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Thursday, September 30, 2010

Recession affecting every Aspect of American Life

USA Today

The nation's financial crisis is altering Americans' way of life from the home and the workplace to the highway and the altar, according to 2009 Census data released Tuesday.

Median household income — the level where half make more and half make less — fell 2.9% from $51,726 in 2008 to $50,221 last year, the second consecutive annual drop, according to the American Community Survey, far-reaching demographic data separate from the 2010 Census.

"The recession has affected every aspect of American life," says Mark Mather, a demographer at the Population Reference Bureau. "It doesn't matter if you're lower income or higher income, highly educated or just have a high school degree."

People are cautious because they don't know when the economy will improve, says Robert Lang, an urban sociologist at the University of Nevada-Las Vegas. "They're risk-averse," he says. "It's a short-term crisis but it's changing long-term expectations. Just like the Great Depression haunted the postwar years, this recession is so deep, its impact may alter the first several decades of this century."

The data show the impact of the recession that began in December 2007 — the National Bureau of Economic Research says it officially ended in June 2009 — and the housing bust that began earlier:

• Fewer people are moving. The share of people who haven't changed homes in the previous year climbed from 83.2% in 2006 to 84.6% in 2009.

• Delaying marriage. For the first time since the government began tracking the data, the share of women 18 and older who are married fell below 50%. "The recession has accelerated the trend," Mather says. "A lot of these young adults are choosing to live together rather than get married. It's kind of an adaptive response to the lack of jobs and economic uncertainty."

The share of adults ages 25 to 34 who have never married has jumped from 34.5% in 2000 to 46.3% in 2009, his analysis shows.

• Cars and home offices. The share of homes that have more than one car dropped, but the proportion of workers who worked from home jumped from 3.9% in 2006 to 4.3% last year. "The recession is altering behavior," Lang says. "It's the downsizing of America."

• Demand for higher education. The percentage of people holding a bachelor's degree or higher edged up to 27.9% in 2009, another potential effect of the recession. "You finish your bachelor's degree and there's no job available," Mather says. "More people are going for master's or some kind of professional degree."

BP CEO Shakes Up Management

The Wall Street Journal

Acting to restore BP PLC's reputation in the wake of the Gulf of Mexico oil spill, incoming Chief Executive Robert Dudley unveiled big changes designed to improve safety and announced the departure of the senior executive who oversaw drilling operations.

Two days before officially taking over as CEO, Mr. Dudley also said Wednesday that he will split BP's exploration-and-production division into three parts and order a review of how the company manages third-party contractors.

The overhaul creates a safety unit that will have sweeping powers to challenge management decisions if it considers them too risky. It will be headed by Mark Bly, currently BP's top safety executive and author of the company's inquiry into the Deepwater Horizon disaster.

BP also will review how it rewards its managers, following criticism that employees have incentives to increase earnings and boost production but not to improve safety. Some U.S. legislators have said the gulf spill happened because BP cut corners on safety, which BP denies.

The moves show how Mr. Dudley plans to resuscitate BP after it plunged into the worst crisis in its 102-year history. The London-based company has lost more than a third of its stock-market value since April 20, when one of its gulf wells blew out, destroying the Deepwater Horizon drilling rig, killing 11 men and triggering the worst offshore oil spill in U.S. history. BP finally killed the well earlier this month.

The restructuring moves mark the "first and most urgent steps" in a plan to rebuild trust in BP, Mr. Dudley said in a written statement. The changes are in areas "where I believe we most clearly need to act, with safety and risk management our most urgent priority."

"BP realizes it has to change," said Peter Hitchens, an oil analyst at Panmure Gordon. "Another disaster like this and it will be stripped of its U.S. operations and may even go bankrupt."

The restructuring is one of the most far-reaching in BP's recent history. But BP critics on the Gulf Coast and Capitol Hill have pointed to similar promises to improve safety after the blast at its Texas City refinery in 2005, which killed 15 people and injured 170. Departing CEO Tony Hayward took charge two years later promising to focus "like a laser" on safety. Yet the new procedures he put in place failed to prevent the Deepwater Horizon disaster.

The main casualty of the latest restructuring is Andy Inglis, head of BP's exploration-and-production arm and essentially the company's No. 2 executive. He was close to Mr. Hayward, who announced in July he was stepping down in the wake of criticism over BP's handling of the spill.

Mr. Inglis's departure was seen as inevitable by people in the industry, since he oversaw drilling operations in the gulf. BP said that "by mutual agreement," he would step down from the board Oct. 31 and quit the company at year-end.

The restructuring creates a division on safety and operational risk that will embed its staff in BP's operating units. Directly accountable to Mr. Bly, the division's staff will be responsible for ensuring that BP's activities are executed to common standards.

"If they find something that's not in line with those standards, they can go straight to Mark Bly who has the operational authority to stop it," a spokesman said. BP says such procedures would have prevented the Deepwater Horizon accident because safety specialists would have been able to veto the decisions taken on the rig that combined to cause the disaster.

"This has to be a positive development, but it needs to be properly supported in terms of management focus, manpower and the allocation of resources," said Nigel Bowker, a former BP safety manager who now runs Blackhall Consulting, which advises the oil industry.

BP's exploration-and-production, or upstream, division will be split into exploration, development and production, with each function run by a senior executive reporting directly to Mr. Dudley. BP's upstream operations until now have had a single boss, currently Mr. Inglis, who was a member of the board, had wide powers and was often seen as the heir apparent to the CEO. Both Mr. Hayward and his predecessor, John Browne, were former upstream chiefs.

"E&P was just too large to be managed by one person," the BP spokesman said. "The changes give the CEO a much clearer line of sight across the piece."

BP's review of third-party contractors follows Mr. Bly's report into the gulf accident. The company accepted some responsibility but also laid substantial blame on its contractors: Halliburton Co., which did the cement job on the well, and Transocean Ltd., which owned and operated the Deepwater Horizon rig.

Wealthy Take Bigger Helping of Fast Food

The Wall Street Journal

The recession whet wealthy Americans' appetite for fast food, a habit that is sticking even as the U.S. economy embarks on a slow recovery.

A new American Express study found that "ultra-affluent" consumers boosted their fast-food spending by 24% in the second quarter, compared with the year-earlier period, while fast-food spending among the rest of U.S. consumers rose 8%.

Wealthy consumers increased their spending on fine dining, too, but not by as much, suggesting that although the economy has shown signs of improvement, the wealthy are trying to hold down costs in certain areas.

"We're seeing a bifurcated behavior pattern, with a lot of affluent consumers still trying to be frugal where they can by spending at quick-service restaurants and discount retailers, but we're also seeing a return to higher-end spending on air travel and luxury items," said Ed Jay, senior vice president of American Express Business Insights, which studied spending patterns among its cardholders.

American Express defines ultra-affluent consumers as those who charge $7,000 or more a month on their cards, and meet certain income criteria.

The ultra-affluent increased their spending on business-class plane tickets by 114% in the second quarter, compared with a year earlier. Rich consumers also boosted spending on cruises, car rentals and luxury hotels. They spent 12% more on fine dining.

For Keith Gutsell, an information-technology risk manager at Northern Trust Bank in Chicago who charges several thousand dollars a month on his credit card and always pays it off, eating at fast-food restaurants helps him feel as if he is being frugal.

"Subconsciously, I think I'm saving money by spending less on food, but my spending somewhere else must be going up, because the amount on my credit card is not going down," said Mr. Gutsell, 41 years old, as he polished off an Extra Value Meal at a McDonald's in Chicago's financial district on Tuesday.

Fast-food restaurants have fared better than mid-price and fine-dining establishments during the recession, but times are still tough for most chains. Visits to fast-food chains fell 2% during the year ended July 31, according to market-research firm NPD Group Inc., compared with drops of 3% for mid-price restaurants and 8% for fine restaurants.

 McDonald's Corp., which has performed well during the downturn, in the U.S. has "seen increased visits and spending across all demographics…in the second quarter of this year, versus the second quarter of last year," spokeswoman Danya Proud said.

Wealthy consumers also are ordering more pizza from Domino's Pizza Inc. stores, a trend the company attributes, in part, to new pizza recipes.

"While we were up with all consumer groups, we did see somewhat stronger results with consumers who are more affluent and have higher education levels," Domino's Chief Executive Patrick Doyle said in an interview.

Wednesday, September 29, 2010

Obit: Owner of Segway Company Dies in a Segway Accident

NY Times

James W. Heselden, a British businessman who invented and sold fortification containers for flood control and military protection and who owned the company that makes Segway electric scooters, died Sunday after plunging from a cliff in West Yorkshire, the police said, apparently while touring his property on a Segway. He was 62.

His body was found late Sunday morning after a passer-by reported seeing a man plummet 30 feet into the River Wharfe, the police said, adding that a “Segway-style vehicle” had also been found.

They did not say what had caused the accident.

Mr. Heselden was born in Leeds, in modest circumstances, and left school at 15. He worked as a coal miner, lost his job after the 1984 miners’ strike, and used his severance pay to start Hesco Bastion, which manufactures the Hesco barriers he invented in 1990.

The barriers — galvanized-steel mesh baskets rising to chest height that can be filled with dirt — were originally developed as flood control devices, and have been used in places like New Orleans and Iowa. Light, portable and easy to assemble, they have also replaced sandbags as a feature of virtually every defensive barrier deployed by coalition forces in Iraq and Afghanistan, and are standard equipment for NATO.

In recent years, Mr. Heselden has appeared on the Sunday Times of London’s list of 1,000 richest people in Britain. A passionate philanthropist, he donated almost $16 million to the Leeds Community Foundation earlier this month, bringing his total lifetime donations to charity to more than $36 million.

The two-wheeled Segway personal transporter, which operates on electricity and changes direction according to the way its driver tilts, was invented by Dean Kamen in 2001. Matt Dailida, vice president for government affairs at Segway, said that Mr. Heselden was “a Segway p.t. owner long before he bought the company,” in December 2009.

Mr. Dailida said that Segway was still trying to find out more about what caused Mr. Heselden to go off the cliff. Mr. Heselden is survived by his wife, Julie; five children, and eight grandchildren.

Where Are All the Prosecutions From the Crisis?

NY Times

A consistent question since the financial crisis in 2008 is why has the federal government not prosecuted any senior executives for their roles in the collapse of firms like Lehman Brothers and Bear Stearns or the risky investments that led to bailouts of onetime financial giants like the American International Group, Fannie Mae and Freddie Mac. How can companies worth billions of dollars just a few months earlier suddenly collapse in 2008 without someone being held responsible?

At a hearing before the Senate Judiciary Committee last week, Senator Ted Kaufman of Delaware summed up the frustration on Capitol Hill with the lack of any identifiable villains for the financial troubles of the last two years. “We have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin,” Mr. Kaufman said. “Why is that?”

Judge Ellen Segal Huvelle of the Federal District Court in Washington expressed similar frustration with the settlement between the Securities and Exchange Commission and Citigroup over the bank’s misstatements in 2007 regarding its exposure to subprime mortgage-backed securities. In its complaint, the S.E.C. refers repeatedly to “senior management” receiving information about increased losses in its portfolio from problems with subprime mortgages, but none were named in its complaint.

Although Judge Huvelle largely approved the settlement, she was confounded by the S.E.C.’s failure to at least identify which Citigroup executives were aware of the information. The judge said that “this is where the S.E.C. is doing a disservice to the public” by not providing any more details, or even charging executives for misleading shareholders.

Judge Huvelle also questioned the deterrent impact of the $75 million penalty the company will pay, or the similarly modest $100,000 and $80,000 penalties imposed in a separate administrative proceeding on two Citigroup officers for their roles in the company’s disclosures. She pointed out that “$75 million will not deter anyone from doing anything,” and that “a $100,000 fine is not a deterrent in corporate America to do a better job.”

At the Senate hearing in which Senator Kaufman questioned the dearth of prosecutions of senior executives, Robert Khuzami, director of enforcement at the S.E.C., testified that his agency has been much more aggressive in pursuing cases against Wall Street. He cited as one example the securities fraud charges filed against Goldman Sachs in April that the firm later settled for $550 million.

Like the Citigroup matter, however, the Goldman case did not name anyone in the firm’s senior management as a defendant, with only a lower-level trader, Fabrice Tourre, sued in the complaint. And in both cases the settlements involved an alleged violation of Section 17(a) of the Securities Act of 1933, which is the lowest-level fraud charge the S.E.C. can bring because it only entails negligence rather than intentional conduct.

The bankruptcy examiner’s report filed by Anton R. Valukas about Lehman Brothers that questioned the firm’s reporting of the so-called “Repo 105” transactions may provide the groundwork for civil fraud charges against former executives of the investment bank. As I discussed in a previous post, the likelihood of criminal charges arising from Lehman’s conduct in the months before its collapse in September 2008 is small, so an S.E.C. case is probably the most serious proceeding that may be pursued, if that ever occurs.

The S.E.C. has already accused executives at Countrywide Financial with civil fraud charges for making misleading statements about the company’s mortgage risks, and also accused its former chief executive, Angelo R. Mozilo, of insider trading for making approximately $140 million in profits by selling shares in the company in the months before its near collapse. The trial in that case is set to begin on Oct. 19.

Even in the Countrywide case, civil fraud charges simply do not resonate with the public in the same way as criminal charges, in large part because a term of imprisonment cannot be imposed in an S.E.C. action and the stigma is not nearly as great. The same would be true if the S.E.C. files suit against Lehman executives — it is “only” civil, not a criminal prosecution, so even just the catharsis of an unseemly perp walk will not be available.

One possible reason for the lack of prosecutions involving senior executives is the Supreme Court’s ruling in Skilling v. United States, involving Jeffrey K. Skilling, the former chief executive of Enron, that limits the right of honest services provision, 18 U.S.C. § 1346, for criminal fraud prosecutions to just those cases involving bribes and kickbacks. It is now impossible to pursue cases against corporate executives for questionable conduct that involved some measure of dishonesty that caused harm to the company unless it also resulted in the person lining his or her own pocket.

The Senate Judiciary Committee will hold a hearing on Tuesday entitled “Restoring Key Tools to Combat Fraud and Corruption After the Supreme Court’s Skilling Decision.” It will be interesting to see whether the absence of any high-profile criminal prosecutions from the financial crisis will be cited as a reason for Congress to amend the honest services law to reach corporate misconduct that does not involve some form of personal benefit to the defendant. In the Skilling case, the Supreme Court questioned whether a crime involving only a breach of fiduciary duty could pass muster.

Even if Congress were to amend the honest services statute to reach a broader range of corporate misconduct, it would not apply to anything that happened back in 2008. Mr. Kaufman’s question is likely to remain unanswered for quite a while because prosecutors have not shown much interest, at least to this point, in pursuing criminal cases against executives of companies involved in the financial crisis.

Tuesday, September 28, 2010

Small Business Bill Signed into Law


President Barack Obama signed a $30 billion small business lending bill into law on Monday, claiming a victory on economic policy for his fellow Democrats ahead of November congressional elections.

The law sets up a lending fund for small businesses and includes an additional $12 billion in tax breaks for small companies.

"It was critical that we cut taxes and make more loans available to entrepreneurs," Obama said in remarks at the White House. "So today after a long and tough fight, I am signing a small business jobs bill that does exactly that."

Obama is trying to show voters, who are unhappy about 9.6 percent unemployment, that he and his party are doing everything they can to boost the tepid U.S. economy.

Democrats said they backed the bill because small businesses had trouble getting loans after the financial crisis that began in December 2007. They estimate the incentives could provide up to $300 billion in new small business credit in the coming years and create 500,000 new jobs.

Republicans characterized the bill as a smaller version of the unpopular Wall Street bank rescue effort and blocked it in the Senate for weeks until two retiring Republicans broke ranks and voted to end blocking maneuvers.

Republicans are expected to make big gains in the November 2 elections and hope to win majorities in one or both houses of Congress.

Obama criticized the opposition party for fighting the bill and thanked the two Republicans, George Voinovich and George LeMieux, whose support allowed it to get through the Senate.

He said the measures would have fast-acting effects on the small business community, which both political parties are courting in an effort to boost jobs.

"It's going to speed relief to small businesses across the country right away," Obama said. "We've got to keep moving forward. That's why I fought so hard to pass this bill, and that's why I'm going to continue to do everything in my power to help small businesses open up and hire and expand."

Citi Discovers Security Flaw in iPhone Application

NY Times

After Citigroup on Monday discovered a potential security flaw in the Apple iPhone app that its customers use to access its Web site, the bank urged customers to upgrade to a newer version of the software, which it says will correct the problem.

In a statement, Citigroup said the original app accidentally saved information from a banking customer’s account into a hidden file on the iPhone. The statement from Citigroup was first reported by The Wall Street Journal.

Citigroup said the update “deletes any Citi Mobile information that may have been saved” to a customer’s iPhone or computer. The bank also said the update “eliminates the possibility that this will occur in the future.”

Although Citigroup was working with customers to fix the problem, the bank said it did not believe its customers’ personal information was affected. Citigroup also said the bug only affected iPhone users in the United States, though it did not say how many.

John Hering, co-founder of Lookout, a security company specializing in the protection of mobile phones from viruses and malware, said that the vulnerability of smartphones was a growing concern, and that Citigroup’s  announcement shows how unsafe these devices can be.

“I think this just underscores the importance of making sure these devices stay safe and this isn’t a one-time problem either,” he said. “Mobile apps are often exposing more information than people realize.”

Mr. Hering and other security experts believe that the mobile industry is on the verge of some major security problems as more people use their phones for banking and other personal information.

“At this point, it’s not a matter of if, it’s a matter of when,” he said.

Although Apple says the iPhone is a safer environment than other mobile competitors because of the company’s strict rules about approving the apps it allows on the iPhone, bugs like this show that flaws can always make it onto a system, sometimes at the fault of the application’s owner.

“I think this is going to be the beginning of more and more applications that have this kind of problem,” Mr. Hering said. “I commend Citibank for staying on top of this, but in the next scenario it could be a much different story.”

Monday, September 27, 2010

Booze Tax Hikes May Reduce Alcohol-Related Problems

Bloomberg / BusinessWeek

Boosting taxes on alcohol leads to lower rates of alcohol-related disease, injury, death and crime, researchers say.

University of Florida investigators analyzed 50 published papers that estimated the health and social effects of alcohol taxes or prices. The study authors concluded that higher alcohol taxes have a greater impact than drinking prevention programs such as Alcoholics Anonymous.

The results of the meta-analysis suggest that doubling the average state tax on alcohol would result, on average, in a 35 percent reduction in alcohol-related deaths, an 11 percent reduction in traffic crash deaths, a 6 percent reduction in sexually transmitted diseases, a 2 percent reduction in violence and a 1.4 percent reduction in crime.

The study findings were released online Sept. 23 in advance of publication in the November print issue of the American Journal of Public Health.

The findings "clearly show increasing the price of alcohol will result in significant reductions in many of the undesirable outcomes associated with drinking," lead author Alexander C. Wagenaar, a professor of health outcomes and policy at the University of Florida College of Medicine, said in a news release from the Robert Wood Johnson Foundation.

"Simply adjusting decades-old tax rates to account for inflation could save thousands of lives and billions of dollars in law enforcement and health care costs," Wagenaar added.

In a previous study, the same team of researchers found that a 10 percent increase in alcohol price leads to a 5 percent reduction in alcohol consumption.

"Taken together, these two studies establish beyond any reasonable doubt that, as the price of alcohol goes up, alcohol consumption and the rates of adverse outcomes related to consumption go down," Wagenaar said.

"The strength of these findings suggests that tax increases may be the most effective way we have to prevent excessive drinking -- and also have drinkers pay more of their fair share for the damages caused and costs incurred," he concluded.

The study was funded by the Robert Wood Johnson Foundation, a philanthropy devoted to public health.

In a news release issued Thursday afternoon, Distilled Spirits Council Vice President Lisa Hawkins said: "Numerous studies, including research from the National Institute on Alcohol Abuse and Alcoholism, show that alcohol abusers are the least sensitive to tax increases. It is the moderate responsible consumer who cuts back the most when prices rise.

"According to scientific studies, moderate alcohol consumption is associated with the lowest all-cause mortality compared to non-drinkers. It makes no sense to penalize moderate drinkers to pay for the abuse of a few, particularly when raising taxes will not reduce problems associated with abuse. For example, according to government statistics, there is no relationship between alcohol excise tax rates and alcohol-related traffic fatalities," she said.

Wal-Mart Bids for South African Market


Wal-Mart (WMT.N) is in talks to buy South Africa's Massmart (MSMJ.J), a $4 billion deal that would give the U.S. retailer a big presence in fast-growing Africa and bolster its emerging markets strategy.

The world's largest retailer has been hit by weakness in the United States, where low-income shoppers are particularly vulnerable to unemployment and higher petrol prices. It has responded by focusing on cost cuts and international growth.

Buying Massmart, South Africa's third-largest listed retailer by value, would give Wal-Mart a considerable network in Africa's biggest economy and a foothold in 13 other countries in sub-Saharan Africa.

Home to some of the world's fastest growing markets, Africa also boasts an emerging middle class and roughly 1 billion consumers, making it an increasingly attractive target for overseas investors.

"Massmart is a very good fit with their business," said Bryan Roberts, global research director at industry research firm Planet Retail in London.

Other international retailers could eventually bid for one of Massmart's local competitors to tap the potential of sub-Saharan Africa, he said.

"There's no shortage of good businesses that could be acquisition targets -- Shoprite, Woolworths and the like."

Massmart and Wal-Mart said the U.S. company had made a non-binding proposal of 148 rand per Massmart share, valuing it at around 30 billion rand ($4.1 billion) or a premium of nearly 10 percent over Thursday's close of 134.75 rand.

Massmart said it has granted the U.S. firm an exclusivity period and said there was no certainty of a formal offer.

Shares of Massmart jumped more than 11 percent and were up 10.9 percent at 149.48 rand as of 5:58 a.m. ET, slightly exceeding the proposed offer price.

Shoprite shares were little changed while Woolworths stock rose around 1.4 percent.

Wal-Mart's bid values Massmart at 26.3 times its 12-month adjusted earnings per share, according to Thomson Reuters data. That compares to 21.5 times for Shoprite and 15.5 times for Woolworths.

The deal could boost South Africa's rand, which would benefit from an inflow of currency. The rand was near a 2-1/2 year high on Monday at 7.0100 to the dollar.


Massmart sells general merchandise, electronics and food via a low-margin, high-volume model. It runs nearly 288 stores and nine different retail and wholesale chains.

It has also been one of the most aggressive of South Africa's retailers in expanding into the continent.

Wal-Mart's proposal is the third bid by a big overseas firm for a South African company in recent months.

"It's a big vote of confidence for the South African retail economy and for South Africa," said Syd Vianello, an analyst at Nedcor Securities.

By joining forces with Wal-Mart, Massmart could put more pressure on its rivals, said Nedcor's Vianello.

"It also has lots and lots of pricing and competition implications for the South African retail industry. Wal-Mart is the world's largest retailer, it can source products cheaper than anyone else in the world."

Both Massmart and Shoprite had long been seen as potential targets for Wal-Mart, which has over 8,600 retail units around the world but no material presence in Africa.

Massmart shares have risen more than 50 percent this year, compared to a rise of more than 36 percent in the South African retailers index .JGERE and a little over 2 percent in the broader market .JTOPI.

Deutsche Bank and Goldman Sachs advised Massmart.

Some Airline Fees up by more than 50%

USA Today

Airline fees are steadily increasing — some by more than 50% since a year ago, a USA TODAY analysis shows.

The analysis, which compared 13 U.S. airlines' fees today with those in effect in June 2009, also reveals that passengers are encountering new types of fees.

Six big U.S. carriers now have priority boarding fees, and Spirit Airlines has begun charging for carry-on bags.

The numerous fees are a sore subject for many fliers, but their dissatisfaction hasn't deterred airlines from bringing in record revenue from additional fees.

U.S. airlines brought in $2.1 billion in ancillary revenue during this year's second quarter, including nearly $893 million from checked-bag fees and about $600 million from changed reservations, government statistics released Sept. 20 show.

That's up 15.8% from the same period the year before.

USA TODAY's analysis shows that:

•Most U.S. airlines charge $23 or $25 for a first checked bag. Only Southwest and JetBlue do not charge. Most airlines charged $15 — and four airlines charged nothing — in June 2009.

•The most expensive change fee for a coach ticket has jumped from $250 to $300, which American charges for some international flights. The most expensive change fee for Continental, Delta, United and US Airways is $250.

•Booking a reservation by telephone — even for a free frequent-flier ticket — can be costly. US Airways charges an extra $35 for a phone reservation for an international flight. Allegiant Air charges a $29.98 round-trip booking fee and a $14.99 convenience fee.

•The most expensive fee to cut the line and board before fellow passengers is $39 charged by United. The airline also has less expensive priority-boarding fees.

•The maximum charge for a preferred seat on some United Airlines flights has jumped from $119 in June 2009 to $159. Such a seat offers 5 more inches of leg room than other coach seats.

•Continental says it's not new, but the airline and at least three other carriers — American, Hawaiian and US Airways — charge a little-known fee for passengers who request receipts after they have flown. Continental charges $20 if a passenger requests a receipt more than seven days after a flight. US Airways charges the same amount if a receipt is requested more than 30 days after a flight.

Recession's Effects hit Majority in U.S.

USA Today

The worst economic slowdown since the Great Depression hurt more than half of Americans, especially younger people, minorities and those with a high school education or less, a Pew Research Center survey found.

"For a narrow majority of Americans, 55%, the Great Recession brought a mix of hardships, usually in combination: a spell of unemployment, missed mortgage or rent payments, shrinking paychecks and shattered household budgets," according to the survey released Friday. "But for the other 45% of the country, the recession was largely free of such difficulties."

The survey, taken May 11-31, reflects the responses of 2,967 people to eight questions designed to measure economic hardships experienced during the recession. The margin of error was plus or minus 2.2 percentage points.

Demographics largely distinguished people who "lost ground," including those who lost jobs, had trouble paying rent or had to borrow money from family or friends to pay bills, the survey found. Whites, older adults, the better educated and the more affluent were significantly less likely to report that they made major lifestyle changes because of the economy.

Almost half of all white respondents surveyed "held their own" during the recession compared with 33% of blacks and 29% of Hispanics. Additionally, older adults were "more sheltered" than younger people as about seven in 10 people age 65 and older "held their own," the survey said.

Only 47% of people in the eastern U.S. lost ground during the recession compared with almost 60% of the population feeling financial stresses in the Midwest, South and West, the survey said. The recession adversely affected a smaller proportion of suburban and rural residents than those in cities.

Almost two-thirds of those who fared worse withdrew money from savings and retirement funds, while 43% were jobless at some point during the recession, the survey found.

The half that better weathered the slump reported few instances of declining family income, a need to withdraw money from savings and retirement to pay bills or of deteriorating finances, the survey found. Less than 1% said they were unemployed.

The recession most affected peoples' spending habits, according to the survey. Slightly more than half of those who faced no major struggles during the recession reported their single biggest adjustment was in spending, compared with 33% of those who lost ground.

About half the people in both groups reported declining home values. About 80% of those surveyed said they believe "buying a home is the best investment that the average person can make."

Saturday, September 25, 2010

New Tax Breaks for Small Businesses

Market Watch

The Small Business Jobs and Credit Act is about to be signed into law. New high-level, expensive government posts have been created. There’s money for Small Business Administration loans and state governments, and a few new tax provisions — including the good, the bad and the downright sneaky.

Cell phones are no longer listed property. Excuse my rejoicing, but this has been a nuisance for years. As long as cell phones were considered listed property, you were required to keep logs of personal versus business use. Corporations were hit hard on audits when staff used their company phones to call family and friends.

Were you keeping logs, or paying your company back for your personal use? Neither was anyone else. Frankly, no one really wanted to enforce those rules. After all, IRS staff were using their cell phones personally, too.

More time for bonus depreciation

Bonus depreciation was extended to Dec. 31, 2010. It was set to expire on Dec. 31 last year, but it got a reprieve. New business assets you bought since Jan. 1 of 2010 are apt to qualify for a 50% special depreciation deduction. The assets must have a recovery period of 7 years or less.

Because bonus depreciation is back, you may deduct up to $8,000 on the purchase of your new car. That, along with regular depreciation, allows you up to $11,060 worth of depreciation for the first year, according the experts at CCH, a Wolters Kluwer business.
Small-business health insurance

This has always been baffling. Small-business owners may reduce their taxable income for the cost of self-employed health insurance. But they have not been permitted to reduce their self-employment taxes by the cost of the health insurance.

For 2010 only, the health-insurance deduction will reduce your self-employment taxes, too. Why only for one year? Can you imagine the form changes IRS will have to make to change Schedule C for 2010 and then remember to change it back for 2011? This should have been permanent — like the cell phones.
Penalty relief — big time

The tax code hits businesses with penalties of 75% for not reporting “tax shelter” activities. Some of those penalties have been much higher than any possible benefit the business owner or investor ever got from the investment. In fact, many of the small business hit by these penalties didn’t even know they were engaging in tax-shelter activities.

According to CCH, since June 2009 the IRS has exercised forbearance in collecting some of those penalties. For now, if you were hit by those penalties after Dec. 31, 2006, the revisions to IRC section 6707A may have dramatically reduced the ceilings on your penalties. Sit down with your tax pro to see just how you’ve been affected. This may be a good opportunity to file some amended returns.
Good for really small businesses
If you’re the owner of a really small business, you perhaps tend to operate it using your own savings, personal loans, credit cards, and so forth, as a primary source of capitalization. That means you start out with a limited budget and pray that your clever marketing moves will generate enough money to cover operations, quickly. Sometimes that works.

The deduction for start-up costs has increased from $5,000 to $10,000 during 2010 and 2011. And, before, you lost this benefit if your start-up costs were $50,000. That has increased to $60,000. This will be a big help to the ma-and-pa-type start-ups. Remember, though, the business must have opened its doors during 2010 if you want to take advantage of writing off those start-up costs. So be sure to start selling something before Dec. 31.

Good for bigger small businesses, real-estate investors

Everyone’s favorite political football, Section 179 depreciation, just jumped from $250,000 to $500,000 for 2010 and 2011. The amount of assets your business may purchase before you are too big to qualify for this benefit also rose, from $800,000 to $2 million. In 2012, the Section 179 deduction will return to $25,000, with an asset purchase limit of $200,000. Unless, of course, it changes again.

Naturally, this increase does not apply to the behemoth personal vehicles. Those are still limited to a deduction of $25,000 in the year of purchase.

Certain real estate is now eligible for Section 179 benefits, according to Spidell Publishing Inc.: qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.

Remember, to keep this Section 179 benefit, the asset you purchased must continue to be used for business for its entire tax life. If you stop using a 5-year asset, or sell it after 3 years, you must pay back the Section 179 benefit. Most people don’t realize that this applies to things like your computers, video cams, and other small, but expensive electronics that tend to be replaced every year or two.
Sneaky provision

Qualified Small-Business Stock (QSBS) has special provisions to encourage investors to risk their money in new, start-up corporations. If the company fails, there are generous provisions to write off part of the losses quickly. There are incentives allowing certain capital-gains exclusions when the stocks are sold.

QSBS investors have been getting a boost lately. Historically, we were able to exclude 50% of certain profits, if the stock had been held for five years or more. Then, it got pushed up to 75% of profits, for QSBS purchased after Feb. 17, 2009, and before Jan. 1, 2011 — with a special alternative minimum tax rate. The latest law increases the exclusion from tax to 100% for QSBS purchased after March 15, 2010, and before Jan. 1, 2012.

That sounds generous. Except for the little clause in the new law that says paragraph 7 of Code Section 57 does not apply. Congress took away the special alternative-minimum tax treatment. In other words, you exclude 100% of the gains from your regular income tax and pay 28% in AMT, or higher once the low capital-gains rates expire next year.
Waste of taxpayer resources

An interesting little feature of this bill “prohibits the use of funds under this Act to pay the salary of an individual officially disciplined for viewing, downloading, or exchanging pornography on a federal government computer while performing official federal duties.”

How much salary reduction do you expect to see from this? Or will the cost to enforce this be higher than the savings?
And more…

There are several other provisions that will enhance or confuse your business experience. Wait about two weeks for your tax professional to get up-to-date on all the details. Then make an appointment to do some planning. Definitely get a business tax tune-up before October ends so you can take advantage of tax benefits on money you’ve already spent, and see if that frees up money for some expansion or marketing. Or just to pay off some bills.

Friday, September 24, 2010

This Genetically Altered Salmon Is No Fish Story

Bloomberg / BusinessWeek

For 15 years, AquaBounty Technologies has tried to win U.S. approval to sell a genetically modified salmon that can reach full size up to twice as fast as its naturally occurring brethren. Now the effort by the Waltham (Mass.) company may be drawing to a close. U.S. Food and Drug Administration advisers last week held what may be the agency's final hearing on whether AquaBounty's salmon is safe to eat.

The FDA hasn't set the timing of a final decision. Its staff, though, has already agreed that the meat from the altered fish is safe and has no biologically relevant differences from that of the naturally occurring variety. So AquaBounty's fish finally may be headed for American kitchens. FDA approval could make the salmon the first in a series of animals with mix-and-match DNA that have the potential to change the U.S. food chain.

AquaBounty's Atlantic salmon contain a growth gene implanted from another variety of salmon that's activated by DNA from an eel-like creature called the ocean pout. The altered fish can grow to "market weight" of as much as 13 pounds in two or three years, compared with three to four years required for natural salmon, says Chief Executive Officer Ronald L. Stotish.

The company would sell its AquAdvantage brand salmon eggs to fish farms isolated from the ocean that then could see their catch reach supermarkets in about two years. Stotish says the enhanced fish could "increase the availability of a high-quality product that is indistinguishable from the traditional food."

Not everyone is firing up their grills just yet. Groups opposed to genetically modified foods on Sept. 16 held a protest in Washington. "Today it's a fish that we're talking about. But very soon it will be genetically engineered pigs, chicken, and our beloved cows," Ben & Jerry's CEO Jostein Solheim told protesters.

Critics say they're particularly miffed that the FDA is reviewing AquaBounty's altered fish as a veterinary drug rather than creating a new review process for gene-altered foods. FDA spokeswoman Siobhan DeLancey says the genetic material used in the AquaBounty fish meets the statutory definition of a veterinary drug because it alters the structure and function of the animal. She says veterinary drug approval is stringent: "The review of the AquAdvantage salmon, conducted under that process, includes a rigorous analysis of food safety and application of a stringent safety standard: 'reasonable certainty of no harm.'"

The FDA's decision, critics say, allows some testing data reviewed by regulators to be kept confidential, as trade secrets. "They're obviously using this veterinary designation to keep the data confidential," says Wenonah Hauter, executive director of Food & Water Watch, an environmental and food-safety group in Washington. "I think they're afraid of the public reaction."

Alaska Senators Mark Begich and Lisa Murkowski, whose state harvested 163 million commercial salmon last year, are also against AquAdvantage. "Let's call this genetically engineered fish for what it is: Frankenfish," Begich said in a statement. "Approval of genetically modified salmon, the first such hybrid to be considered for human consumption, is unprecedented, risky, and a threat to the survival of wild species."

The modified fish, all female, are sterile, so they can't reproduce with regular salmon, Stotish says. "People who take the time to look" at the regulatory data "will satisfy themselves that the FDA has taken a very cautious, very robust regulatory approach," he says.

Stotish says 97 percent of the total tonnage of salmon now consumed in the U.S. is imported. Almost 427,000 tons, valued at $1.39 billion, was imported last year from countries led by Chile, Canada, and Norway, according to Agriculture Dept. data. Although he says it's too early to project the sales potential of AquAdvantage eggs, Stotish says the fast-growing salmon could help domestic fisheries gain a larger share of the market.

The genetically engineered salmon eggs are produced at an AquaBounty facility in Prince Edward Island, Canada, and the fish are grown to market weight at an AquaBounty farm in Panama. If the FDA approves the aquaculture company's salmon, another company would sell the Panama-grown fish in the U.S., Stotish told reporters at a Sept. 20 FDA advisory panel meeting. He declined to identify the company because the product hasn't been approved yet. "AquaBounty does not plan to be in the fish business," he said. "We're a technology company."

Borders Mimics Partner’s Pilates Gear to Spur Sales


Borders Group Inc. President Michael Edwards says he has hit on a solution for reviving his money- losing bookstore chain: Be less like a bookstore chain.

Edwards, 50, has taken a page from Toronto’s Indigo Books & Music Inc., which prospered as Borders and larger rival Barnes & Noble Inc. lost sales. Indigo, founded by Chief Executive Officer Heather Reisman, brands itself a “cultural department store,” using books as bait to attract shoppers to other items.

Edwards is mimicking that strategy for Borders’ 500 superstores, whose sales have dropped for 10 straight quarters, after consulting with Reisman last year and joining the Borders board on a tour of one of her Toronto superstores in March. Indigo outlets feature items like Pilates balls and wine glasses along with copies of “The Girl with the Dragon Tattoo.”

“They’ve done a cutting-edge approach to providing well- designed, sophisticated products that seem appropriate to a book lover,” said Edwards, who reports to CEO Bennett Lebow. “We found that valuable for us as we think about the future.”

Borders, the second-largest U.S. bookstore chain, has posted four straight annual losses as online retailer Amazon.com Inc. and discount chains won customers. The closing of most of its mall locations and store remodelings failed to stem the losses, and the recession led to even deeper sales declines.

The growing popularity of electronic books adds another challenge. Barnes & Noble has devoted many more resources to e- books, betting millions to make and market the Nook reader and transform the company into an e-commerce retailer.

“We are now putting money behind that business because we see something real,” Chief Financial Officer Joe Lombardi said in an interview. Online sales, which include revenue from digital books, climbed 42 percent in the latest quarter.

Rival’s Edge

Barnes & Noble may have an edge in executing its plan because it has more cash to invest, said Michael Souers, a retail analyst for Standard & Poor’s in New York.

“If I had to bet on one or the other, Barnes & Noble is probably the better off of the two,” said Souers, who has a hold on shares of both companies. “But it’s still really unclear at this point. Doing nothing is not going to work, obviously.”

Borders, based in Ann Arbor, Michigan, rose 15 cents, or 14 percent, to $1.26 at 4 p.m. in New York Stock Exchange composite trading. Barnes & Noble advanced $1.52, or 9.4 percent, to $17.71. Indigo fell 10 cents to C$13.75 in Toronto trading.

Simple Concept

Edwards began working with Indigo last year after Borders spent $5 million on a 20 percent stake in Kobo Inc., a Toronto digital book provider partly owned by the Canadian chain. Borders started selling e-books from Kobo on its website in July, a year after Barnes & Noble entered the market, and also offers the Kobo e-reader.

Reisman, 62, founded Indigo in 1996 after earlier stints as a social worker, management consultant and beverage company executive. She also is the wife of Gerry Schwartz, who runs Onex Corp., Canada’s biggest buyout firm, and serves on Indigo’s board.

The concept for Indigo was simple: Millions of people love bookstores so much they would buy almost everything there if they could. In the company’s founding documents, Reisman coined the “cultural department store” phrase to describe her booklover’s paradise.

That idea became a reality at the chain’s first location, a 20,000-foot superstore in the Toronto suburbs, when it began offering a book series on fly-fishing and later introduced brass fly cases for C$30 ($29) that sold out. The store also offered fresh flowers, part of a plan to feature merchandise that “smelled amazing or looked amazing,” Reisman said.

Nursery Rhymes

These days non-book items make up 17 percent of sales, more than five times the amount in the 1990s. Reisman expects to double that in three years, partly by building store appearances around special events.

About 30 percent of books are bought as gifts, Reisman says, so it makes sense to pair the wine guides with the brie bakers in the entertaining section or nursery rhymes and pacifiers in the baby area. That’s paid off in sales per square foot, where Indigo’s rate was about $295, more than two-thirds higher than Borders’ $173 last year.

“They give you a lot more reasons to go shopping in their bookstores that have nothing to do with books,” said Antony Karabus, CEO of Karabus Management Retail Consultants, a subsidiary of PriceWaterHouseCoopers Canada LLP. “Those other chains just look like bookstores. Indigo looks like much more.”

More to Buy

Now Edwards wants Borders to look like more too. The chain started by hiring a branding firm, Big Red Rooster of Columbus, Ohio, to make over signs and store layouts to emphasize items other than books for this holiday season. The company also brought on Michele Delahunty-Cloutier, a veteran of retailers Chico’s FAS Inc. and Gap Inc., to oversee the changes as chief merchandising officer.

In the next two years, Borders will fill its superstores with stand-alone sections, such as areas where people can craft stuffed animals through the Build-a-Bear Workshop Inc. brand, that will differentiate it from Barnes & Noble, Edwards said.

“You create more shops within a shop, so you really know you are in a unique part of the store,” Edwards said.

Edwards chose this route because he expects half the chain’s books to be sold online in three years, and other items can boost profits because they have higher margins than books. His time working for defunct computer retailer CompUSA also showed him the wisdom of diversifying, he said.

Bookstores aren’t the first retailers to face down the two- pronged attack of new technology and increased competition. The key for book chains is how quickly and well they can execute their transformations, said Wendy Liebmann, CEO of retail consultancy WSL Strategic Retail in New York.

“The final nail hasn’t shown up, but somebody has the hammer ready to hit it,” Liebmann said. “The coffin has been built.”

American Struggles With Costs, Unions as Mergers Boost Rivals


American Airlines, which stood by as its biggest U.S. rivals completed two mergers, is struggling to return to profit as it confronts the highest costs among its peers, worst margins and the threat of a strike.

American parent AMR Corp. seeks to end two years of losses by expanding alliances, buying more fuel-efficient planes and refocusing operations on U.S. hub airports. “There are a number of opportunities that we are on the verge of tapping,” Treasurer Beverly Goulet said in an interview.

So far, American has been unable to stem a slide toward third place in the U.S. by traffic from No. 1 in the world as competitors combine, or to win over unions balking at the new labor contracts the airline says are pivotal in curbing expenses. The stock’s 14 percent drop this year is the only decline among the six biggest U.S. carriers.

“They have performed so poorly, people have written them off,” said Don Hodges, chairman of Dallas-based Hodges Capital Management. “They just don’t consider American a factor when they think about investing in airlines.”

Hodges, whose company held 25,650 AMR shares as of June, includes AMR in his Pure Contrarian Fund of “good companies going through a temporary problem area.” While he recommends the stock to well-off clients who can afford to take risks, he has cut his stake from 2 million shares in 2008.

Talks Today

American’s scheduled contract talks today with its pilots’ union come four years and a day since bargaining began. Flight attendants, airport ground workers and mechanics began talks as much as three years ago. Among almost 50,000 workers represented by unions at Fort Worth, Texas-based American, only a group of 90 technical specialists has approved a new contract.

“I can’t get comfortable recommending the purchase of American stock as long as that labor situation is an issue,” said James M. Higgins, an analyst at New York-based Soleil Securities Corp. who advises holding AMR.

American won $1.6 billion in annual union concessions in 2003 to avert bankruptcy, instead of shedding costs in Chapter 11 as UAL Corp.’s United Airlines, Delta Air Lines Inc., US Airways Group Inc. and Northwest Airlines Corp. did last decade. Chief Executive Officer Gerard Arpey took the job as those agreements were reached.

Airline Consolidation

As recently as 2008, American was the world’s largest carrier. Delta bought Northwest that year, and Continental Airlines Inc. and United agreed in May to a tie-up they expect to close by Oct. 1. The combination will leapfrog Delta as the global leader by traffic.

To counter a possible loss of corporate accounts to rivals with broader networks, Arpey, 52, is working to deepen pricing alliances with carriers outside the U.S. and add flights at hubs in five domestic markets used by business travelers. By early 2011, 98 percent of American’s capacity will touch those hubs, up from 88 percent “several years ago,” the carrier said.

In February, American persuaded Japan Airlines Corp. to stay in the Oneworld alliance, preserving the Asian portion of its global network by fending off Delta’s efforts to lure JAL into the SkyTeam group of carriers.

“Where do premium customers and the rest of the customers want to fly?” said Kenji Hashimoto, American vice president for strategic alliances. “Where American and our partners fly, it lines up really nicely to that list.”

Revenue, Savings

By the end of 2012, American expects about $500 million in annual revenue and savings from its recently approved joint venture with British Airways Plc and Spain’s Iberia Lineas Aereas de Espana SA, a pending Japan Airlines venture and the “cornerstone strategy” for U.S. hubs. New York, Los Angeles, Chicago and Dallas-Fort Worth are the four largest metro areas, and Miami is a gateway to the Caribbean and Latin America.

Cash and short-term investments at the end of June totaled $5.5 billion, and AMR has about $5 billion in debt due in 2011 and 2012, according to Goulet, the treasurer.

“We have a very good plan going forward,” Goulet said. “We can do long-term planning and make changes in our network and let it bear fruit over time, without having to worry about feeding ourselves day to day.”

Investors haven’t been as optimistic. Since May 31, 2007, when the last of AMR’s competitors left court protection, the shares have tumbled 77 percent, the most among the 12 carriers in the Bloomberg U.S. Airlines Index. AMR rose 7 cents yesterday to $6.64 in New York Stock Exchange composite trading.

The company also may be the only one of its peers with a 2010 loss, with 14 analysts projecting an average of 97 cents a share. Analysts estimate the five other major U.S. airlines will post profits, according to Bloomberg surveys.

Operating Costs

Counting fuel, labor and other expenses, American’s cost to fly each seat a mile in 2010’s first half was 12.76 cents, the most among the 6 biggest U.S. carriers and topping Delta’s 12.31 cents, based on data compiled by Bloomberg. Its pretax margin was -4.3 percent, the only negative among its peers.

“They’re playing the hand they were dealt by avoiding bankruptcy,” said Hunter Keay, a Stifel Nicolaus & Co. analyst in Baltimore. “It’s unfortunately costing them dearly.”

Keay recommends buying AMR because “the downside is pretty limited.”

Part of the financial drag on American comes from its Boeing Co. MD-80s, which make up the largest part of the airline’s 619-plane fleet.

Jet Fleet

While they’re being replaced by Boeing 737s that are about 35 percent more fuel-efficient for each seat flown a mile, the MD-80s still account for about 40 percent of American’s mainline jets, and won’t all be retired until about 2016 at an average replacement rate of 3 to 4 planes a month. American’s main jet fleet averages about 15 years of age, tied with Delta for the oldest among the six biggest U.S. airlines.

On labor costs alone, American says its disadvantage against rivals is $600 million, a figure disputed by unions.

“It’s significant,” said Jeff Brundage, American’s senior vice president for human resources. “It’s a big brick in our backpack to being competitive in this industry.”

American has said boosting productivity would allow it to increase wages while keeping its current cost structure. Studies show the airline at or near the bottom of the industry in productivity, said Jerry Glass, president of F&H Solutions Group in Washington and a former US Airways labor executive.

“It’s critically important that the labor groups understand that work rules are what is preventing American from reporting profits in 2010, to a large degree,” Stifel Nicolaus’s Keay said.

Union Demands

American’s unions insist that at least some of the 2003 concessions be restored. The Transport Workers Union withdrew a tentative contract for 10,600 baggage handlers and ramp workers in June, saying it couldn’t recommend ratification. Mechanics and stock clerks rejected a proposed three-year contract last month and gave TWU leaders approval to call a walkout among their 12,700 members.

Pilots are working at 1993 hourly rates, leaving them with “massive anger and frustration” over a lack of progress in talks that began in 2006, said David Bates, president of the Allied Pilots Association, which represents 9,600 active pilots at American.

“What we are looking for is not something that’s going to hurt the company,” said Laura Glading, president of the Association of Professional Flight Attendants, which has 16,550 active-duty members at American. “You can’t come to labor and keep taking and taking and taking.”

Glading was prepared to press a U.S. mediator in meetings this week to declare a stalemate in bargaining and recommend that the National Mediation Board trigger a countdown toward the first strike at a major carrier since 2005. The mediator yesterday canceled the sessions with the attendants.

The union tensions cast a shadow over American’s recovery strategy, Soleil Securities’ Higgins said.

“The changes they are making in their flying are going to help,” he said. “They are doing a lot of sensible things. For me, they’re all completely dwarfed by labor and the question about what’s going to happen there.”

Nespresso Opens Stores as North American Sales Rise


Nespresso sales in the U.S. and Canada have increased about 50 percent this year, helped by store openings and a new distribution agreement, said Frederic Levy, the head of Nestle’s Nespresso brand in those markets.

The coffee company is opening its 13th sales location in the region tomorrow with a “boutique” in New York’s Soho neighborhood, said Levy, who is president of Nespresso in North America. A shop within a Sur La Table store in Florida will follow next month.

“The new coffee culture is expanding” in the U.S., Levy said today in a telephone interview. “Word of mouth is very strong.”

Nespresso sales reached 2.77 billion Swiss francs ($2.76 billion) worldwide last year, with about 90 percent of the total from Europe. That’s almost 3 percent of Vevey, Switzerland-based Nestle’s revenue. First-half Nespresso sales increased more than 25 percent, Nestle said Aug. 11. The brand is growing even as U.S. consumers have cut spending, according to analysts.

“It may be super-premium, but any consumer can afford to buy the machines and the capsules,” said James Amoroso, a food industry consultant in Walchwil, Switzerland. “It is also a market that is still at the very beginning of its life cycle. Penetration in the U.S. must still be extremely low.”

Nespresso doesn’t plan price increases in the U.S. in 2010, Levy said, adding that the last boost was in early 2008. Futures contracts for Arabica coffee beans have been trading near the highest in almost 13 years.

Crate & Barrel stores began selling Nespresso machines in March, Levy said. The coffee makers range from $149 to $2,500 and the capsules average 55 cents each.

Single-serve machines are responsible for about 7 percent of the global coffee market, according to Nespresso. The brand plans to eventually have 20 to 30 boutiques in the U.S., Levy said.

Thursday, September 23, 2010

Ally Suspends Evictions Over Allegations of Foreclosure Fraud

Washington Post

Some of the nation's largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork - an admission that may open the door for homeowners across the country to challenge foreclosure proceedings.

The legal predicament compelled Ally Financial, the nation's fourth-largest home lender, to halt evictions of homeowners in 23 states this week. Now it appears hundreds of other companies, including mortgage giants Fannie Mae and Freddie Mac, may also be affected because they use Ally to service their loans.

As head of Ally's foreclosure document processing team, 41-year-old Jeffrey Stephan was required to review cases to make sure the proceedings were legally justified and the information was accurate. He was also required to sign the documents in the presence of a notary.

In a sworn deposition, he testified that he did neither.

The reason may be the sheer volume of the documents he had to hand-sign: 10,000 a month. Stephan had been at that job for five years.

How the nation's foreclosure system became reliant on the tedious work of a few corporate bureaucrats is still a matter that mortgage lenders are trying to answer. While the lenders may have had legitimate cause to foreclose, the mishandling of the paperwork has given homeowners ammunition in their fight against foreclosure and has drawn the attention of state law enforcement officials.

Ally spokesman James Olecki called the problem with the documents "an important but technical defect." He said the papers were "factually accurate" but conceded that "corrective action" may have to be taken in some cases and that others may "require court intervention."

Olecki said the company services loans "from hundreds of different lenders," but he declined to provide names.

Spokesmen for Fannie and Freddie confirmed Tuesday after inquiries from The Washington Post that they use Ally, formerly called GMAC, to oversee some mortgages. The companies have launched internal reviews to assess the scope of any potential issues.

Ally, Fannie and Freddie - all troubled mortgage companies that received extraordinary bailouts by the federal government during the financial crisis - declined to say how many loans might be affected. The Treasury Department, which owns a majority stake in Ally and seized Fannie and Freddie in 2008, also declined to comment.

Fannie and Freddie, created by Congress to finance mortgages and encourage homeownership, have in recent years been repossessing houses at record numbers. Fannie alone reported recently that 450,000 of its single-family loans were seriously delinquent or in the foreclosure process as of June 30. That's nearly 5 percent of the loans it guarantees.

Lawyers defending homeowners have accused some of the nation's largest lenders of foreclosing on families without verifying all of the information in a case, but it has been hard for them to stop foreclosure proceedings.

Ally's moratorium comprises only the 23 states - none in the Washington area - that mandate a court judgment before a lender can take possession of a property. But if Stephan signed documents related to foreclosures in states without this requirement (it's unclear whether he did), it could help a much broader range of borrowers.

Iowa Assistant Attorney General Patrick Madigan, chair of a national foreclosure prevention group composed of state attorneys general and lenders, said the fallout from the Ally review could be enormous because Stephan's actions could be considered an unfair and deceptive practice.

"If servicers are submitting court documents that aren't true or that have not been verified, that is of great concern," Madigan said.

Stephan's job at Ally was arguably one of the least enviable in the mortgage business: formally signing off on foreclosure papers that his company would submit to the courts to get approval to evict delinquent homeowners and resell their homes.

From his office in suburban Philadelphia, Stephan oversaw a team of 13 employees that brought documents to him for his signature at a rapid clip. Stephan did not respond to messages left at his work and home.

His official title was team leader of the document execution unit of Ally's foreclosure department, but consumer advocates call him the company's "super robot signor" or "affidavit slave."

In sworn depositions taken in December and June for two separate court cases involving families trying to keep their homes, Stephan revealed his shortcuts when reviewing the files. He said he would glance at the borrower's names, the debt owed and a few other numbers but would not read through all the documents as legally required. He would then sign them. The files were packed up in bulk and sent off for notarization several days later.

Stephan testified he did not know how the "summary judgment" affidavits he signed were used in judicial foreclosure cases.

At the rate Stephan was reviewing files, if he worked an eight-hour day he would have had an average of only 1.5 minutes for each document.

"A ridiculous amount of time for something so critically important," said Thomas Cox, an attorney in Maine who was one of those who deposed Stephan. He added that Maine and Florida law enforcement officials are investigating the matter.

Stephan was the only employee signing papers for foreclosures that were to be submitted to courts that did not involve bankruptcies. The latter cases, which were more complex, were handled by a separate department.

Olecki said Stephan still works for Ally but added, "We cannot comment further about his position."

While several large lenders contacted by The Post declined to talk about the document review process for foreclosures, attorneys working on behalf of homeowners said the setup at Ally was not unusual.

Christopher Immel, an attorney in Florida who deposed Stephan for a case in Palm Beach County, said he thinks Stephan was not a rogue employee but one that was performing his job responsibilities as the company told him to do.

"GMAC has a business model to do this, and Stephan was just one small part of it," Immel said. "He was under the impression it was okay to do this."

Blockbuster Files for Bankruptcy Protection

Associated Press

Blockbuster Inc., once the dominant movie rental company in the U.S., filed for Chapter 11 bankruptcy protection on Thursday, after reeling from mounting losses, rising debt and competitors that have better catered to Americans' changed media habits.

Blockbuster will continue to operate its 3,000 U.S. stores. But the move, long expected, marks the end of an era that Blockbuster and its gold-and-blue torn ticket logo helped establish - of Americans visiting video-store chains for the latest movie-rental releases. Increasingly, Americans are forgoing Blockbuster and watching movies via video subscription services like Netflix Inc., video on demand and vending machine services such as Coinstar Inc.'s Redbox.

In a submission to the U.S. Bankruptcy Court in the Southern District of New York on Thursday, the company said it reached an agreement with bondholders on a recapitalization plan. Under the plan, bondholders will exchange nearly $1 billion in debt for equity in a reorganized Blockbuster. The company has received commitments for $125 million in "debtor-in-possession" financing from senior noteholders to repay customers, suppliers and employees during the reorganization.

"After a careful and thorough analysis, we determined that the process announced today provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future as we continue to transform our business model," said CEO Jim Keyes.

Blockbuster, founded in 1985 by a Dallas software entrepreneur, was once a home entertainment powerhouse. It helped popularize videotape recorders and took off in 1987 after Waste Management Inc. founder Wayne Huizenga took control and began aggressively expanding and buying up competitors.

But Blockbuster has been losing money and market share for years as Netflix, Redbox and other services gained popularity. Netflix subscribers have grown from 1 million in 2002 to 15 million in 2010. Redbox, meanwhile, operated 26,900 kiosks as of the end of June. Wedbush Securities analyst Michael Pachter predicts that number will exceed 28,000 by the end of September.

In response, Blockbuster ended late fees and started online and kiosk services of its own. But it was unable to keep its debt in check.

Blockbuster, based in Dallas, earlier this year said it would close hundreds of stores and said it was struggling with liquidity problems. It had warned investors it might file for bankruptcy protection and was delisted in early July by the New York Stock Exchange.

Hollywood Video parent Movie Gallery Inc., once the second-largest U.S. movie rental chain behind Blockbuster, also fell victim to changing movie-watching habits and filed for bankruptcy protection in February - it's second trip through bankruptcy court. It liquidated in August.

Movie rentals aren't the only retail segment that has been disrupted by changing ways to consume media. Amazon.com has challenged traditional booksellers like Borders Inc. and Barnes & Noble Inc. and iTunes helped lead to the end of many record and CD stores.

Blockbuster said Thursday it plans to keep its 3,000 U.S. stores open while it evaluates them. Digital and mail businesses will all continue to operate normally. Operations outside the U.S. and domestic and international franchisees are not part of the Chapter 11 reorganization. Blockbuster's U.S. DVD vending kiosks, owned and operated by NCR Corp., are also not part of the reorganization and will continue to operate normally.

Billionaire investor Carl Icahn will help steer the latest efforts to save Blockbuster, reviving a role he played previously in trying to shape up the company. He has thrust himself into position of power, this time by snapping up about one-third of Blockbuster's highest-priority debt, according to a report published Wednesday in The Wall Street Journal.

Blockbuster said in its filing it had about $1 billion in assets and $1.46 billion in debt.

Blockbuster's largest creditors include the Bank of New York Mellon, Twentieth Century Fox Home Entertainment, Warner Home Video Inc., Sony Pictures Home Entertainment, The Walt Disney Co., Universal Studios Home Entertainment and other movie studios.

Wednesday, September 22, 2010

Watching for Copycats who Steal your Business Model

USA Today

Quick, what's the name of the blanket with sleeves?

If you said Snuggie, you'd be in good company. But that wouldn't make Gary Clegg or Sean Iannuzzi very happy. Clegg created the Slanket and Iannuzzi created the Freedom Blanket before the Snuggie launch — and then they were out-marketed by Snuggie-maker Allstar Products Group.

Sure, their "functional" blankets sell, but it's the Snuggie that rose to superstardom with its wacky TVinfomercials. It's Snuggie that Jay Leno, Ellen DeGeneres and Oprah Winfrey mentioned in front of millions of TV audience members.

And as Allstar President Scott Boilen conceded during an interview on The Oprah Winfrey Show: "It's not a wholly original idea." But that didn't stop his company from reaping millions in sales off the concept.

There's a slew of Snuggie-esque stories in the business world.

It's the oft-repeated tale of an innovative firm coming out with a novel idea or a fresh take on an existing product, and then a new competitor — seeing the riches to be made on a popular product — creates a similar version.

Adam Glickman says that after he opened his first Condomania condom retail store in New York in 1991, several stores in the U.S. copied his idea, and the idea was quickly replicated in Japan, Singapore and South America. Yuen Yung, creator of customizable-sushi restaurants in Texas, says he found out earlier this month that his idea has been copied in Cincinnati.

And Jane Wyler, creator of a reusable dry cleaning bag called the Clothesnik, says she was "shocked" when her product idea was knocked off by a couple she met at a trade show where she was selling her product.

Sometimes the imitation is happenstance — it's the great-minds-think-alike phenomena. But often, it's another firm tweaking an idea or outright copying a product.

Easy to rip off ideas

In this time of technological innovation and rapid-fire manufacturing, it's easier than ever for a rival to rip off an idea, says David Kappos, director of the United States Patent and Trademark Office. "If someone sees your idea built, they will almost certainly be able to copy it and have it manufactured," he says.

The first line of defense, Kappos says, is a patent.

"If you have a great idea, you've got to protect it," he says. "If you don't protect (your ideas), it's very easy for others to legitimately take them."

The filing charge per patent is about $1,000, but individuals and small businesses are able to get a 50% discount, Kappos says. His other advice is a bit more costly to follow: He suggests that firms hire legal help with the patent filing. The fees can be stiff: "in the ballpark of $5,000 to $10,000," he says. But "It's just like preparing a will or contract or leases. Sure, you can do them yourself, but it really is better to get an attorney, if you can."

Yet, investing in patent protection doesn't mean a company can become complacent. Firms should monitor for patent infringements and be ready to dole out cease-and-desist letters, as well as lawsuits.

And even if a company secures a patent, there is always a chance that competitors can legitimately tweak a product idea then sell their own version.

It sickens Wyler that she helped a rival to replicate her idea. In 2008, she met a couple at a trade show who expressed interest in investing in her company. She was intrigued by the potential partnership and filled the husband in on business. Wyler's reusable dry cleaning bags were made of organic cotton. Soon afterward, she discovered that the couple had modified her concept to create a reusable bag made from the material polypropylene.

"I'm so naive that I didn't think people would do this to me," she says. "I told him all of my trade secrets."

Kappos' advice is that all innovative firms ask others to sign non-disclosure agreements before spilling any information. "(NDAs) are very common, and people don't react negatively to them," he says.

Another way to stay ahead of competitors is to consistently innovate, says Mark Rampolla, founder of coconut-water company Zico.

When he launched in 2004, demand for the beverage (made from the clear liquid inside young, green coconuts) was small. Now it's a huge industry that is consistently attracting more makers.

Rampolla says he's focused on the brand's core attribute — it's an all-natural body hydrator — but that he will also tinker with the marketing, packaging and other elements to stand out. The latest change: He offers plastic bottles in addition to the more-common carton that most companies fill with coconut water.

The new bottle "is a very unique offering, and that is consistent with our positioning of nature's sports drinks," he says.

Sarah and Jenifer Caplan, co-founders of the flat shoe brand FootzyRolls Luxe, also spend much time trying to keep their product line unique as rivals step onto their turf.

"We look at our market and say, 'How can we be different?' " Jenifer says.

There were few competitors when they entered the market last year with rollable ballet flats that easily fit in a handbag. But the rivalry has heated up immensely.

Their newest competitor is Dr. Scholl's. The footwear king just launched Fast Flats foldable shoes, which it markets as "a practical solution for a long day or night in heels."

Competing with the big boys

Dr. Scholl's - maker of custom orthotic inserts - deployed a large ad campaign, and stores nationwide now have large Fast Flats displays. That type of promotional footprint worries the Caplans.

"We are two girls who started this company from nowhere," Jenifer says. "We don't have the money to go out like Dr. Scholl's and do multimillion-dollar marketing campaigns."

Despite their concerns, the sisters have crafted a plan to stay one step ahead of Dr. Scholl's and other rivals. They are coming out with new styles and colors, as well as forging partnerships that can take their distribution beyond retail stores.

With so many others entering the rollable-shoe market, Sarah says that many smaller brands will likely be stomped out of business: "Only a few are going to be able to survive," she says. And, if they keep innovating, "We know that we're going to be able to."

Web Start-Up Values Soar

The Wall Street Journal

Investors Bid Up Internet Firms to Levels Reminiscent of the Last Dot-Com Boom
The technology-heavy Nasdaq Composite Index is relatively flat this year. Yet tech company valuations are rapidly rising in one area: closely held consumer Web firms.

Venture-capital investors and others have been bidding up the valuations of consumer Web start-ups this year, particularly of the firms that show the most user traction. In an echo of the 1990s dot-com boom, some investors also are giving lofty valuations to Web firms that have no revenue and that barely have a product out.

Among them: question-and-answer website Quora Inc. in March raised around $14 million in a financing round that inputs a value for the whole company of about $87.5 million, people familiar with the matter have said. The Palo Alto, Calif., firm didn't publicly launch its service until June and hasn't said how it will make money.

Another company, Blippy Inc., which allows people to share and discuss their purchases online with friends, raised $11 million in a deal valuing the whole company at $46 million earlier this year. In June, mobile-technology firm Foursquare raised $20 million in funding at a company valuation of $95 million, up from a $6 million valuation less than a year earlier, a person familiar with the matter said.

Valuations for closely held companies are typically guesswork. But the strong numbers for consumer Web companies indicate how parts of Silicon Valley's start-up market are bouncing back following the recession. The recovery already started showing up last year, when Twitter Inc. was valued at $1 billion during a round of funding, up from $95 million in mid-2008 when it raised a previous round of funding, according to research firm VentureSource, a unit of Wall Street Journal owner News Corp.

Some investors worry the lofty numbers signal that froth has returned to the Web sector. That can create false hopes for a company's performance, pressuring entrepreneurs and investors to gamble to live up to such expectations. Many investors won't recoup their investments, especially with the stock market having been relatively unreceptive to initial public offerings in recent years.

"Anytime you take an increase in valuation, then you're making an implicit promise that you have to meet and that's what's challenging," said Matt MacInnis, chief executive of Inkling, a San Francisco interactive textbook start-up. Last month, Inkling announced a funding round led by venture firm Sequoia Capital that included a bump-up in valuation to the tens of millions of dollars, said Mr. MacInnis. "Now the onus is on the entrepreneur to knock it out of the park or fail," he said.

The escalating valuations for consumer Web start-ups are reflected in the secondary market, where investors buy and sell the shares of closely held companies such as social-networking company Facebook Inc. On SecondMarket, which operates an exchange where investors can trade the stocks of closely held start-ups, the share prices of six actively traded private companies—including four consumer Web start-ups—rose an average of 39% between January and August, according to the company.

In contrast, the Nasdaq—which includes publicly traded tech behemoths such as Apple Inc. and Intel Corp.—is up just 3% so far this year through Tuesday. "There's a big disconnect between the public market and the private market," said Saar Gur, a venture capitalist at Charles River Ventures and an investor in Blippy.

While hot Web companies garnering high valuations aren't new, the speed with which valuations are jumping has quickened, said Silicon Valley start-up investors. Driven by the Internet's growing scale, Web companies can take off more quickly than before if they gain a toehold with consumers. That leads to valuations soaring more rapidly than in the past as venture capitalists and other investors fight for a piece of the momentum.

Deal-of-the-day site Groupon Inc., for instance, was founded in 2008 and quickly brought in consumers eager to tap its discounts. By April when it received a $135 million investment from Russian investment firm Digital Sky Technologies Ltd. and venture firm Battery Ventures, Groupon was valued at about $1.35 billion.

"Before, people didn't expect growth trajectories to be as fast," said venture capitalist Patricia Nakache of Trinity Ventures. "A lot of consumer Web companies are going from a seed investment and leapfrogging" in valuations.

Some Web entrepreneurs said they now have more power to drive high valuations than in the past. Since Internet firms are relatively cheap to build—all that's needed is several staffers and some computers—many entrepreneurs don't need lots of cash when investors call, said Philip Kaplan, a Blippy founder.

As a result, entrepreneurs may turn down funding until "investors say 'What do we need to do to make this happen,' " he said. "The ball is in our court."