On June 27th, Roulston Research held a Consumer Packaged Goods Conference Call with John Machuzick and Daryl Brewster. Mr. Machuzick spent 35 years at General Mills, serving as a Senior VP and President of Bakeries and Foodservice during his time with the company. After General Mills merged with Pillsbury in 2001, he took charge of streamlining the integration of the two companies and helped turn around the deterioration that was taking place. Mr. Brewster worked in the consumer goods sector for 30 years at companies including Campbells, Nabisco, Kraft, and Krispy Kreme. He currently leads Brookside Management, a boutique advisory firm that focuses on providing senior-level counsel to the consumer products and retail industries. Topics and trends that were addressed by Mr. Machuzick and Mr. Brewster include more widespread GMO labeling, gluten-free foods growing in popularity beyond consumers who require them, mergers and acquisitions in the CPG industry, and whether companies can successfully run brand name and private label businesses together.

The issue of genetically modified food has been a hot topic in Europe for quite some time, but it is now picking up steam in America. Both speakers agree that this is a long term issue but is not likely to become a big governmental issue. They agree that GM foods lead to greater crop yields and have not been found to have any harmful effects. Any changes to the current system would take years to implement, e.g. Whole Foods is requiring that all of their foods be labeled for GMOs by 2018. Another recent trend is more widespread availability of gluten-free foods. About one percent of the US population has Celiac Disease, which is essentially severe gluten intolerance. In addition, a significant portion of the population is gluten sensitive. There are also many people who eat gluten free diets simply because they believe it is healthier, and this is becoming more prevalent. As a result, more companies are offering gluten-free options, and companies that focus on those products are doing well. Private label food companies have also been doing well. In recent years, their quality has increased, and they are growing about 5% per year. ConAgra’s acquisition of Ralcorp gives them access to several categories of private label products including pasta, cereal, and snack foods. However, the speakers have concerns about how that will affect their business. In the past, they said, companies have had a difficult time focusing on both brand name and private label products. ConAgra’s situation is slightly different, though, as the company does not make brand name versions of their private label products, so there will be no self competition. Due to the Ralcorp acquisition, mergers and acquisitions have been an important topic in the CPG industry. The speakers expect there to not be any big deals in the near future, but rather small, strategic acquisitions that build competencies and categories within existing business. They see room for growth in several different categories including beverages, healthy snacks, yogurt, fresh food, and pet food. The speakers also discussed, Amazon in the food industry, Dean Foods, B&G Foods, and several players in the coffee industry including Starbucks and Green Mountain Coffee Roasters. If you are interested in listening to the podcast from the event or engaging John or Daryl in a one-on-one discussion, please contact info@roulstonresearch.com.

For those with bandwidth left over from the sagas of the season ending episodes of Mad Men, Bruins-Blackhawks final, Edward Snowden, or Canada’s mayoral carnivals, the Sprint-Clearwire-Softbank soap opera has been quite a DISH. Now that is appears that Softbank has won Sprint and Sprint has won Clearwire, let’s ponder what’s next.

Overall, this is good for the industry. Sprint and TMO need to be properly capitalized, if they are going to mount credible competition to Verizon, AT&T, and the greater fixed and mobile broadband world. Now that there’s clarity, Sprint can confidently move ahead and execute on its Network Vision initiative, incorporating its plan for Clearwire into that mix.

What Does This Mean for the Industry?

I think Softbank owning Sprint will not be as disruptive to the industry as DISH would have been. DISH wants to upend the greater fixed & mobile broadband universe, while Softbank is more laser focused on the mobility space. The biggest near-term effect of the Softbank acquisition, if there are no more bumps in the road, is that Sprint gets to breathe a big sigh of relief and move forward with Network Vision. Sprint has a lot – and I mean a lot – of work to do to catch up to Verizon, AT&T, and TMO on the network side. This will be fairly preoccupying over the next 12-18 months. As it helps Sprint execute on Vision, I expect Softbank will push hard to differentiate Sprint’s LTE network, offering tri-band LTE and wider band services, especially in cities, leveraging the Clearwire network. Softbank adds leverage and scale to convince handset OEMs to make tri-band LTE devices.

As Sprint’s network turns from a liability into, potentially an asset (within 12-15 months if it plays its cards right), expect to see a much more aggressive company. I’d predict a big advertising campaign, possibly re-branding or re-positioning the company, but still focusing on the differentiated unlimited offer. Sprint will also have to come up with a new trick to steal some of the 50-60% of U.S. consumers who are in a “family” or “shared data” plan with AT&T or Verizon. We will surely see some disruptive pricing in the U.S. wireless market. There’s a lot of room below $10/GB, which is the prevailing mobile data pricing. There’s also room below the $200+ a month a family must spend with Share Everything/Mobile Share. There’s opportunity to offer creative plans for the 75%+ of “connected” devices, such as tablets, that are not cellular-enabled. And with the handset ownership/procurement model slowly, but steadily, moving away from a subsidy model, there will be more froth in the market, hence more subs and more devices up for grabs, and more often.

Additionally, as Sprint rolls out LTE and expands its 4G capacity, I would expect the company to court a significant MVNO partnership from a major Internet or media company. Think Amazon, Google, Netflix, Facebook, or Viacom, for example, who want to develop creative offers that bundle in content with connectivity. DISH could be part of the fray if it fails to execute on a facilities-based deal. Sort of like Obama asking Hilary to be Secretary of State after he beat her for the nomination and won the election.

What Might DISH Do?

DISH was determined but clearly had a limit in terms of how much it was willing to bid for Sprint & Clearwire, especially given its unique financial situation. This will not be the last of DISH in the wireless space, however. It is determined to disrupt current market structures. DISH strongly believes there’s opportunity to capture share of the relatively uncompetitive fixed broadband market. With the densification of cellular networks, spread of WiFi hotspots, and LTE roadmap, a key strategic and market structure question is whether, 3-5 years from now, fixed and mobile broadband services will still be distinct.

There is a chance that DISH could try to scoop up T-Mobile, or perhaps sign some form of unique MVNO or network sharing deal. It could also cobble together a terrestrial wireless network, through select acquisitions (Leap comes to mind) or some form of hybrid structure, similar to how Metro PCS and Leap Wireless had structured their “nationwide” offerings over the past few years. Some stake in or relationship with Clearwire is still on the table, once the boards vote and the heat of the current moment dies down.

The battle might be over but the war is not.  

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.

Sourcing has become an increasingly important issue for retailers due to a tightening of geographic choices. This is causing worldwide cost increases since choices are decreasing while costs are rising due to less options. The recent developments in Bangledesh where there are major safety concerns that are causing retailers to consider dropping sourcing from the country for fear of legal issues after the April collapse of the Rana Plaza complex factory in Dhaka which killed 1,129 people. China will always have supply but quota and tariffs become a larger issue. Retailers like Gap, Target, and Wal-Mart source in emerging markets like Pakistan, Vietnam, and Cambodia but these countries have limitations continuing to make sourcing more challenging. Quality can’t be found everywhere as only certain products can come from certain locations and fabrics can be costly to stage adding to costs. This makes sourcing opportunities challenging. If price isn’t an issue quality and capability can become the issue. Not all countries can make all products at the same cost or same quality required to make the product sellable or the margin level acceptable. Stay tuned there is more to come.

Gary was the CEO of United Retail Group from 2008 to 2010, a 500 mall and strip-center based chain of specialty stores.  He successfully executed a special turnaround, helping move a recently acquired company from public to private, reduce its losses and grow the business. Prior to United Retail Group, Mr. White was the COO and Executive VP at The Wet Seal, where he returned the company to profitability from large losses.  He was the CEO of Savers, Inc for 3 years prior to Wet Seal and the CEO of Gymboree for 4 years.  He spent 16 years at Target in the beginning of his career, moving from a store manager to Vice President Regional Manager – West. If you would like to speak with Gary about this topic or how it will affect individual retailers on a 1 on 1 basis please contact Tom Roulston at (216)780-9581 or tom@roulstonresearch.com.

The mobile phone industry is one of the largest in the world today, with over 6 billion subscriptions and over 4 billion users worldwide.  On this topic, Roulston Research held its Wireless and Mobile Devices Conference Call on June 21st.  Participants in this discussion were Mark Lowenstein, the Managing Director of Mobile Ecosystem, Former VP of Market Planning and Strategy at Verizon Wireless, and Former EVP at The Yankee Group; and Keith Mallinson, Principal at WiseHarbor, and Former EVP Wireless/Mobile at The Yankee Group.  They discussed the recent trends in the wireless industry, as well as what one might be able to expect going forward.

One of the main focuses of the conversation was the difference between the domestic market in the U.S. and that of the international market, primarily Europe.  In the U.S., the market is very consolidated between 2 firms, Verizon and AT&T.  Since most of the country is already covered, the main game is to steal subscribers from another firm.  In Europe, the market is much more fragmented, and thus there is room for expansion into.  As a result of this dominance in the American market, there has been considerable talk and action toward consolidating firms to try to compete with these two giants.  Recently, the main news has been in Softbank acquiring Sprint, and Sprint acquiring Clearwire.  What these firms hope that these mergers will do will give Sprint the spectrum and infrastructure necessary to compete in the domestic market.  Dish and Google also want to enter this space, along with the broadband space, potentially by partnering with each other or with other firms such as T-Mobile.  Google is an interesting player to watch here, because they have interest in increasing smartphone use, which would increase traffic to their site, but may not have as much interest in actually getting into the broadband or smartphone market directly.  Their efforts to develop a broadband infrastructure in certain cities is likely more experimental than a long term investment idea.  The participants believe that there is a possibility of Google subsidizing data plans of some of the carriers to increase market penetration of smartphones in general.  The participants also believe that some of the best investor opportunities come not from these major carriers, but from companies that provide some of the background infrastructure for these phones, such as Cisco.  Other topics covered include intellectual property, litigation regarding this property, and the value of spectrum.   If you are interested in listening to the podcast from the event or engaging in a 1 on 1 discussion with Mark or Keith, please contact info@roulstonresearch.com.

As the way we use media in our everyday lives changes, so too have methods of gathering and analyzing data on this media.  Roulston Research recently held a media measurement roundtable on June 20th to discuss this very issue.  Presenters were Jay Guyther, who along with being the current EVP of Mobile Research Labs was also the former SVP of Ratings Services, PPM Marketing, and Global Marketing at Arbitron, and former Media Measurement Research Consultant at Google; and Alec Gerster, who is the former Senior Marketing Director at Microsoft, former CEO at Initiative, and former CEO at Mediacom.  The presenters discussed the recent changes to the media measurement industry, and offered some thoughts on what the industry might look like going forward. 

The industry moving forward appears to be dominated by questions revolving around data integration.  In the past, there have been different ways of measuring viewership and ratings for all different kinds of media, with Nielsen dominating television, Arbitron dominating radio, etc.  With the recent acquisition of Arbitron by Nielsen, there appears to be potential for data integration across these platforms.  While the presenters believe that the name and legitimacy of these ratings as currency give Nielsen an advantage in this field moving forward, it is far from the only player.  Comparing data between the two sources has proved to be difficult, and promises to be even more difficult as they try to integrate other sources.  As new technologies are being increasingly utilized, it is important to determine how to measure data from other sources.  Until recently, smartphones and tablets were considered the same type of media, despite their differences in uses.  Smaller companies are more situated to adapt to these changes than large companies such as Nielsen.  Additionally, Nielsen gets much of its revenue from TV stations, so has little incentive to move into other areas of the field.  Google, with its large amounts of data, is also a potential player in this field.  However, the presenters contend that when Google tries to move outside of its core line of business, it is often clumsy in its approach, and may be unsuccessful.  Additionally, Google may have an interest in making its own media sources look good, so it may not be able to provide unbiased information as Nielsen does, which harms its legitimacy among advertisers as well as competitors.  Other topics discussed include methods of collecting data, set-top boxes, and the future of terrestrial radio.  If you are interested in listening to the podcast from the event, or talking with either Jay or Alec, please contact info@roulstonresearch.com.

Bernanke spoke yesterday about ending QE purchases of Treasury bonds.  You could almost hear the blood draining from Jack Lew’s face at the prospect of taking those Treasuries to a market in retreat.  He’s going to have to do more than shutdown White House tours to Boy Scout troops (remember the horrors of Sequestration?) to cover the increased interest costs on new bonds. That one saved $17 million a year.

Jack’s problem is he might have to talk to “Ruchel” about her decision to take the kids to Europe and Africa on a summer vaca (cost ~$100 million).  That would be like Bill explaining one or another girlfriend to Hillary back when they pretended they were married.

Anyway, we have more pressing matters to discuss today – how bad things can get in the commodity complex over the next year.  We’ll focus on our beloved oil industry but the message carries.

Ben’s QE policies lifted asset values way ahead of market growth.  A lot of that went to the carry trade across the board.  Buy it, store it, sell the future, pocket the spread.

Lacking real demand from the real market, capex often went to building inventories. A lot of capex went to adding capacity for just that purpose.

How much capex?

Well, let’s talk oil where capex last year for the top 100 producers hit $316 billion – a record.  It rose some 18% year-over-year(!!!). Of that, ~$208 billion went to development.

We’re not down on expanding production to meet real demand.  But growth some 10 times demand growth is, well, speculative.  And why not speculate?  At zero interest rates (ZIRP), you’ve got a physical covered position – buy the stuff, store it, and sell futures or calls.

To put a number on it, how does 2 cents per barrel per month sound for a interest rate? Sounds pretty good to me.  Don’t get those kind of rates on my Shell gas card.

With a 3-month future running 30 cents per barrel to spot, a 90% leveraged deal earns 2.5% after costs – 5 times the yield on Jack Lew’s junk bonds, err, 10-yr Treasuries.

Thanks, Uncle Ben, for the financing and the profit.

When the presses shut down, however, things are likely to get ugly.  Think meth addict cut off from Heinsenberg’s Blue Crystal – yo!

Shutting down the presses begins to “undistort” markets, leaving excess capacity high and dry.  Interest rates go up (as they did today after Ben stopped talking), carrying costs go up, and margins collapse.

Lots of people did that math today across the complex as the realization that the party WILL end and maybe soon.  And the market sank.

What works with oil works with a lot of other commodities.  So, we expect inventories to start clearing real fast across the board.

Let’s put some numbers to this.  If crude inventories are cut to the 5-year average, ~50 million barrels will enter the market.  Done over 6 months, you get 275K barrels/day.

Or, roughly 1/3 of IEA’s projected growth in oil demand over the next year.

Now, remember we mentioned an 18% yoy growth in capex last year? Well, how’s all that capacity going to do with a lot less demand growth and no inventory to play the carry trade?

Can you say “Bubble Pop”? Sure you can.

Stephen Maloney is a partner at Azuolas Risk Advisors with over 30 years experience in the US and EU modeling risk and valuation in energy, FX, and other commodities. Stephen has led energy M&A teams for Fortune 100 firms over 15 years. He also routinely advises executive and credit committees concerning high risk ventures and capital investments. His clients include companies, hedge funds, and financial institutions actively marketing or trading physical and financial commodities and derivatives. To learn more about Azuolas Risk Advisors please visit http://www.azuolasriskadvisors.com/.

Nordstrom announced last year that they are looking to double the number of Nordstrom Rack Stores by 2016 while continuing to grow through ecommerce. Despite the expansion, both stores have been able to coexist peacefully with 60% of customers shopping at both the rack and its flagship stores even though rack shoppers are skewed toward the younger audience. Dick Seesel is optimistic on Nordtrom Rack’s growth stating, “Rack stores have some of the hallmarks of Nordstrom stores—plenty of “better” apparel and especially dominant shoe departments compared to the competition—but nobody would mistake the presentation in these stores for a full-line Nordstrom store. I would rank the “store experience” somewhere between a TJMaxx and an Off 5th store, where Saks has taken a more distinctive position on presentation and product development. Rack outlet stores are an important growth vehicle as Nordstrom continues to be very deliberate in the expansion of its anchor department stores. And the credibility of the Nordstrom brand allows the outlet concept to expand into virtually any city, even those who will never see a full-line store being built.” To read the full posting please visit http://www.retailwire.com/blog-post/597a53d1-9285-4012-a1e7-60c6786e6a7b/how-high-is-nordstrom-racks-ceiling.

Dick Seesel is the Manager and owner of Retailing In Focus, LLC. He was most recently a Senior Vice President and Divisional Merchandise Manager at Kohl’s Department Stores. Dick is proud to have helped Kohl’s grow from 18 stores to a national retail powerhouse, during an era of change and consolidation throughout the retail industry. During his 24 years at Kohl’s, Dick managed the Women’s Accessory, Jewelry, Cosmetics and Intimate Apparel businesses. Prior to Kohl’s, Dick worked for Dayton’s Department Stores (Minneapolis, MN) and his family’s retail business.