Trade Event Report
Merrill Lynch's "Retailing Leaders" and Household Products & Cosmetics Conference, + + + + +
By Al Berrios (contact Al Berrios)

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> The Big Retail Picture
> The Challenges at Consumer Goods Companies
> The Challenges at Retailers

When I was in high school, Merrill Lynch sponsored a program where the best and brightest were eligible to work at a Merrill office as a paid intern. Out of dozens who competed, two were selected from each high school in my city. It was called the Merrill Lynch F.I.R.S.T. program and there was nothing I wanted more than to be selected. Merrill passed on me, and I've resented them ever since. I later discovered that one of the students who was selected from my class didn't even like business or finance. I was convinced Merrill was full of morons.

In March, I was fortunate to attend 3 analyst conferences organized by Merrill, two of which, as far as I know, banned press, and consequently, proves this publication's value to you, since we're covering them here. The venues were impressive, the food delicious, the networking opportunities outstanding, but best of all, the free stuff analysts got was so friggin' cool, I have no other choice but to reverse my opinion of Merrill.

The most recent one was Merrill's "Retailing Leaders" where I was fortunate enough to hear the COOs, CEOs, and CFOs of Saks, Columbia Sportswear, Neiman Marcus, PathMark, Nordstrom, Polo, Aeropostale, Colgate-Palmolive, Newell Rubbermaid, Avon, Clorox, Reckitt Benckiser, and Rayovac. I was, as you can imagine, giddy with excitement that I often found myself struggling to reserve.

The event took place on March 23-25 at the Pierre, in NYC, an elegant, high-powered hotel on Central Park East. As usual, Merrill spared no expense keeping us full with treats like Krispy Kreme in the morning, salmon or steak for lunch, and Snickers and Milky Way bars for snacks.

The Big Retail Picture

Let's look at the big picture; these top companies are concerned with two major things: mergers, acquisitions, & divestitures in retail and what the format of the future will look like. There was another subject that didn't seem to raise as many eyebrows as Merrill wanted it to: the elimination of quotas from China. (Turns out that come Jan 1, 2005 lots of raw agricultural goods China sends us here in the U.S. will no longer have quantity restrictions. But because China has had some difficulties complying with their current efforts as a WTO member, no one's particularly stressing the "Chinese question".)

In case you weren't aware of this, retailers can choose to be either specialty (knick-knacks, home improvement, music) or broad-based (department stores, discount stores).

Once you've got the category, you need the retail formats:
1) company-owned stores
2) franchised or licensed concepts
3) direct-to-consumer such as e-commerce and catalogue

Within these formats, retailers can choose to sell
1) traditional vendor brands
2) private label, which are your in-house brands and traditionally lower priced (although that trend is changing as quality improves)

The retail business model is relatively simple
1) Raw materials are used by vendors to make their products
2) Vendors distribute their products to retailers
3) Retailers pull consumers into their environment with product selection, marketing and channels they make available to them.

Since operational efficiency has been completely exploited to keep costs low, there are four strategies to make money in retailing:
1) wide pricing spectrum
2) product and service selection and differentiation
3) break-through marketing and positioning
4) and channel access, which doesn't necessarily mean aggressively opening up new stores

…and manufacturing:
1) hedging strategies for raw materials and energy
2) dynamic pricing
3) perpetual innovation and development supported by
4) effective brand management

The Challenges at Consumer Goods Companies

Private label, plain and simple. Using Colgate-Palmolive as an example, their results have been declining by almost half every 5 years for the last two decades compared to the S&P. With difficulty understanding the product markets in which they operate, a hazy strategic direction, and over-dependence on brand extensions, Colgate will continue to experience challenges on the shelves as private label brands continue to offer reasons why consumers should stop buying Colgate. Although they've discovered the power of a brand like Palmolive to move across product segments (i.e. shower gels and underarm), al berrios & co. believes that their core business, the Colgate oral care brands need improved clarity in their product selection, packaging, and pricing (i.e. why would I, as a consumer, spend $2 to $3 more for Colgate toothpaste to get my teeth clean and breath fresh, but also happens to have a hint of lemon, when I can purchase regular Colgate toothpaste that also cleans my teeth and freshens my breath for $0.99 at the dollar store?)

al berrios & co. does believe that a company like Colgate can continue to sell premium priced oral care simply because consumers prefer to purchase brands they're familiar with. To some degree, branding your product gives it certain inelastic properties, preventing significant impact in sales volume during price increases.

Although oral care and other household products have established value-price standards, consumer goods companies, such as Newell, can maintain high margins with innovations in other household products such as tools, garbage bags, containers, etc. because many consumers still don't have established value-price standards in these segments.

The Challenges at Retailers

Of course, here too, there was a competing boutique retail consultancy (which shall also remain nameless in this publication) discoursing on the what's going on in retail. This guy was actually insightful, with a memory like a steel trap for statistical figures. This consultant correlated trends in real estate and store formats that helped him predict what's going to happen during the next 2 to 5 years - and I think he's on to something.

As the following chart shows, there're clearly expansion opportunities among many retailers, if they can successfully avoid direct competition with larger chains. However, over-expansion of all retailers is a problem, as evident by the growing success of retailer liquidators such as Gordon Brothers and Excess Space Disposition.

Source: al berrios & co. General Sentiments of U.S. Teens Towards Their Retailers Study Q104

> "An Analysis of How Media Companies Influences Consumers"

> Country information for China in the WTO
> 2003 Report To Congress on China's WTO Complaince (PDF format)


Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

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