation becomes fast, wild and discordant, it shows the nation is in confusion. “

PUNS FOR EDUCATED MINDS

  •  No matter how much you push the envelope, it’ll still be stationery.
  •  A grenade thrown into a kitchen in France would result in Linoleum Blownapart.
  •  If you jumped off the bridge in Paris, you’d be in Seine.
  •  A rubber band pistol was confiscated from algebra class, because it was a weapon of math disruption.

THREE CHEERS FOR THE BEAUTY BIZ!“I’m tired of all this nonsense about beauty being only skin-deep. That’s deep enough. What do you want – an adorable pancreas?”

Jean Kerr, American author and playwright

HERE ARE SOME INSIGHTS FROM “THE GIPPER”:

“Politics is supposed to be the second-oldest profession. I have come to realize that it bears a very close resemblance to the first.”

POLITICS TOTALLY ASIDE, REAGAN WAS A GREAT LEADER. AND, WHERE IS IT NOW, WHEN WE SO DESPERATELY NEED IT?

AND FINALLY, A CAUTIONARY NOTE FROM my brother-in-law John Downey:

“The early bird gets the worm, but the second mouse gets the cheese!”

OF COURSE, IF YOU PREFER WORMS OVER CHEESE – GO FOR IT!