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Perishable Pundit
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Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur

Wal-Mart Needs to Jump-Start A Virtuous Cycle And Stop Putting Onus On Shoppers To Find Lower Prices

When Wal-Mart first began rolling out supercenters, the supermarket industry was panicked. It wasn’t just that a new competitor was coming to town, or that Wal-Mart possessed operating efficiencies supermarkets would find tough to match that worried CEOs at supermarket chains. It was the recognition that general merchandise carried rich profit margins compared to food.

In theory, Wal-Mart could sell food at break-even or even use it as a loss-leader to attract consumers into the store where Wal-Mart would profit by selling general merchandise at rich margins.

Of course, now Wal-Mart’s first quarter earnings come out, showing overall profits up but same-store sales down in the US. The business has changed so much that the food tail is now wagging the general-merchandise dog, so The New York Times is running pieces with headlines such as Wal-Mart Frets as U.S. Shoppers Buy Food and Little Else.

One gets the distinct impression that Wal-Mart executives don’t really understand why same-stores sales are down — now for eight consecutive quarters.

At different times and in different places, Wal-Mart executives have pointed to various issues to explain the problem:

  • To their credit they have recognized that the decision to limit assortment was a mistake. As we wrote here, what works for Aldi simply makes no sense for a supercenter whose competitive advantage is, specifically, variety. Yet Wal-Mart knew this was a mistake over a year ago. True, it is a big ship and not easy to turn on a dime. Still, at the old Saturday morning meetings, if a problem was identified at the meeting, the team used to present a solution before the meeting was out. It seems odd that to a substantial extent the problem couldn’t be rectified by now. Of course, it seems odd that Wal-Mart would have pulled all that assortment without testing its effect on consumers in the first place.
  • Now executives are pointing out that the economy is really impacting Wal-Mart shoppers, and that its customers are indicating through their shopping patterns that they are running out of money before the end of the month. So much so that Wal-Mart is offering some items in smaller package sizes, and consumers are responding by buying them at the end of their pay periods, even though these items are more expensive per ounce, just to make it through until their next check.

    This poor-economy argument doesn’t make 100% sense. If Neiman–Marcus or Hermes made this argument that its customers were feeling a pinch financially, one could accept it. After all, it is not as if there are even richer people who could now slum it and shop at these high-end stores. For Wal-Mart, however, there is a stratum just economically above the core Wal-Mart shopper, and if times are tough, one would expect these consumers to migrate to Wal-Mart.
  • The latest argument is that because of high gas prices, consumers are reluctant to get in the car and go to Wal-Mart. This makes little sense. Traditionally Wal-Mart benefited from high gas prices because its massive supercenters offered one-stop shopping for so many items.

We would like to suggest that Wal-Mart’s problems relate to both substance and marketing that is reminding consumers of its substantive problem.

On the substance side, The Street published a piece built on research by Customer Growth Partners titled, Who Has It Cheaper? Wal-Mart vs. Target, which was not what Wal-Mart would want to hear:

According to pricing studies conducted by Customer Growth Partners, a consumer research firm, January, February and March all revealed Target’s prices were lower than Wal-Mart’s. The monthly study, which is conducted in four states, compares products across segments, including 30 fresh, frozen and non-perishable groceries, eight household chemicals, paper and other consumables like detergent, seven health and beauty aids like shampoo and counter medicines and 10 general merchandise items like apparel and toys.

In CGP’s analysis for the first three months of the year, Target held a 0.6% price differential over Wal-Mart. This was the first time since the firm began conducting these studies in 2006 that Target displayed lower prices. In the past, Wal-Mart has typically maintained a 2% to 4% advantage over Target, says CGP President Craig Johnson.

In fact, the situation may be worse for Wal-Mart:

If you then factor in Target’s new Redcard loyalty program, which offers users a 5% discount, that price difference widens. Of course, not all of Target’s customers are Redcard holders. Johnson estimates that the loyalty program makes up about 13% to 16% of sales.

But the usage and penetration of the Redcard appears to be increasing, as it provides shoppers at least a 5% discount on new, higher cost, but generally undiscounted consumer electronics items like Apple’s new iPad 2 and Nintendo’s 3DS.

Wal-Mart does not offer a similar program, which could put the company at a further disadvantage moving forward.

Now Pundit sister publication PRODUCE BUSINESS has run a comparative analysis of produce pricing between Wal-Mart and other retailers for 10 years, and we find Wal-Mart to consistently be less expensive on fresh produce.

The article also point outs that this is still true of food generally:

In a separate study conducted in January by Kantar Retail of just one Wal-Mart and one Target store in Massachusetts, it found that Target’s prices were about 2.8% lower than Wal-Mart’s. But the research firm noted that Target’s low prices are more dependent on temporary sales. This means shoppers need to be willing to change brands based upon the promotions being offered in order to really notice a few extra bucks in their wallets.

Two categories, in particular, where Wal-Mart remains a price leader are groceries and non-perishable home good like paper towels and light bulbs.

While Target has grown its P-Fresh assortment by leaps and bounds, Wal-Mart continues to dominate the sector. About half of all of Wal-Mart’s merchandise falls under the groceries segment, while CGP estimates that 15% to 20% of Target’s merchandise are groceries.

According to the Kantar study, Wal-Mart was cheaper in edible grocery items by about 1% and has a 3.4% advantage over Target with non-grocery items.

Kantar purchased a basket of 13 edible items, finding price differentiations like a tub of Land ‘O Lake butter for $3.48 at Wal-Mart and $4.39 at Target. It is also worth noting, that five of the items Kantar studied in the category were on sale that week at Target, while just one item at Wal-Mart was a special. If these items were not on sale, Wal-Mart would have been cheaper by 6.2%.

The problem, of course, is that target is not the toughest competition. What about dollar stores, Aldi, Save-a-Lot and various other deep discounters?

The truth is that every quarter Wal-Mart has been pointing to higher profits and lower same store sales. What it needs to do, of course, is invest some of its profit margin into lowering prices. This would jump start a virtuous cycle in which lower prices lead to higher sales per square foot, which would result in fewer costs per dollar sold, which could allow for lower prices ad infinitum.

In the CGP study, Wal-Mart bounced back to beat Target on prices in April — but not if one takes the 5% Redcard discount — in which case, Target is the clear winner.

This is more serious than just losing customers for a month; it is about losing positioning. As the article points out:

Wal-Mart has been struggling with its image among core shoppers since it removed thousands of items it deemed unprofitable from its shelves starting in 2009. While it is currently restocking some of this merchandise, the process is slow, and has left a sour taste among some customers.

But an even bigger concern has been the perception among shoppers that Wal-Mart does not offer the same savings it always had. “We believe that the price leadership perception, in fact, is a greater issue for Wal-Mart than destocking the fifth or sixth brands in a particular category,” Johnson says.

Although in The New York Times piece, Wal-Mart’s leadership speaks aggressively:

In the United States, Wal-Mart has been making a number of changes to revive same-store sales. Michael T. Duke, chief executive of Wal-Mart, said on Tuesday that “comp sales growth remains the greatest priority for me and the entire Wal-Mart U.S. team.”

We think the actions of Wal-Mart’s executives make us think that enhancing short-term profits is a still higher priority. If they don’t fix this, Wal-Mart will lose its most precious asset -- the perception of consumers that it offers the right price.

Wal-Mart’s ‘Match It!’ marketing campaign is really not a good idea.

Although Wal-Mart has long had a policy of matching prices, it never needed to promote it when it was perceived as the low price leader. Making customers feel like they have to be detectives and researchers to get the lowest price is exactly the opposite of the experience shoppers want from Wal-Mart. They want Wal-Mart to do the research and Wal-Mart to make sure they are not overcharged.

Note that the campaign does not include any Wal-Mart promise to lower its price if someone points out that a competitor is less expensive on an item. Only the particular person complaining gets anything – and then just a match. This whole campaign basically advertises to consumers that at Wal-Mart you will be overcharged unless you are a super sleuth. What a comedown for a chain that used to advertise: “Always the low price. Always.”

Chiquita/Fresh Express Announces Roll Out Of Fresh Rinse To Cover Entire Salad Production:
Peer-Reviewed Article To Be Published, Potential To License To Others, Marketing Campaign To Begin.
No Word On How It Compares To Alternatives. Would It Thrive As A Spin-Off?

Any fair assessment of the matter would have to acknowledge that Fresh Express has enjoyed a merited reputation for a long standing and deep concern for food safety. Working from the inside, Jim Lugg, now retired and a consultant to Fresh Express but its longtime head of food safety and quality, whose name now adorns the James R. Lugg Global Research & Innovation Center in Salinas, CA — one of two world-wide research facilities operated by Fresh Express’s parent company, Chiquita Brands  — would not bend on safety. He partnered with Michael T. Osterholm Ph.D., M.P.H, a pioneer in public health and food safety epidemiology, and Professor Osterholm provided the intellectual heft. The Lugg/Osterholm dynamic duo manned the barricades of food safety and, in insisting on the highest standards, made not only Fresh Express exemplary in its field but also helped raise food safety standards for an entire industry.

Yet food safety costs money and, from time to time, Fresh Express has struggled with how best to monetize this substantial investment in food safety.

Ronald Reagan was well-known for popularizing an 11th commandment for Republicans: “Thou shalt not speak ill of other Republicans,” and so the produce industry has an unwritten 11th commandment of its own: “Not to market food safety to consumers.” The concern, of course, being that one firm’s promotion might cause a decline in consumer confidence in all other fresh produce.

Fresh Express has sometimes seemed to transgress this unwritten industry commandment. For example, at the PMA convention in San Diego back in 2006, with the wounds of the great spinach crisis of 2006 still raw, attendees woke up to a USA Today with a headline reading: ‘Fresh Express Leads the Pack’ in Produce Safety. This appearance in a consumer newspaper was seen as an attempt to market its food safety bona fides to consumers.

The PMA convention just this past October in Orlando, Florida was also filled with much excitement; not a small amount of the thrills were engendered by the appearance of an article in The New York Times titled Post-Recalls, A New Way to Clean the Greens.  The piece was about the introduction by Fresh Express of a new wash solution it named FreshRinse.

There were many reasons the piece caused a stir.

First, because by leaking the story to a consumer publication, especially The New York Times, Fresh Express was seen by many as violating the same 11th Commandment of the Produce Industry — don’t market to consumers about food safety. We received communication from some of the top retailers in the country who wondered if this new wash wouldn’t tend to disparage product that didn’t use this new wash.

Second, because the release was kept secret, it caught many industry leaders blindsided. David Gombas, senior vice president of foods safety and technology at United Fresh was, quite predictably, quoted in the article but, in the end, had to acknowledge he knew nothing about the new wash:

“Fresh Express is a member of the produce association, but Mr. Gombas said that he was not aware of the company’s plans or the results of its research.”

Third, in the absence of information many, including the Pundit, were confused about a reference made in The New York Times article about an ingredient “found in milk” that turned out to not come from milk at all.

Fourth, because nothing was peer-reviewed or even seen by people not working with Fresh Express, there were questions as to the veracity of the claims being made, and competitors were simply irate. Here is just one of the many letters from competitors we received at the Pundit last October even while PMA was still going on:

October 15, 2010

Fresh's self-serving announcement is destructive to a healthy salad industry based on quality performance and consumer trust. Taylor Fresh Foods patented the SmartWash product and system almost two years ago and created New Leaf Food Safety Solutions to make SmartWash available to the salad industry (see PMA booth) More than six months later, Fresh Express applied for a patent on their wash product.

New Leaf has tested Fresh's patented wash in New Leaf's pilot plant in Salinas this past year. Results clearly indicate SmartWash eliminates bacteria cross contamination and is much more effective in killing harmful bacteria than Fresh Express's "new" process. I believe New Leaf folks shared comparative results with Fresh Express in the past month.

With this new PR blitz, Fresh is essentially trying to claim a bronze medal is better than a gold medal. Worse still, Fresh is denigrating the use of chlorine (which many scientists call the greatest breakthrough in advancing human health) in salad wash systems.

SmartWash is a real breakthrough for the salad industry, vetted by USDA researchers and run in over 25 per cent of the salad industry for the past year. It will eliminate outbreaks in the fresh salad industry and win back consumer confidence in our fresh produce industry. It is real and it works. Fresh Express is struggling in the marketplace (sales down 10 per cent again this quarter) and desperate for a PR boost.  I do not want their problems to undermine our collective opportunity to build a safer, healthy and growing fresh produce industry.

—Bruce Taylor
Chairmen & CEO
Taylor Farms

Salinas, California

It is a powerful letter and the sense of outrage is palpable.

Now, seven months later, Fresh Express is passing a milestone… As of today, all Fresh Express salads are being washed not in the traditional chlorine but in FreshRinse. Here is the announcement:

Express Salads Now Washed with New Breakthrough Fresh Rinse™ Produce Wash Providing Important Food Safety Benefits —

Eco-friendly Produce Wash Reduces Bacteria

Consumer Marketing Campaign Aims to Create Consumer Awareness
Cincinnati ‒May 24, 2011 Chiquita Brands International (NYSE: CQB) and its wholly-owned subsidiary, Fresh Express Incorporated, today announced that Fresh Express salads sold nationwide are now manufactured using its new breakthrough produce wash, Fresh Rinse™. Fresh Rinse™ has been scientifically validated to dramatically reduce certain bacteria while at the same time continuing to provide high levels of freshness, taste and quality consumers expect from Fresh Express salads. Leading the category, Fresh Express sells more than 60 varieties of pre-packaged ready-to-eat salads in more than 24,000 retail stores in the United States.

“We’ve reached an important milestone in our mission to improve world nutrition with the expansion of our revolutionary new process to wash leafy greens across our Fresh Express salad lines,” said Fernando Aguirre, Chiquita Chairman and CEO. “In addition to a significant improvement in food safety, our national Fresh Rinse conversion has shown improved quality and freshness as measured by sustained testing at our initial processing facility. Our continuous investments into food safety, freshness, and quality enhancement will make a positive impact on the lives of our consumers by increasing consumption of our nutritious, great tasting Fresh Express salads.”

Years of intensive investment by Chiquita, with research led by principal scientist, Dr. Kai-Lai Grace Ho, and support from the company’s food safety, innovation and manufacturing teams, led to the invention of Fresh Rinse™. The effectiveness of this new patent-pending technology has been validated by studies performed at the National Center for Food Safety and Technology — a recognized third-party research and testing facility. These independent studies confirmed that Fresh Rinse™ demonstrated superior effectiveness in removing pathogens from wash water and from certain leafy greens compared to traditional chlorine washes. An article detailing the Fresh Rinse™ technology has been peer reviewed and accepted for publication by the Journal of Food Protection.

“The ability of Fresh Rinse to reduce bacteria in fresh produce is an important preventive strategy for minimizing the likelihood of food borne illness,” said Dr. David Acheson, former Associate Commissioner and Chief Medical Officer of the U.S. Food and Drug Administration as well as an advisor to Fresh Express. “The beauty of Fresh Rinse is the synergy between the two ingredients. When combined, they work together to deliver a significant level of magnitude improvement in antibacterial efficacy. In sum, each ingredient alone is not nearly as powerful in bacteria reduction as the combination of the two; this is a case where two plus two actually equals 22.”

The unique ingredients that comprise Fresh Rinse™ are also eco-friendly and break down to safe compounds. Moreover, Fresh Rinse™ meets the strict requirements necessary for use on products labeled organic, which represents a growing segment of the pre-packaged salad category.

Chiquita’s mission is to improve world nutrition by helping lead the world in branded, healthy and nutritious foods. Elizabeth Somer, a nationally recognized nutritionist and author often seen on NBC’s TODAY Show, works with Fresh Express to educate consumers about the important role fresh lettuces and leafy greens play in providing nutritional benefits for good health.

“The one food that research has shown is most highly associated with longevity and good health is leafy greens – in other words, salads,” said Somer. “Because dark leafy greens are the most nutrient-packed foods available to us, a food safety breakthrough like Fresh Rinse used with convenient, ready-to-eat packaged salads will go a long way towards helping consumers increase their consumption through reinforced confidence.”

Fresh Rinse™ has been applauded as a significant advancement in fresh salad food safety by leading medical and scientific experts who advised Fresh Express during the project. In addition to Dr. Acheson, they include Dr. Michael T. Osterholm, PhD, MPH and Executive Director of the University of Minnesota Center for Infectious Disease Research and Policy; and Dr. Robert Buchanan, director and professor, University of Maryland Center for Food Safety & Security Systems, former senior investigator, U.S. Department of Agriculture (USDA) and former deputy administrator for science and technology for the USDA Food Safety Inspection Service.

Fresh Express salads cleaned with Fresh Rinse™ can now be found in the refrigerated salad section of grocery stores and supermarkets nationwide. Fresh Express is currently the only company distributing salads washed in Fresh Rinse™. As part of its commitment to public health, Chiquita intends to license Fresh Rinse™ for use by others in the produce and fresh foods industries.

In a sense, the release represents the fulfillment of pledges made by Fresh Express back in October. Company executives pledged to roll out FreshRinse to its entire production and it has happened. Company executives also said that they would submit an article on their research to be peer reviewed in the Journal of Food Protection, and an article has been submitted and accepted. Company executives also promised that the Fresh Rinse would be offered to competitors, and now company executives say, having completed the roll-out to all Fresh Express production facilities, they are now ready to create license agreements with other produce firms.

We have little doubt that FreshRinse is effective and safe. It is composed of peroxyacetic acid, an organic peroxide, and lactic acid. Fresh Express has gotten not only Michael T. Osterholm, Ph.D. ,M.P.H. but also Dr. David Acheson, former Associate Commissioner and Chief Medical Officer of the U.S. Food and Drug Administration to sing the praises of the compound and, although these gentlemen are retained by Chiquita/Fresh Express, they are high caliber individuals and would not vouch for something they did not believe to be true.

Of course, the problem is that the answer you get depends on the question you ask, and there is a sense that the wrong question may be asked.

Fresh Express continuously compares its product, favorably, to chlorine. Fair enough, but most processors are now looking beyond chlorine, which is, after all, only approved to clean water, not produce.

Bruce Taylor’s letter, for example, makes explicit that he believes in SmartWash as preferable to FreshRinse. It seems somehow odd that so many months after introducing FreshRinse, the marketers of FreshRinse, though making this big announcement, are not prepared to produce a study comparing the efficacy of FreshRinse against SmartWash. Isn’t that, after all, the actual kind of decision that a processor must make?

One senses the announcement was somehow rushed. It is wonderful that an article has been peer-reviewed and accepted for publication; wouldn’t it make sense to actually have the article published and available for people to read? Otherwise, it is hard to make any real judgments about the product.

There are a lot of great things that have come out of the discussions around this new announcement. Chiquita/Fresh Express took the time to walk the science officers at both PMA and United through the technology and science — so they wouldn’t be blindsided again. One can hope that FDA, seeing the efficacy of technologically advanced washes, will begin to incorporate recommendations into guidance documents that might make fresh produce safer.

Yet there are concerns raised by this announcement as well. Fresh Express is doing a slow rollout as packaging materials get used up with new packaging that includes a reference to FreshRinse. It has prepared marketing materials included TV commercials that focus on freshness and flavor but do prominently feature FreshRinse. The TV commercial proudly announces:

Fresh Express salads are washed in FreshRinse. A breakthrough eco-friendly wash that now cleans our salads 7x better.

There is type on the screen saying: Based on average reduction of bacteria (Total Aerobic Plate Count, an indicator for the level of microorganisms on a product) vs. traditional chlorine wash.

It is a very nice commercial… a chef in a restaurant explaining she serves Fresh Express salad to her patrons in the restaurant and to her family at home because it is so fresh. It is warm and persuasive – right up to the point where they start talking about FreshRinse. Whatever its merits, it is hard for this Pundit to believe it is going to helps sales to focus on FreshRinse. it comes across as if it is some kind of chemical additive.

And this cleaning 7x better, what does that mean? Surely many consumers will think it means they were being sold pretty dirty stuff for many years.

From an industry perspective the implication is pretty clear: Items not washed in FreshRinse are dirty. One question is if this is true. If the industry isn’t strictly using “traditional chlorine wash” then the comparison is not apt. Even if it was true it is hard to imagine retailers being thrilled with ads running implying that everything not washed in FreshRinse is not very clean.

With the on-screen references to “microorganisms” it is pretty clear that Fresh Express is trying to use cleanliness as a proxy for safety. And in that sense one wonders if the claim isn’t overreaching. After all, it may be true that FreshRinse  cleans the salads 7x better — as measured by Total Aerobic Plate Count — but most of these microrganisms are harmless and so the product is probably not 7x safer.

Another potential issue is that although Chiquita/Fresh Express executives emphasize that they are ready to license FreshRinse for other companies in the industry to use, they haven’t done so.  In fact it seems like it might be quite difficult. After all if Fresh Express has FreshRinse on its labels and in its ads, it can’t just let anyone use the product. What if they have a food safety problem?  So Fresh Express is going to have to be enormously intrusive and rigorous about licensing this out. Competitors buy from each other all the time but which competitor is going to let Fresh Express into every crevice of its operation. We are sure Fresh Express would like the revenue and maybe it will license overseas or in other industries, but it is very hard to see how this will work with other domestic salad processors.

We have no doubt that Fresh Express has been thinking about washes for a long time. It is an obvious area of concern and opportunity. But if it is to serve the cause of building consumer confidence in fresh produce and bagged salads we need to first, test it against real life alternatives, not just some baseline wash. Second, we need to make sure it is genuinely available to the whole industry. Third, we need to keep the industry advertisements focused on fresh produce, not things that will come across as a chemical additive and not things that will imply that one treatment is the key to “clean’ produce.

The industry should be grateful that Fresh Express has invested in this technology, it has nurtured it and given it a giant client in its own plants. Now, much like a parent who must let child go, so Chiquita should spin off FreshRinse to its shareholders.

If it really as good as the executives at Chiquita/Fresh Express imply, then it will be much more successful, much faster, as an independent company. As a freestanding food safety technology company, it would be much easier for other processors to sign-on. Chiquita shareholders will make a mint, the industry will be safer, consumers  and government will have more confidence in the produce industry and its products. And the enormously talented people at Chiquita/Fresh Express can go back to focusing on selling fruits and vegetable and leave the chemical pushing to others.

The Case Of The Stolen Tomatoes: Doesn’t The FBI Know About PTI?

The police have been quiet since last month when William Neuman at The New York Times wrote the story of a heist of trailer loads of tomatoes with a piece titled Price of Tomatoes Has a Lot to Do With These Thefts. The gist of the story was simple:

… a gang of thieves stole six tractor-trailer loads of tomatoes and a truck full of cucumbers from Florida growers. They also stole a truckload of frozen meat. The total value of the illegal haul: about $300,000.

Though the story played on the angle that the high price of tomatoes — post Mexican freeze — had transformed tomatoes into a “tempting target” and pointed to the suspicions of investigators that someone familiar with the produce hauling industry was behind it all, one suspects that if police get to the bottom of it, someone in the produce industry was highly likely to be involved.

Of course, police might not get to the bottom of it. One of the peculiarities of the media coverage of the matter is that nobody mentioned the Produce Traceability Initiative. Florida growers and packers have been participating in PTI, so one would assume that most of these cases of tomatoes would have easily been identifiable. It would be like trying to sell a “hot car” with a Vehicle Identification Number right on the windshield. Yet it didn’t make law enforcement sound very much on top of things that nobody mentioned PTI. Perhaps this is another example of one part of government not knowing what is going on under the gentle push of another?

Perhaps the only way these tomatoes could be sold would be to a repacker, where the product could lose its identity. The repacker, though, would have to be in on the heist, carefully disposing of the cartons. Repackers don’t buy trailers of tomatoes from people who knock on their doors, so this product would have had a home before it was ever stolen.

Did the FBI and other law enforcement agencies know about PTI? If they did, we can expect another shoe to drop — perhaps right on someone in the produce trade.

Focusing On What Is Easily Measured Is Not Likely To Achieve The Ultimate Goal In Health Care Or Business

There has been a bunch of press coverage over a study published in the Archives of Surgery under the title, Surgical Vampires and Rising Health Care Expenditures: Reducing the Cost of Daily Phlebotomy, that found that simply making physicians aware of how much blood-tests were costing their non-intensive care unit leads them to order fewer tests.

This is all well and good, as there are many reasons physicians might order tests that do not contribute to better outcomes for patients. Perhaps the physicians have a financial interest in more tests being ordered, for example, or perhaps they are ordering tests they themselves think worthless but are doing so to practice “defensive medicine” in case they are ever sued. Perhaps it is just mindless rote activity.

Nothing in this study, however, was designed to identify any such reasons. All we can say is that if you make a weekly announcement to remind doctors how much is being spent on blood tests by their nonintensive care unit, the doctors order fewer tests. Or at least they did for the duration of this study—quite possibly the effect would wear off with the passage of time.

The media response immediately assumed that ordering fewer blood tests is a good thing. U.S. News & World Report headlined an article, Unnecessary Blood Tests Plunge After Cost Reminders: Study, and Katherine Hobson, writing on The Wall Street Journal’s Health Blog, ran a piece titled Reducing Unnecessary Blood Test By Telling Doctors the Cost. Reuters headlined that Putting a Price on Blood Tests Can Save Money — Study.

But we don’t know if the lab tests that went unordered were necessary or not. We don’t know if failing to do them actually saved any money. It is entirely possible that doctors in the study felt intimidated into ordering fewer tests than they believed desirable.

If one patient went into atrial fibrillation and died because a test wasn’t done to make sure his electrolytes were in balance, then the tests weren’t unnecessary, and it wouldn’t take many patients winding up having heart attacks and going into intensive care, etc., for it to mean that the savings on labs didn’t actually save any money.

In fact, even the definition of saving money can be difficult to pin down. For example, avoiding a particular test might not be “necessary” and might “save money” in the sense that the patient may recover all on his own, without medical intervention. Yet if the test would have identified the illness sooner and medical intervention sped the healing process along, meaning that the patient would return to work four weeks sooner, then the cost to society of not doing the test includes both a month’s lost pay for the patient plus  the value added  the working patient would create for his employer.

We are focused on these medical studies because we are dealing with illness among friends and family. Yet it also strikes us that this temptation, to think that what is easily measured is most important, is endemic in business.

Think about a subject such as shrink. Many years ago, we wrote a piece titled Three Cheers For Shrink that focused on anti-shrink efforts being made in the floral department. The gist of the piece was that focusing on reducing the cost of shrink is typically counter-productive. One should focus on getting the best outcome by utilizing optimal operating procedures.

All too often today, we see one short term goal — reduce lab costs or reduce shrink in the floral department — and neglect the ultimate purpose of our activity — bringing about good health or increasing profitability at store level.

To focus on the means without any attention to the ends one hopes to achieve is bad for business and bad for public policy.

Pundit's Mailbag — Is Costco Repeating Wal-Mart’s Mistake? Of Engagement Rings, Wedding Dresses And Knowing One’s Customer

We recently received this note commenting on a piece we wrote about Wal-Mart’s efforts to go back to the basics:

This excellent piece on Wal-Mart, titled “Wal-Mart’s Efforts To Go Back To Days Of Sam Walton May Only Position The Company In Between Deeper Discounters And More Upscale Venues — portraying Wal-Mart’s foray into high fashion — is especially relevant as Costco recently announced it will be building bridal boutiques within its warehouses. (“Where did you say you got that gown?!”).... Is Costco taking the same risk here?

We have blogged extensively on the different directions taken by Wal-Mart to keep up with the marketplace. Losing sight of the original EDLP strategy and attempting to “Targetize” themselves have only confused customers. As marketers, we are constantly telling clients to stay on strategy: to pick a positioning and maximize it. Or, if you are making a major change, do so with gusto and glory! You just can’t have your cake and eat it too...

— Veronica Kraushaar
VIVA Global Marketing, LLC
Nogales, Arizona

Veronica was kind enough to quote the Pundit piece in her own marketing blog ”Here comes the (Costco) bride…” and we appreciate that.

To be clear, Costco is not actually opening permanent bridal boutiques. Instead, what it is doing is opening pop-up bridal boutiques initially as a test in a few stores in California. If the test is successful, the boutiques will probably only appear in Costco stores during peak wedding season, a period roughly from January to June.

This effort follows a successful effort last year as a Costco store in Issaquah, Washington, called Magical Weddings featuring Disney-themed bridal gowns based on the Disney Princesses: Ariel, Belle, Cinderella, Jasmine, Sleeping Beauty and Snow White designed by Kirstie Kelly. Ms. Kelly is the same designer who Costco is featuring in its pop-up boutiques.

We think Veronica’s note points to how subtle differences in clientele and image can be and how important it is for businesses to really understand both.

There is a common joke in retailing in which it is said that if you take a selection of Ralph Lauren Purple Label men’s shirts — typically sold at $395 and up — and put them in Costco for $195, they fly off the shelves and the customers can’t believe the bargain. Take the same item and put it out on the shelves at Sam’s Club and the customers wonder what kind of crazy people pay $195 for a shirt!

Costco, because of its treasure hunt merchandising philosophy and high-end private label program, is famous for having really good quality goods at discounted prices.

Now there are limits and surely those who were thinking of dropping by the Monique Lhuillier boutique and picking up a $20,000 dress are not going to go buy their dress at Costco. Still most people buy bridal dresses at places such as David’s Bridal, where there are beautiful dresses for less than $500. It is not obvious that one gets much prestige out of one’s friends knowing one’s bridal gown was purchased at David’s Bridal.

So part of the difference is the reputation of Wal-Mart vs Costco, but we would also point out a big difference is that in our story we were speaking of engagement rings, which are, traditionally, bought as a gift from the groom to the bride. Wedding gowns are bought by the bride herself or her family. So if a bride can buy a wedding gown at Costco at a bargain price, she is being smart and frugal. If a guy is buying an engagement ring at Wal-Mart, he might just come across as cheap.

The real question about Costco’s efforts in this area are three-fold:

  1. Will Costco be able to ultimately secure the brands it wants? There is a limited audience for one designer’s gowns. If Costco can actually sell the exact same gowns being sold in bridal boutiques and department stores for less, it will find plenty of customers.
  2. Can it create the experience brides want? With so many second and third marriages, this might not be as big a deal as it once was, but the classic first-time bride goes out to shop for the wedding gown with her mother, perhaps her sister or bridesmaids. Trying on lots of dresses and parading them is part of the fun of getting married. If Mom can’t participate at Costco and she is paying for the dress, she might just take the whole process elsewhere.
  3. Perhaps the biggest issue is whether selling the dresses cheap won’t undermine Costco’s reputation for quality. Right now, Costco educates its consumers to believe it can sell cheap because it sells in bulk. In other words, it gives its customers a rationalization for why it is able to operate cheaper and thus sell cheaper. Presumably, though, it won’t require the purchase of a three-pack when buying a wedding dress, which means consumers will be suspicious about the value proposition.

Many thanks to Veronica Kraushaar and Viva Global Marketing for sending along this note.



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