Perspectives on Various Issues of Interest

Easy Method Driving School

Price Markdowns in Apparel Industry

An article published on January 14, 2009 in Wall Street Journal reported that apparel maker Liz Claiborne Inc. warned of a fourth-quarter loss, signaling that suppliers to many retail chains will be sharing the pain of deep discounts triggered by the worst consumer spending slump in decades.

Claiborne, which also operates its own stores, said its fourth-quarter loss could be as much as 15 cents a share because of markdowns and sluggish sales. It had previously forecast earnings of 19 cents to 24 cents a share. Analysts were expecting profit of 19 cents a share, according to Thomson Reuters.

Claiborne's warning comes as retailers and their suppliers are engaged in tense negotiations over "markdown money," or the amount that suppliers provide to help retailers cover their shortfall in profits resulting from discounting.

"It was a very promotional season," Claiborne Chief Executive William McComb said, describing the discounting atmosphere as "a strange game of Russian roulette." Once department stores marked things down, he said, Claiborne also cut prices at some of its own retail stores. Mr. McComb declined to comment on his negotiations with retailers.

Susan Kellogg, chief executive at designer Elie Tahari, contended that some retailers slashed prices too early. She said monthly sales at the brand's own retail stores remained positive early in the season even though they didn't discount as much as other stores that sell the label.

Investors on Tuesday initially were cheered by news that Claiborne had successfully renegotiated its credit facility, reducing its size to $600 million from $750 million and extending it to May 2011. Claiborne's new credit agreement came at a steep cost. It will pay lenders Libor plus 500 basis points, compared with the old rate of Libor plus 95 basis points.

"The market had an unreasonable fear that we wouldn't get [the deal] done," said Mr. McComb, citing analysts' reports that highlighted the risk of non-renewal amid the credit crunch.

Another factor hurting apparel makers is that off-price retailers, such as TJX Cos., that typically buy excess inventory from apparel makers are offering much lower prices and even turning away goods amid a glut in supply. Jerry Politzer, chief executive officer of retailer Loehmann's, for instance, said it has negotiated better prices and has declined merchandise over the past three months.

"Even discounters are asking for markdown money," said Antony Karabus, chief executive of consultant Karabus Management. The price discounters will pay is now significantly less than 90% to 100% of an apparel maker's production costs, he said.

Source: Dodes, Rachel,  “Liz Claiborne Warns of Loss” Wall Street Journal, January 14, 2009.

Amazon's Sales Growth

An article published on January 30, 2009 in Wall Street Journal reported Amazon.com Inc.'s profit rose 9% and sales surged 18% in the fourth quarter as the Internet giant used its pricing muscle to lure shoppers.

Chief Executive Jeff Bezos's goal of establishing Amazon as the Internet's biggest store, with aggressive discounting, free shipping offers and a relentless expansion into new product categories, is paying dividends just as most retailers are struggling and scaling back.

Mr. Bezos said its not clear how much Amazon stands to benefit from the closings of traditional retailers. "It is difficult to say what if any short term impact you might see from that," Mr. Bezos said on a conference call. "In the long term, fortunately the markets that we operate in are very large markets and there is room for lots of winners."

The Seattle-based company reported earnings of $225 million, or 52 cents a share, for the quarter ended Dec. 31, compared with a profit of $207 million, or 48 cents a share, a year earlier. Revenue reached $6.7 billion.

Amazon Chief Financial Officer Tom Szkutak said discounting during the "very competitive quarter" hurt the company's gross profit margins, but "one of the reasons that you see the growth that you do is because of the value we are providing."

Amazon's prices and convenience have turned people such as 31-year-old Winchester, Va., resident Jessica Redden into regulars. Over the holidays, "I was on Amazon every day," says the stay-at-home mother of five, who spent about $600 on the site over Christmas on items including an iPod and DVDs. "We did do price comparison among the big box stores that were local to us, and found time and time again that Amazon had the best price." "I don't feel like I need to venture to any other site," she says, for products ranging from diapers to toys.

Amazon approached the holidays by offering a wider array of goods, even though it faces lower profit margins when it expands into new types of products. Over the last year, Amazon has added stores for digital music, out-of-print CDs, and even accessories for motorcycles and ATVs.

"Amazon is growing at a good two to three times the pace of everyone else," says Scot Wingo, Channel Adviser's chief executive.

Overall e-commerce spending declined in the fourth quarter amid the recession, but Amazon's share of the market rose to about 10% from 6% in 2005, while eBay's main commerce site declined to 17% from 22% in 2005, according to Susquehanna Financial Group.

Source: Fowler, Geoffrey A.,  “Amazon’s Sales Surge, Bucking Retail Slump” Wall Street Journal, January 30, 2009.

SAP's Foray Into "On-Demand" Web-Based Software

An article published on February 4, 2009 in Wall Street Journal reported that SAP AG plans to imitate the Web-based software makers that have been chipping away at its business.

The German software company introduced a new version of its flagship business package that lets customers pay for and use just the pieces they really need. Companies could, for example, get new payroll software without changing the inventory database. The new software, called Business Suite 7, also eliminates the need to do onerous upgrades. It is a strategy that takes a page from the book of makers of "on demand" software, such as Salesforce.com Inc., which have flourished in recent years as businesses have sought simple, low-cost software that doesn't require teams of technicians.

Usually, SAP's big corporate customers buy a software suite that can do all their back-office functions including payroll, inventory and billing. Every few years customers must do a systemwide upgrade to get new features and tools, a costly process that takes several months.

The new product is important to SAP. Spending on information technology is expected to drop 3% this year to $1.66 trillion, according to Forrester Research Inc. That would mark a reversal after seven years of growth.

SAP and its main rivals, Oracle Corp. and Microsoft Corp., have already seen revenues slump as businesses put the brakes on spending. All three are laying off workers, with 3,000 departures at SAP.

"The Business Suite is a key test for SAP to show that it can reduce the total cost of owning and running its systems," said R. "Ray" Wang, an analyst at Forrester Research. The advent of Web-based software "is putting tremendous pressure on conventional software companies like SAP to become more nimble, more innovative and cheaper."

Salesforce.com, which sells business software over the Internet, saw its revenue rise 48% to $787.2 million in the nine months ended Oct. 31. Its products can be activated immediately, paid for on a monthly subscription and don't require any hardware or periodic upgrades.

"These are tough times for any company that's selling big-ticket software," said Bruce Francis, vice president of corporate strategy for Salesforce.com. "It's obvious that the industry is moving toward [Web-based tools] and the current environment just shines a spotlight on this."

Instead of signing big contracts with upfront payments for a suite, SAP will likely sign smaller deals but in higher volume. "This changes our sales approach," Mr. Snabe said. "We have to continuously prove ourselves to our customers now."

Source: Abboud, Leila ,  “SAP Takes a Page From Rivals for Software Update” Wall Street Journal, February 4, 2009.

Merck Outsources Distribution to UPS

An article published on January 7, 2009 in Wall Street Journal reported that United Parcel Service Inc. said it agreed to manage U.S. distribution for most of Merck & Co.'s drugs and vaccines, and to provide package-transportation services for the company.

Merck, based in Whitehouse Station, N.J., had previously handled distribution in-house, but decided to outsource much of the function to UPS as part of an effort to save costs and better focus on core tasks such as drug research, a Merck spokeswoman said. Financial terms weren't disclosed.

The deal illustrates how major drug makers are increasingly turning to outside partners for assistance with a range of functions, from drug testing to sales and marketing. Merck also has been striving to reduce costs, and announced in October that it would cut an additional 7,200 positions by the end of 2011.

For Atlanta-based UPS, the deal underscores its expansion into health-care services, though that isn't seen as a serious competitive threat to the wholesale-drug distribution industry. From its 2000 acquisition of Livingston Healthcare Services, UPS has built up a network of health-care distribution centers.

The deal comes at a tough time for shipping companies. Although high fuel prices have receded, trucking and shipping companies face declines in orders and sales across a range of industries. In December, UPS's investment ratings were cut by several firms. J.P. Morgan said UPS had relatively outperformed other transporters since the beginning of November, but it no longer expects that outperformance to continue.

Through its unit UPS Supply Chain Solutions, UPS has taken control of two Merck distribution centers comprising more than 200,000 square feet of space, which provide the drug maker with temperature-controlled storage, packaging and transportation services. Most of Merck's U.S. vaccines and pharmaceuticals go through the two centers, located in suburban Atlanta and Reno, Nev.

UPS also plans to open two new health-care distribution centers, in Puerto Rico and the Netherlands.

"UPS has been pushing into the health-care market pretty aggressively as an outsourcing logistics provider over the last several years," said Adam Fein, president of Pembroke Consulting, a pharmaceutical supply-chain consulting firm in Philadelphia. But it isn't seen as a serious threat to the wholesale-drug distribution industry, which is dominated by AmerisourceBergen Corp., McKesson Corp. and Cardinal Health Inc.

Source: Loftus, Peter and Brin, Dinah Wisenberg,  “UPS Gets Merck Contract” Wall Street Journal, January 7, 2009.

Competing with Quality and Advertising Based Goodwill

 

Goodwill formation is a complex process and many factors influence the formation of goodwill of a firm. The implications of advertising enabled goodwill formation are reported in several articles in the research literature. In a paper my co-author and I extend this stream of research by including quality in the goodwill formation process.  The relationship between quality/advertising investments and goodwill level suggest that with everything else held constant, a firm would decrease its advertising efforts with higher goodwill levels. The implications on quality efforts are quite opposite. With higher accumulated goodwill level, a firm invests higher in quality. This finding puts into perspective the differing implications for advertising and quality efforts with regards to the firm's goodwill level. As the goodwill of a firm increases less of this need to be communicated through the medium of advertising. However, with increasing goodwill levels a firm makes higher investments in quality to maintain (or potentially increase) the goodwill level.

Source: Nair, A. and Narasimhan, R. 2006. "Competing with Quality and Advertising Based Goodwill," European Journal of Operational Research, 175(1), 462-474.