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Thursday, November 11, 2010

Starbucks Leaves Stores Unfixed as McDonald’s Perks Up


Less is more at Starbucks Corp.

The Seattle-based coffee chain is betting it can increase sales by spending the same amount of money as usual, about $250 million a year, to renovate only about half the approximately 1,900 shops due for a facelift in 2011.

Emphasizing stores in precincts like Manhattan’s Soho district, and employing such eco-friendly touches as reclaimed furniture, will lift the whole brand, Arthur Rubinfeld, Starbucks’ global development chief, said in an interview.

Starbucks is trying to caffeinate sales growth, which may have topped 10 percent in the most recent quarter for the first time since March 2008, while paying investors dividends. The strategy risks alienating customers at the unimproved stores as McDonald’s Corp., now pushing its own coffee drinks, plans to pump $1.2 billion into restaurant renovations this year.

“I have concern over Starbucks setting expectations that don’t get fulfilled by a visit to a typical store,” Julius Dorsey, the president of the Cleveland-based management consultant Dorsey & Co., said in a telephone interview.

Starbucks, led by Chief Executive Officer Howard Schultz, is scheduled to announce its fourth quarter and full-year earnings today. Quarterly sales are projected to rise 14 percent, with adjusted earnings per share increasing 33 percent according to an average of analyst estimates compiled by Bloomberg. The company is also expected to announce a dividend of 13 cents a share, according to a Bloomberg forecast, the third in the company’s history.

Shares Doubled

Starbucks rose 57 cents to $29.67 at 9:30 a.m. New York time on the Nasdaq Stock Market. Before today the shares had advanced 26 percent this year. While that about matches the return for McDonald’s, shares of the world’s largest hamburger chain have more than doubled in five years while Starbucks declined 1.1 percent.

Starbucks refurbishes its stores after five years and then again after 10. Since 2008, the number of stores turning 5 and 10 has doubled and as many as 1,900, or about a quarter of the company’s 8,800 stores, are due for upgrades in 2011. The company has closed about 900 stores since 2008. It declined to say how many 5- or 10-year-old shops were among the closures.

Many of the coffee shops feature the same earth tones and blond wood Starbucks has used since the 1990s.

Rehabbing all of them would cost as much as $475 million. Like other restaurant chains, Starbucks has cut capital spending since the recession. In the past 12 months Starbucks spent about $450 million and used about half for renovations, according to company filings. It will renovate the same number of stores, about 1,000, again in the next year, Chief Financial Officer Troy Alstead said in a July conference call.

Reclaimed Materials

Starbucks hired architect Kambiz Hemati from BCBG Max Azria Group Inc., the Vernon, California-based fashion retailer, to design the new stores. They feature reclaimed materials, low- flow faucets and energy-efficient air conditioning. As the company gradually remodels the rest of its coffee makers, it will borrow from the flagship stores, Hemati said.

Every time Starbucks opens a new location, the company makes sure the media hears about it -- part of a campaign to burnish the overall brand. After a new store opened in Seattle three weeks ago, it was mentioned 357 times in traditional media outlets, according the news tracking firm Vocus. USA Today wrote a story, which began: “The Starbucks of the future arrived today.”

Feds: Woman illegally fired over Facebook Remarks

Associated Press

A Connecticut woman who was fired after she posted disparaging remarks about her boss on Facebook has prompted a first-of-its-kind legal case by federal authorities who say her comments are protected speech under labor laws.

The National Labor Relations Board alleges that American Medical Response of Connecticut Inc. illegally fired Dawnmarie Souza from her job as an emergency medical technician late last year after she criticized her supervisor on her personal Facebook page and then traded Facebook messages about the negative comments with other employees.

The complaint, filed Oct. 27 by the board's Hartford, Conn., regional office, could set a precedent for employers to heed as more workers use social networking sites to share details about their jobs.

"It's the same as talking at the water cooler," said Lafe Solomon, the board's acting general counsel. "The point is that employees have protection under the law to talk to each other about conditions at work."

Federal labor law has long protected employees against reprisal for talking to co-workers on their own time about their jobs and working conditions, including remarks that may be critical of managers. The law applies whether or not workers are covered by a union.

NLRB officials claim the Connecticut ambulance company has an unlawful policy that prohibits employees from making disparaging remarks about supervisors and depicting the company "in any way" over the Internet without permission.

"This is the first complaint we've issued over comments on Facebook, but I have no doubt that we'll be seeing more," Solomon said. "We have to develop policies as we go in this fast-changing environment."

The trouble for Souza started when her supervisor asked her to prepare an investigative report when a customer complained about her work, according to the complaint. Souza claimed she was denied representation by her union, the Teamsters Local 443.

Later that day, Souza logged onto her Facebook page from a home computer and wrote: "Looks like I'm getting some time off. Love how the company allows a 17 to be a supervisor."

A 17 is the code the company uses for a psychiatric patient. Souza also referred to her supervisor with two expletives. Her remarks drew supportive Facebook postings from other colleagues.

John Barr, an attorney representing the company, said the real reason Souza was fired was because of two separate complaints about her "rude and discourteous service" within a 10-day period. He said Souza would have been fired whether the Facebook comments were made or not.

Barr said the company understands that workers have right to talk about wages and working conditions. But he said it stands by its policy against employees discussing the company on the Internet, including social media sites.

"If you're going to make disgusting, slanderous statements about co-workers, that is something that our policy does not allow," Barr said.

Jonathan Kreisberg, director of the board's regional office in Hartford, said the company's policy is overly broad. He acknowledged that the law protecting worker speech has some limits, such as not allowing employees to disrupt the workplace or engage in threatening conduct. But Kreisberg argued that Souza's Facebook comments did not cross a legal line.

"Here she was on her own time, on her own computer and on her own Facebook page making these comments," Kreisberg said. "If employees are upset about their supervisor and get together on their own time talk about him, criticize and call him names, they can do that."

A hearing on the case before an administrative law judge is set for Jan. 25.

Wednesday, November 10, 2010

Chocolate: Worth its Weight in Gold?

The Independent

Fancy a bit of chocolate? An afternoon Kit Kat with your cup of tea? A chunk of fruit and nut? Go on, you've earned it.

Except that in the future, chocoholics might have to work quite a bit harder to pay for their fix. The world could run out of affordable chocolate within 20 years as farmers abandon their crops in the global cocoa basket of West Africa, industry experts claim.

"Galaxy, Creme Eggs, every kind of £1 chocolate bar will be a thing of the past," warns London chocolatier Marc Demarquette, who believes a bar at £7, or its future equivalent, will be more like it. And Demarquette, who worked as an advisor for a recent BBC Panorama documentary on the troubled West African cocoa fields, is not alone. John Mason, executive director and founder of the Ghana-based Nature Conservation Research Council, has forecast that shortages in bulk production in Africa will have a devastating effect: "In 20 years chocolate will be like caviar. It will become so rare and so expensive that the average Joe just won't be able to afford it."

The reason for this unimaginable shortage – which has been presaged by the doubling of cocoa prices in six years to an all-time high over the past three decades – is simple.

Farmers in the countries that produce the bulk of cocoa bought by the multinationals who control the market have found the crop a bitter harvest. The minimal rewards they have historically received do not provide incentives for the time-consuming work of replanting as their trees die off – a task that usually means moving to a new area of canopied forest and waiting three to five years for a new crop to mature.

"It's hard to maintain production at high levels in a particular plot of land every time, because of pest problems that eat away at the yields and the farms need to be rejuvenated," explains Thomas Dietsch, research director of ecosystem services at the Earthwatch Organisation. "Although research into new varieties and better management methods could solve those problems, the other challenge is that cocoa is competing for agricultural space with other commodities like palm oil – which is increasingly in demand for biofuels."

Meanwhile, as the supply of the raw material diminishes, millions of new consumers in the developing world are becoming addicted to the sweet energy-fix at the end of the processing chain. "Chocolate consumption is increasing faster than cocoa production – and it's not sustainable," Tony Lass, chairman of the Cocoa Research Association, told the annual conference of Britain's Academy of Chocolate last month.

Despite price rises on the trading floor, precious little reaches the smallholders who make up 95 per cent of growers, according to Mr. Lass, a former Cadburys trader and ethical sourcing advisor who has co-authored a book on the cocoa industry.

"These smallholders earn just 80 cents a day," he says. "So there is no incentive to replant trees when they die off, and to wait up to five years for a new crop, and no younger generation around to do the replanting. The children of these African cocoa farmers, whose life expectancy is only 56, are heading for the cities rather than undertake backbreaking work for such a small reward." As harvests diminish on the Ivory Coast, by far the world's biggest cocoa producer, crops in Indonesia, the third largest producer, have been hit by a change in weather systems, forcing cocoa prices sky-high.

Demarquette, who makes chocolate for Fortnum's and has a shop in London's Fulham Road, adds that, to make matters worse, the soil in Africa's traditional cocoa fields is rapidly becoming depleted. "In Ghana and Ivory Coast the earth is dead where trees have already been harvested – there are no nutrients left in the soil," he claims. And some farmers in West Africa have turned to child labour to compensate for the manpower shortage.

"Production will have decreased within 20 years to the point where we won't see any more cheap bars in vending machines – unless they are made with carob instead of chocolate," he says. "It's because the growers in West Africa only see 2p for every £1 bar. Even if you double that, it's no incentive for the next generation – which rightly expects decent working conditions. Those young people are heading for the cities. They won't stay around just so schoolchildren and commuters can continue to get their quick fix."

The good news for consumers is that cocoa, which can only be grown in latitudes within 10 degrees of the equator, is also being produced in South America, the Caribbean and Asia.

However Demarquette says it looks doubtful that those areas will be able to satisfy increased demand, "given the speed with which consumption is growing, with new markets like India and China coming along behind and following Western tastes".

There is already an upward trend in retail prices for quality chocolate, he notes: "With growers of premium cocoa beans already getting up to 45p per bar to look after their crops properly and fund their future, chocolate will go back to being what it used to be – a rarefied treat."

Perhaps the world will be happy to live with that. Mintel figures released last month show that all the growth in the £3.6bn chocolate market is in the premium sector, which means chocoholics may well be prepared to dig ever deeper into their pockets for their fix.

"We are currently selling a 70g bar for £7 – and the price will go up, as there is ever more demand for properly cultivated beans," says Demarquette.

"Of course," he adds, "there is all the difference in the world betweendecent chocolate and confectionery that is so full of sugar and palm oilthat it doesn't deserve to be called chocolate at all."

Sara Jayne Stanes, chair of the UK Academy of Chocolate, believes foodies will save the chocolate industry from extinction by paying whatever it takes for the good stuff: "I do not believe we will run out of cocoa beans, as sustainability is something that affects us all," she says.

"Over the past 10-15 years, growing curiosity and interest in the fine-chocolate end of the market has created an understanding of how it is different from chocolate confectionery," she says. Consumers must appreciate that "fine chocolate, like fine wine, will cost considerably more, as cocoa farmers stop leaving the land in search of better-paid jobs in the cities. The result will be more careful cultivation of the crops, and a greater supply of fine cocoas."

A spokesman from Cadburys doesn't deny the shortage of cheaper cocoa, but suggests scarcity might be averted through Fair Trade initiatives.

"Together with other manufacturers and the wider cocoa industry, we have been working on a number of agricultural initiatives to both increase and improve yields," he says. "Our move into Fair Trade was a separate step, to both pay a better price to farmers, and to encourage the next generation of cocoa farmers to stay within the industry."

The crisis may well be averted in Ghana, Cadbury's supply heartland and the world's second largest producer, according to Divine Chocolate, a Ghanaian manufacturer that is 45 per cent owned by a cooperative of 45,000 cocoa farmers. "The Fair Trade system helps ensure that the value of farming is delivered directly to the farmers and their communities," says its managing director Sophi Tranchell.

"The best route for sustainability is for farmers to organise themselves into larger units, to be able to manage their own farming improvements through improved remuneration, and to put them in a position where they have more influence in the cocoa supply chain. Why else should they continue?" She believes Divine Chocolate has found the right recipe: "Fairtrade – and particularly the Divine ownership model – delivers sustainability into the hands of the farmers, not the hands of the global buyers."

But it is in the Ivory Coast, by far the world's largest source of cocoa, where the future of the crop is much more uncertain. "Fair Trade doesn't really exist here," says Ange Aboa, a reporter based in the country's largest city, Abidjan, who specialises in covering the industry. "Young people are moving away from cocoa into rubber, whose price is more stable. And on top of that we have cocoa diseases like swollen shoot and black pod, which have caused a 10 per cent drop in production."

The biggest hope, he says, is a Nestlé project to replant 10m trees over the next decade: "But these are only for the cooperatives with whom they work, and the replanting will make up for about a quarter of the trees which have been lost. Their goal is to buy only from the cooperatives in future, and not top up by buying from local exporters".

This should result in better quality beans, he says, but the question of whether there will be enough of them to continue to perpetuate the world view of chocolate as a cheap energy-fix is much more questionable.

"It's hard to imagine a world without a demand for chocolate, but whether it remains the low-cost snack food it is now may well change in time," says Earthwatch's Dietsch. "If the demand for biofuels pushes up the price of the oil-palm crop it may well supplant cocoa – unless measures are taken for those farmers who still grow it to remain in cocoa production."

But one cause for optimism, he says, is that "the cocoa industry is far ahead of other commodities, like coffee, in putting programmes in place that seek to ensure sustainable supplies".

Chevron to buy Atlas Energy for $4.3 billion

LA Times

The deal, which calls for a $3.2-billion cash payment and the assumption of $1.1 billion in debt, boosts the oil giant's presence in the U.S. shale-gas business.

Chevron Corp. said Tuesday that it would buy Atlas Energy Inc. for $3.2 billion in cash as the oil giant bolsters its market position in the U.S. shale-gas business.

Stockholders of Pittsburgh-based Atlas Energy will receive $38.25 in cash for each of their shares, Chevron said, plus $5.09 a share to reflect the value of Atlas Energy's stake in Atlas Pipeline Holdings, for a total purchase price of $43.34 a share.

The deal includes the assumption of $1.1 billion in debt.

"This acquisition is the right opportunity for Chevron," said George Kirkland, the San Ramon, Calif., company's vice chairman.

"We are acquiring a company that has one of the premier acreage positions in the prolific Marcellus" region, Kirkland said.

One of the more plentiful shale-gas regions in the U.S. has been the Marcellus Shale, which takes in large swaths of western Pennsylvania as well as parts of West Virginia and upstate New York.

Chevron will buy a foothold in 1.2 million acres, including 486,000 acres in the Marcellus Shale and 623,000 acres in the Utica Shale — labeled by analyst John Freeman at brokerage Raymond James & Associates as "two of the most economic natural-gas resource plays."

Chevron's move to acquire Atlas Energy comes less than a year after Exxon Mobil Corp. boosted its domestic shale-gas presence with the purchase of XTO Energy Inc. for about $40 billion in stock.

Chevron's investment is about one-10th the size of the XTO deal, during a time of plentiful natural gas supplies and stubbornly low natural gas prices.

But energy companies argue that down the road, demand will increase as the economy recovers.

Domestic shale gas has been freed up in recent years by advances in horizontal drilling and hydraulic fracturing, a technique that uses high-pressure water to break up shale to release the methane gas trapped inside.

As part of the deal, Chevron also gets Atlas' 49% share in Laurel Mountain Midstream assets, which provides transportation services for natural gas in the region.

Baucus, Levin Say Congress Will Keep `Onerous' Minimum Tax From Increasing


Congress will “do everything possible” to prevent the alternative-minimum tax from forcing 21 million households to pay an additional $66 billion in taxes this year, four lawmakers said in a letter to the Internal Revenue Service.

Max Baucus of Montana and Charles Grassley of Iowa, the chairman and top Republican on the Senate Finance Committee, urged IRS Commissioner Douglas Shulman today to prepare for the 2011 tax filing season by assuming the minimum tax will be adjusted for inflation. A delay in making the adjustment in 2007 held up processing of tax returns and refunds the following year.

“We will work to craft the AMT provision so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT,” the senators wrote in the letter. It also was signed by Michigan Representatives Sander Levin and David Camp, the chairman and top Republican on the House Ways and Means Committee.

The lawmakers were responding to a Nov. 5 letter from Shulman in which he warned of delays in 2011 if legislation isn’t enacted “until late this year.”

“We will move as fast as we possibly can to implement any late tax law changes and minimize the impact to taxpayers,” Shulman wrote. “However, our implementation timelines are driven by careful planning and risk management. Changes to systems that handle the enormous transaction and dollar volume that the IRS manages cannot be completed without substantial engineering and testing work.”

Lame-Duck Session

Congress plans to act on the tax during a lame-duck session beginning Nov. 15.

The alternative-minimum tax was created in 1969 to prevent 155 wealthy Americans from avoiding any tax by claiming excessive deductions, credits and exemptions.

It replaces deductions such as those for medical expenses and state and local taxes with a flat exemption when the itemized deductions become too large compared to income. Amounts over the exemption are taxed at 26 percent or 28 percent, depending on the amount of income.

The tax wasn’t indexed for inflation and over time has affected Americans of more modest income. Congress has responded with a series of annual “patches” for inflation that raise the exemption amount.

H&R Block

For this tax year, about 21 million additional households would face an average tax increase of between $3,000 and $5,000 unless Congress raises the exemption, said Kathy Pickering, executive director of the Tax Institute at H&R Block Inc. in Kansas City, Missouri, the nation’s largest preparer of tax returns.

The lawmakers said they are drafting legislation to set the 2010 exemptions at $72,450 for married taxpayers filing jointly and $47,450 for singles. The exemptions currently are $45,000 and $33,750.

If lawmakers don’t adopt the patch, Pickering said, a family of five with $50,000 in income and a child in college would pay more taxes.

Without the patch, the minimum tax would have its greatest effect on large families and residents of states with high taxes, such as California and New York, because exemptions for children and deductions for state and local taxes are denied under the AMT. People earning between about $75,000 and $500,000 would be most likely to pay the tax, she said.

Balance Due

“Those who were looking forward to getting a refund wouldn’t be getting one and some would have a balance due they would otherwise not have expected,” she said.

In 2007, Congress didn’t renew the patch until Dec. 26. The leaders of the tax-writing Senate Finance and House Ways and Means committees sent a letter the previous Oct. 30 to the IRS saying they planned to adopt the tax adjustment.

Because of the late change, the IRS didn’t start accepting tax return filings until mid-February 2008, delaying refunds for about 4 million households that usually file tax returns in January.

IRS spokesman Anthony Burke said the letter from the lawmakers “will be very helpful.” The IRS expects to process about 140 million individual tax returns in 2011 and distribute almost $300 billion in tax refunds, Shulman’s letter said.

Spill Panel says Management Culture to Blame

Associated Press

It wasn't just the botched technical decisions. BP and other companies' management, communication and overconfidence in dealing with risk led to the Gulf of Mexico oil spill, investigators for the presidential commission said Tuesday.

The commission's chief engineer, Richard Sears, outlined seven managerial findings, including muddled lines of authority and a compounding cascade of small problems that ultimately caused 11 people to die and millions of gallons of oil to spill.

"This is something that built over hours if not days, weeks, months. The companies involved each had data. They were each responsible for operations, and if data had been shared differently and operations had been carried out differently, I believe this disaster could have been prevented," Sears said. "And for whatever reason...it didn't happen that way, and it's sad."

Investigators, experts and panel members said Tuesday BP too often operated on the fly in the closing days of work on its doomed Gulf oil well, adding needless risk of a blowout.

They said the company was hurried and made confusing, last-minute changes to plans that were unusual in the complex environment of deep water. They said BP could have operated more safely if the company took the time to get the necessary equipment and materials.

"We are aware of what appeared to be a rush to completion," commission co-chairman William K. Reilly said. What is unclear, he said, is what drove people to determine they could not wait for equipment and materials to perform operations more safely.

Lawyers investigating the April 20 disaster for the commission said they would examine a series of steps where decisions saved time or money and could have increased risks. But the panel's chief counsel, Fred H. Bartlit Jr. repeated that there was no evidence that anyone involved in drilling the well consciously chose cost cutting over safety.

The panel's leaders made clear Tuesday that the findings in sum exposed a lack of safety culture on the rig, with Reilly blasting all three companies — BP, Halliburton Co. and Transocean — as "laggards" in the industry and in "need of top-to-bottom reform."

The reforms suggested by the commission included improving communication between the operating company, in this case BP, and its contractors.

"It was confusing to us as to where responsibilities lay," Sears said.

The panel's investigative team also said there needed to be clearer procedures for closing a well.

"There didn't seem to be a lot of rigor as to how these end-of-well operations were managed," said Sears, a 30-year veteran of Shell who led the technical aspects of the investigation. "This is fundamentally dangerous."

Much of the scrutiny focused on the BP's plan to temporarily plug the well, which investigators with the presidential commission say added to the risk of a blowout. Plugging the well is a procedure used to seal it off until the company comes back to produce oil and gas. BP says its actions are common throughout the industry, but numerous experts suggested otherwise Tuesday.

Several questioned BP's use of a single plug in the process. Charlie Williams, a chief scientist with Shell Energy Resources Inc., said the company used a minimum of three plugs in its deep water wells.

BP also chose to fill the well with seawater, rather than heavy drilling mud, leaving it vulnerable to an upsurge of oil and gas — a condition that is not allowed for exploratory wells drilled in other places, experts said. The company also chose not to use mechanical plugs, devices put inside the pipe that also can block oil and gas.

Many of the decisions would have required additional time and materials, said Steve Lewis, an advanced drilling technology engineer with Seldovia Marine Services who reviewed BP's drilling plans, federal permits and communications on behalf of the commission.

"I know there was pressure on these people to get done and move on," Lewis said. "The apparent shuffling and scrambling was not really necessary."

Tuesday, November 9, 2010

Private Equity sees 'Buckets of Money' in Water Buys


Water scarcity will generate big returns for the irrigation sector once climate change and population growth take their toll on farming, private equity managers said on Tuesday.

Asked at an agriculture investing conference whether it is possible to make money from water, typically a public good rather than a bankable commodity, Judson Hill of NGP Global Adaptation Partners was unequivocal.

"Buckets, buckets of money," he told the meeting of bankers and investors in Geneva, a leading European hub for commodity trading. "There are many ways to make a very attractive return in the water sector if you know where to go."

Smart irrigation technology will be at a premium in arid regions and places where higher crop yields are needed to meet rising food demand, Hill said, also citing opportunities from water rights in Australia and parts of the United States.

"Irrigation is a big industry and it is growing. I think it's going to grow dramatically," he said, estimating the sector at $3.5 billion today. "In parts of the U.S. we still grow rice in the desert, as crazy as that is. I think that will change."

Gary Taylor, a partner with AgriCura, a fund focused on U.S. corn, soybean, cotton, rice and wheat farming, said water was fundamental to smart agricultural land investments.

"We have done extensive work to understand the aquifer system along the Mississippi river and do believe over the term of our fund that water will become increasingly important," Taylor, a former executive at Cargill, said.

For agricultural equipment manufacturers such as  John Deere, there are also opportunities in tailoring irrigation systems to drought-resistant seeds developed by companies such as Monsanto, Dupont and Syngenta.

"There are very efficient ways to approach irrigation," said Cory Reed, John Deere's director of strategic marketing, describing a need to water certain commodity crops with careful volumes on a fixed schedule.

Hill also named links with communities as critical to gaining traction in the "very, very local" water sector, where investments can involve negotiations with governments amid growing awareness about scarcity risks.

"The water business is very much like the energy business was 20 or 25 years ago," he said. "As the price of water increases we are all going to become better stewards, not because we all become environmentalists but because it will affect our pocketbooks."

Penn Evaded Harvard Losses With `Defensive' Fund, Marks Says


The University of Pennsylvania, the Ivy League school founded by Benjamin Franklin, outperformed its wealthiest peers by avoiding many hard-to-sell assets such as real estate, according to Howard Marks, former chairman of the the investment committee.

Penn held less in private equity and property, more in stocks and owned a “defensive” mix of hedge funds, as well as “substantial” cash and short-term U.S. Treasuries, Marks wrote in an Oct. 20 memo to trustees, obtained by Bloomberg News. The Philadelphia school’s investments fell 16 percent in the year ended June 2009, versus the 27 percent and 25 percent declines of Harvard and Yale, the two richest U.S. universities.

“Most things in investing are two-edged swords: if you do more of them, you’ll make more if they work but lose more if they don’t,” wrote Marks, chairman of Oaktree Capital Management LP in Los Angeles, who left his endowment post on June 30. “Two prominent examples are (1) using borrowed money, or ‘leverage,’ to magnify results and (2) investing in illiquid assets that can’t always be sold on demand other than at a substantial discount from their fair value.”

The $5.7 billion fund outperformed Harvard in Cambridge, Massachusetts, and Yale in New Haven, Connecticut, again in the past year, while still trailing them over the last decade. Yale’s David Swensen pioneered the strategy of using private equity, real estate and commodities to beat stocks and bonds. These infrequently traded stakes ballooned as a percentage of big endowments when markets tumbled after the September 2008 bankruptcy of Lehman Brothers Holdings Inc.

5.6% a Year

Penn averaged annual increases of 5.6 percent in the past decade, compared with the 7 percent and 8.9 percent returns at Harvard and Yale, and its own target of 8.25 percent. In the year ended June 30, Penn gained 13 percent on investments, tied for third-best in the Ivy League, while Harvard’s $27.6 billion endowment climbed 11 percent and Yale’s $16.7 billion fund advanced 8.9 percent.

Columbia University’s $6.5 billion fund in New York led with a 17 percent gain, followed by Princeton University’s $14.4 billion endowment in New Jersey, which increased 15 percent. Cornell University’s $4.4 billion endowment in Ithaca, New York, matched Penn last year.

Yale was the worst performer among the eight Ivy League schools, while Harvard ranked fifth.

Marks, 64, started Oaktree after leaving TCW Group Inc. in 1995. The firm managed $75.1 billion, as of June 30, in investments including distressed debt, high-yield and convertible bonds, private equity and real estate. Marks, who graduated from the Wharton school in 1967, served on Penn’s investment committee for 13 years and established the Marks Family Writing Center in 2003 on campus.

Not ‘Superhuman’

“As I wrote last year, ‘everyone had regrettable investments in his or her portfolio -- given the climate, you’d have to be superhuman not to,’” Marks said in his final letter to trustees after 10 years as the head of Penn’s investment board. “What matters is how many, how big and how bad Endowments in general had more of these than other investors in 2007-08, and thus they experienced bigger problems.”

Robert Levy, chairman and chief investment officer at money manager Harris Associates LP in Chicago, has taken over the chairman role at Penn, Marks said yesterday in a telephone interview.

“Investors have a choice between trying to maximize and trying to build in security,” Marks said in the interview. “There isn’t a right over wrong. Everybody has to make that choice for themselves. I think the events of these recent years demonstrate that choice and action.”

Stressing Stability

Penn’s investment committee emphasized stability over maximizing returns and achieved “a respectable return and minimized disappointment and difficulty in bad times,” Marks said.

In the past decade, the endowment added holdings of non- U.S. equities and hedge funds, lessened its preference for value stocks over growth companies, diversified its mix of investment managers and added venture capital and buyout firms, albeit to a smaller extent than its peers, Marks wrote. In 2004, the school appointed Kristin Gilbertson as CIO, growing its internal endowment management capabilities, he wrote.

The Ivy League schools are private institutions in the northeastern U.S. None has recouped the record losses incurred in the year ended in June 2009. As investments tumbled, universities cut jobs, froze salaries and postponed building projects.

Penn dodged the hundreds of layoffs, construction delays, discounted sales of illiquid investments and debt issuance of several of its peer institutions because the university was less dependent on its fund, getting 10 percent of its budget from endowment earnings, Marks said. In comparison, Harvard and Yale get more than one-third of their budgets from endowment income.

“Never forget the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average,” Marks said. “Prudent financial management doesn’t get you through ‘on average’ -- rather, it enables you to survive the low points."

Pfizer 3Q Profit down 70 Percent due to Charges

Associated Press

Pharmaceutical giant Pfizer Inc.'s mega-acquisition of Wyeth boosted its third-quarter revenue 39 percent, but hefty charges and a higher tax rate, both related to that $68 billion purchase, dragged its profit down 70 percent, the company said Tuesday.

The New York-based maker of cholesterol blockbuster Lipitor and impotence pill Viagra posted net income of $866 million, or 11 cents per share. That's down from $2.88 billion, or 43 cents per share, a year earlier.

Excluding one-time items totaling $3.51 billion, or 43 cents a share, the world's largest pharmaceutical company by revenue said net income would have been $4.37 billion, or 54 cents per share. That topped Wall Street expectations by 3 cents.

Pfizer raised its 2010 profit forecast, to a range of $2.17 to $2.22 per share excluding one-time items, from the prior guidance of $2.10 to $2.20 per share. Analyst expect $2.22 per share. But it lowered the top end of its revenue projection by $1 billion, to a range of $67 billion to $68 billion.

Revenue, while up from $11.62 billion in 2009's third quarter because of Wyeth's products, came up short of expectations at $16.17 billion. Analysts surveyed by Thomson Reuters were expecting, on average, revenue of $16.68 billion.

In afternoon trading, Pfizer shares fell 33 cents, or 1.9 percent, to $17.29.

Pfizer is the last major U.S. drugmaker to report its results. Because of the weak global economy and demands from European health programs for price cuts, Pfizer - as did many of its peers - missed Wall Street revenue expectations but managed to beat muted earnings-per-share expectations. That was the case for Johnson & Johnson, Eli Lilly and Co., Bristol-Myers Squibb Co. and Abbott Laboratories. Biotechnology company Amgen Inc., which makes anemia drugs, bucked the trend, narrowly beating revenue expectations and handily topping EPS forecasts.

"Their results followed the same pattern we've seen with peers, missing on the top line but beating EPS estimates due to cost controls," Credit Suisse analyst Catherine Arnold wrote to investors.

Pfizer's one-time items included $499 million for acquisition-related restructuring, $1.16 billion for the gradual decline in the value of intangible assets such as trademarks and brand names and $1.48 billion for asset writedowns related to buying Wyeth on Oct. 15, 2009.

The company also set aside a $701 million reserve for asbestos litigation related to a Pfizer subsidiary, Quigley Co., which is in a long-running bankruptcy reorganization. Quigley was acquired by Pfizer in 1968 and, until the early 1970s, sold products containing asbestos such as linings for furnaces and incinerators.

Sales of prescription drugs, Pfizer's biggest division, jumped 31 percent to $13.95 billion, boosted by the addition of new products from Wyeth such as biologic drug Enbrel for rheumatoid arthritis, Prevnar vaccine against ear and blood infections, and Premarin hormone replacement pills.

Lipitor sales were down 11 percent at $2.53 billion, as competition from generic versions of other cholesterol drugs such as Zocor continues to erode sales. Lipitor, the world's top-selling drug, loses U.S. patent protection in November 2011, and its sales are expected to fall sharply after that. Still, Pfizer reaffirmed its financial guidance for the following year, saying it expects 2012 sales of $65.2 billion to $67.7 billion and earnings per share, excluding one-time items, of $2.25 to $2.35.

Top sellers were Enbrel, at $799 million; Prevnar and a successor vaccine that prevents more strains of pneumococcal disease, with a combined $914 million; and pain treatment Lyrica, up 7 percent at $757 million. Sales were down for Viagra, anti-inflammatory pain reliever Celebrex and blood pressure drug Norvasc.

Sales of veterinary medicines rose 27 percent to $860 million and revenue from Capsugel, which makes capsules for oral medicines and dietary supplements, were flat at $176 million. Pfizer is considering selling that unit.

Pfizer also reported sales of $673 million from consumer health products such as Chap Stick and Centrum vitamins, and $441 million from nutrition products - both Wyeth businesses.

"For the third consecutive full quarter since we closed the Wyeth deal, we are reporting solid operating results," Chief Executive Jeffrey Kindler told analysts during a conference call.

He said Pfizer will expand its pain treatments, a priority area, with its pending $3.6 billion purchase of King Pharmaceuticals Inc., which makes abuse-resistant narcotic painkillers. Kindler noted other deals to expand its sales in emerging markets and its portfolio of drugs for rare diseases.

Analyst Dr. Timothy Anderson at BernsteinResearch, who rates the stock an "Outperform," wrote that Pfizer "has more interesting, immediate pipeline prospects ahead of it, and we are assuming that (Pfizer) will execute on most of these opportunities."

Pfizer shareholders have seen the company's dividend slashed to pay for Wyeth and its share price fall from $48 10 years ago to the high teens now.

Asked how the company will satisfy shareholders, Chief Financial Officer Frank D'Amelio said in an interview that the stock has climbed over the past three months, while Pfizer has been investing in new businesses, boosting sales of older products, buying back stocks and pushing late-stage experimental drugs toward approval. Those include ones to prevent stroke and to treat a genetically based lung cancer.

He said Pfizer's board in December is expected to raise the dividend, now 18 cents per quarter. Pfizer also aims to boost the dividend yield - the annual dividend divided by earnings per share - over the next three years from 33 percent to the industry average of 40 percent.

For the first nine months, net income was $5.37 billion, or 66 cents per share, down from $7.87 billion, or $1.16 per share in the January-September period of 2009. Revenue jumped 50 percent to $50.25 billion, thanks to the addition of sales of Wyeth products.

CVS Caremark Profit falls 21 Percent in 3Q

Associated Press

CVS Caremark Corp. reported a 21 percent drop in third-quarter profit Wednesday as its pharmacy benefit unit continued losing business from previously canceled contracts.

The company said net income fell to $809 million, or 59 cents per share, from $1.02 billion, or 71 cents per share, in the prior-year period. The company's 2009 earnings benefited from $156 million in tax benefits, or 11 cents per share.

Excluding one-time acquisition costs in the most recent quarter, the company would have earned 65 cents per share. That's in line with the average estimate of analysts polled by Thomson Reuters.

The company's revenue fell 3.1 percent to $23.88 billion partly because of lost pharmacy benefit contracts.

CVS lowered the upper range of its full-year guidance to between $2.68 and $2.70 per share. The company previously forecast earnings per share between $2.68 and $2.73. The company attributed the revision to costs for streamlining its pharmacy benefits management unit.

Analysts expect full-year earnings of $2.71 per share, on average.

In the past year, CVS has reported billions in lost contract revenue for its Caremark unit, which provides prescription drug purchasing, customer service and other pharmacy services.

Investors and analysts are still questioning the wisdom of CVS's 2007 acquisition of Caremark for an estimated $26 billion. The combination of the two companies was designed to bring more business to CVS pharmacies in the form of Caremark-covered patients filling prescriptions.

Pharmacy benefits managers handle drug benefits for health plan members and sponsors. They buy large amounts of drugs to fill prescriptions, which is one way they can save money for clients.

In the latest quarter, CVS said pharmacy services revenue fell 8.5 percent to $11.9 billion. Besides canceled contracts with private employers, CVS said it has also lost patients from its Medicare drug coverage plans.

Revenue from CVS pharmacies was $14.2 billion, with sales at locations open at least a year - a key measure of a retailer's health - increasing 2.5 percent. The company said sales were negatively pressured by the introduction of more low-cost generic drugs.

CVS Chief Financial Officer David Denton said pharmacy shoppers are still spending conservatively, though he added that the trend has benefited CVS-brand products.

"We think it's a pretty cautious consumer out there and in fact it's one of the reasons that's driving our private label and proprietary products, as well as our proximity to their homes and the value proposition overall," Denton told analysts on an earnings conference call.

Monday, November 8, 2010

Wal-Mart Fires Shot in Toy War

The Wall Street Journal

Retailer Cuts Prices After Learning Target's Are Lower

The annual battle for the minds and wallets of toy-buying parents has gotten off to a particularly fierce start, with Wal-Mart Stores Inc. slashing prices in an effort to keep Target Corp. from being the low-cost leader this holiday-shopping season.

Toys are key to many retailers' success at Christmas, because parents will buy stuff for their kids even when the economy is awful. But in recent years shoppers have tended to snap up the biggest toy bargains and ignore stores' other offerings.

This year, with economic conditions somewhat improved, retailers are hopeful that if they can lure parents with a great price on electronic hamsters or Stinky the Garbage Truck, shoppers will make other purchases. But store chains continue to feel the need to stake their low-cost claims just days after Halloween.

"It will still be a very competitive season for toys," said Craig Johnson, president of Customer Growth Partners, a retail and consumer consulting firm. "The reason you are seeing so much early discounting is that retailers are trying to get an early share of the market."

When the biggest retailers came out with their initial holiday toy prices shortly after Halloween, Toys "R" Us Inc. and Amazon.com Inc.—which is touting 25% off hot toys—telegraphed aggressive price cuts.

Amazon's toy prices are for the most part within the range of Wal-Mart, Target and Toys "R" Us, which also offer a variety of free-shipping deals on toys to compete with Amazon. Online toy purchases are rising but still make up a small percentage of all toy sales.

Wal-Mart was offering discounts on a broader selection than the bare-bones list of inexpensive toys it promoted last year. But in many cases its prices were higher than those advertised by archrival Target.

Shortly after The Wall Street Journal asked Wal-Mart last week about its price disadvantage, the company issued a new price list, slashing the sticker on many hot toys.

"This underscores our commitment to offer the lowest prices on top toys," Wal-Mart said in a statement.

With its newly announced prices, Wal-Mart beat Target on many toy prices by just a few pennies. But a few big spreads persist.

For example, Wal-Mart is now selling a Barbie doll embedded with a video camera for $39, or $6 less than Target. Meanwhile, Target has priced Stinky the Garbage Truck—a Matchbox truck that tells jokes—at $49.99, after a coupon, or $6 less than Wal-Mart.

Both retailers say that if a shopper presents them with a print ad featuring a lower price, they will match it.

But Target has a new, potentially potent price weapon that Wal-Mart does not: Shoppers get an extra 5% discount on all purchases, including toys, if they pay with a Target credit or debit card or the Target Visa card.

A much lower proportion of Wal-Mart's customers use credit cards of any sort. Wal-Mart's Discover Card gives buyers 1% back on purchases. As of yet, it has not matched Target's 5% discount.

Casey Carl, vice president of toys and sporting goods at Target, said, "We are doing things differently this year. We're expanding our discounts throughout the season."

Target is putting half of its 2,000 toys on sale this year, an increase of about 10% from 2009. The discounts released last week expire Nov. 24, but will be followed by other sales through the holidays.

"From everything we heard, Target was disappointed with their toy sales last Christmas and they seem to be coming out swinging harder and faster," said Eric Johnson, professor of management at Dartmouth College's Tuck School of Business.

Wal-Mart, meantime, is trying to convey that its toy section, which had shrunk by 30% in recent years, is expanding again, at least during the holidays. It also has more than quadrupled the size of its toy-oriented circular for newspapers, which this year has 52 pages.

In a departure from the last two years, when Wal-Mart emphasized toys for under $10 and $5, the retailer is touting popular toys across a range of prices. The most expensive item on Wal-Mart's top toy list is Big Foot The Monster, which walks, talks and burps, for $84.88.

"We've expanded the selection of toys and widened the array of price rollbacks," said Laura Phillips, Wal-Mart's senior vice president of toys and seasonal merchandise.

Ms. Phillips said that while Wal-Mart's price cuts will last through the season, competitors are expected to raise and lower their prices until Christmas. At rival stores, she said, "customers will have to chase sales."

Dartmouth's Prof. Johnson said he sees a shift in Wal-Mart's strategy. "They don't seem as intent on running everyone out of the toy business," he said.

The holiday selling strategy at Toys "R" Us goes beyond price, said Chief Executive Gerald Storch. The retailer is stocking a wider variety of toys in general and more exclusive toys, where it is not necessary to compete on price. The company, for instance, made a big bet this year on a line of miniature die-cast trains called Chuggington that aren't sold by Wal-Mart, Target or other big chains.

Toys "R" Us also holds events that bring products to customers ahead of the competition, such as Sunday's sale on merchandise involving teen heart throb singer Justin Bieber.

In addition, the retailer offers shoppers who enroll in a loyalty program 10% back on holiday purchases up to $500, via store credit. And the company has created an iPad app where children can create a wish list.

But that doesn't mean Toys "R" Us is ignoring its rivals' prices, Mr. Storch said, adding, "At any time, anyone can have the lowest price on a toy and we respond accordingly."

Natural Gas From Midwest Shale ‘Game Changer’ For CT

Hartford Business

Connecticut’s reliance on Middle Eastern fossil fuels surges way beyond petroleum; the state’s true addiction is natural gas.

Claims that natural gas is a cheaper and/or cleaner alternative to oil and coal largely are true; but those hoping that shifting to natural gas will reduce the state’s dependence on foreign fuel — especially from the pesky, unstable Middle East — will be disappointed.

The Middle East supplies only 0.5 percent of America’s natural gas, but the number is at least 10 times higher in Connecticut and rising.

The latest increase in Middle Eastern natural gas fueling Connecticut came in October from a liquefied natural gas, or LNG, facility in New Brunswick, Canada. Facility majority owner Repsol inked an agreement with a company based in Qatar for its LNG, which is then gasified and sent to New England. Qatar — a country on the Persian Gulf — joins Egypt, Peru, Norway and Trinidad & Tobago as the facility’s suppliers.

“Qatar gas makes up for a reduction in what was coming in from Canada,” said Mary Usovicz, spokeswoman for Repsol North America.

Connecticut’s reliance on foreign LNG will plummet — just like it has in the rest of the nation — as the benefits of newly available domestic natural gas in the Midwest are fully realized; but because New England is at the end of the country’s transmission system, those benefits will be slower coming.

“Everybody is so excited that we have this gas supply so close,” said Lisa Cullen, manager of supply for Yankee Gas, Connecticut’s largest natural gas utility. “We have to work to get more of it over here.”

Until the full benefits are realized, Connecticut must rely on LNG at a disproportionate rate to the rest of the nation. LNG accounts for 2 percent of all natural gas in the United States and 20 percent in Connecticut, according to Yankee Gas. The main ports for Connecticut’s LNG are the Repsol facility in New Brunswick and another in Everett, Mass., which relies mostly on Trinidad & Tobago for its LNG.

Even though the Middle Eastern natural gas seems like a relatively small portion of Connecticut’s portfolio, it is roughly equivalent to the proportion on the nation’s petroleum portfolio that comes from the Middle East, which is perceived as influencing America’s prices and politics.

The principal supplier of America’s oil is America, accounting for 43 percent, according to the U.S. Energy Information Administration. Coming in second is Canada, at 11.5 percent. Third is Saudi Arabia at 7.9 percent. No other Middle Eastern country ranks in the top six and the only others in the top 15 of U.S. oil suppliers are Iraq and Kuwait.

The push for Connecticut to decrease its reliance on oil starts with natural gas. Over the past 50 years, the use of natural gas in home heating increased 164 percent while the use of fuel oil decreased 18 percent. Natural gas power plants produced 1,331,000 megawatts of electricity in July, triple all other fossil fuels combined.

Even in cars, the push is for natural gas. Gov. M. Jodi Rell achieved several victories in bringing to plug-in electric cars to the state, which in Connecticut run on power generated mostly by nuclear and natural gas. In October, the City of Meriden opened a LNG fueling station for cars that run strictly on natural gas.

Connecticut’s commitment to natural gas comes at a cost. Residential prices of natural gas have increased 64 percent over the past 20 years, putting the state at No. 6 in the nation for prices. It’s still cheaper than fuel oil — the state ranks No. 5 in fuel oil prices — which has increased 137 percent over 20 years.

The state also ranks No. 3 in the nation for electricity prices, due in part to Connecticut’s reliance on natural gas for electricity generation. That’s an improvement, though, as the state used to rank No. 2 in electricity rates, but the prices have dropped for more than a year as natural gas prices have dropped.

As the demand for natural gas in Connecticut grows, the prices will improve, said Edna Karanian, Yankee Gas director of gas system operations.

Further dampening prices is the increasing availability of the large domestic natural gas supply trapped in Marcellus Shale in Pennsylvania, New York and West Virginia. As the technology to harvest it got more economical, the Marcellus Shale natural gas became cheaper than even other supplies of domestic natural gas — such as from the Gulf Coast — and already has contributed to the falling price of the commodity.

“This is probably one of the more exciting times in the business,” Karanian said. “Any time new supply comes into an area, it has a positive impact.”

The Marcellus natural gas eventually will become the principal supply source for Connecticut and drive down prices — Yankee Gas is predicting a 59 percent in its winter premiums over the next five years — but the proposed expansion of its transmission system to more widely use the commodity doesn’t include Connecticut.

Connecticut is a potential customer for use the Marcellus natural gas, but the current demand isn’t high enough to make a new pipeline capacity project economically viable, Karanian said. Yankee Gas may start a transmission project of its own or make it a joint venture to boost the shale natural gas use in the state.

“It is truly a game-changer here in New England,” Cullen said.

Because of the widespread use of domestic shale natural gas, the amount of foreign LNG used in the country is far less than predicted, said Damien Gaul, economist with the U.S. Energy Information Administration. Natural gas coming from foreign sources hit a 15-year low nationally in 2009.

“The LNG producers (such as Qatar and Egypt) don’t really care because they are making a lot of money elsewhere in the world,” Gaul said. “There may come a time when they want a bigger portion of the U.S. market, but not now.”

Qatar, with two major LNG companies, is undergoing a major expansion of its natural gas exports. After Russia and Iran, Qatar sits on the world’s third largest natural gas supply; and the country’s monarch has called for the expansion its current LNG export of 44 million tonnes — a metric cubic ton — to 77 million tonnes. Qatar already leads the world in LNG exports

While Qatar’s overall exports to the U.S. makeup about 0.2 percent of its total exports, part of that expansion includes the deal with Repsol for the LNG port in New Brunswick.

Since that port opened in 2009, it has sent more than 100 billion cubic feet of natural gas to the U.S. Northeast. This increased use of the Canadian pipeline into the United States has helped shave off peak prices in the high demand months by increasing the supply availability, Usovicz said.

“Having gas come from the north is a positive thing,” Usovicz said.

Amazon Expands in Bulk With Diapers, Soap Deal

The Wall Street Journal

In a deal that underscores the growing competition to capture a consumer shift toward buying bulk items online, Amazon.com Inc. is poised to acquire Quidsi Inc., the parent company of Diapers.com and Soap.com, according to a person familiar with the matter.

The parties could announce the deal as early as Monday.

Amazon, the largest online-only retailer in the U.S., is expected to pay about $500 million in cash and assume $45 million in debt and other liabilities, this person said.

The management of Quidsi will remain with Amazon, the person added.

Representatives for both companies didn't immediately respond to requests for comment.

The deal was earlier reported on Fortune magazine's website.

Seattle-based Amazon, which has experienced sharp growth in recent years amid the online shift in consumer-shopping habits, has used acquisitions to increase its presence in certain categories. Last year, Amazon acquired online shoe and apparel retailer Zappos for $1.1 billion, Amazon's biggest buy to date.

Amazon's planned purchase of Jersey City, N.J.-based Quidsi shows hope for the business of selling consumer staples online. While household basics such as cleaning supplies, shampoo and paper goods are still a small slice of online sales, they are growing fast.

Last year, household-product sales over the Internet reached about $10 billion, up from $4 billion in 2003, according to estimates by market-research firm Nielsen Co. That compares with an estimated $361 billion in overall online sales in 2009.

Online shopping for household goods has been held back by the cost of shipping bulky but low-value items, like paper towels and laundry detergent, and the prevalence of bricks-and-mortar stores that sell the products for about the same price.

Yet Quidsi's fast-growing Diapers.com, launched in 2005, helped show there could be a market for selling household products for kids by pairing a wide selection and fast, free shipping with an efficient warehouse-distribution system. Earlier in the year, Quidsi expanded into other packaged goods by launching Soap.com as its second site.

The company previously said it brought in $180 million in revenue last year, and expects to bring in $300 million this year.

For Amazon, hooking shoppers on buying frequently used, everyday staples brings in repeat visitors that could also buy higher-margin goods. In September, Amazon launched a program that offered free two-day shipping for new parents for three months or more.

Amazon has also priced diapers aggressively; on Sunday, a package of 252 Pampers Baby Dry diapers cost $40.99 on Amazon.com, and $44.99 on Diapers.com.

Major consumer-product companies are accelerating their online investments because it provides direct access to consumer data, a gold mine that has long been controlled by retailers.

As retailers during the recession aggressively developed and promoted their own private-label products that compete with brand names, getting first-hand information about shopping habits has become even more important to manufacturers.

Procter & Gamble Co., the world's biggest consumer-products maker, earlier this year launched an online store that sells its major brands. P&G says the site is intended as a way to study consumers' online-buying habits rather than a significant source of sales growth. P&G garners only a fraction of its $79 billion in annual revenue from online sales.

Will Masses embrace Electric Cars despite High Prices?

USA Today

The biggest automotive revolution since horseless carriages first rumbled along rutted roads is about to take place — and you'll have to strain to hear it.

That's because the first mainstream electric cars in nearly a century will be hitting the streets over the next couple of months, and their electric motors are as eerily quiet as they are tailpipe emission free.

Automakers such as Nissan and Chevrolet are touting the new vehicles in splashy ads, but already there are signs that wary mainstream consumers won't be quick to embrace the largely untested electric models. Automakers likely will have no trouble selling out their initial, limited production to electric enthusiasts and early adopters who have to have the latest thing, but mass acceptance that would lead to profitable production in big numbers remains a question.

The government and the auto industry are promoting electrictransportation as a way to cut U.S. dependence on foreign oil, ease the need for more U.S. oil drilling and cut carbon dioxide in the air. But the technology remains a colossal gamble, with billions invested by the industry and billions in subsidies from the government for research, factories and a direct-to-consumer rebate of $7,500 to partially offset the higher price of electrics.

Buyers still have to be convinced that being Earth-friendly is worth several trade-offs — beyond the cars' sticker prices, which can be double the cost of a similarly sized conventional car. Most prominently, most electric cars for now will have a range of about 100 miles before they need to be recharged. That process can take as few as 30 minutes with special chargers, but in most situations will take up to eight hours.

Even if you haven't paid attention to electric cars, you soon won't be able to escape hearing about them. Nissan has started its ad campaign for the fully electric Leaf. Chevrolet is about to crank up promotion for the Volt, a plug-in electric that also has an onboard generator powered by an auxiliary gas engine. Electric advocacy groups, such as Plug In America, plan their own public education campaigns.

President Obama has set a goal of a million plug-in electric vehicles on U.S. roads by 2015, though that rollout pales compared with the more than 11 million conventional vehicles that will be sold this year alone. Even with all the subsidies, promotion and consumer education efforts, only 0.6% of cars sold in the U.S. in 2020 will be fully electric, predicts auto researcher J.D. Power and Associates. And only 9.6% will be hybrids — with or without a plug-in recharging cord.

"Barring significant changes to public policy, including tax incentives and higher fuel-economy standards, we don't anticipate a mass migration to green vehicles in the coming decade," says John Humphrey, a senior vice president for J.D. Power.

Some reasons why:

•Lack of public charging stations. All-electric cars need to be plugged in to recharge and can't always be at home, but so far there aren't many public charging stations. Supported by federal grants from the Energy Department, two companies alone are installing more than 20,000 private and public charging stations in select metro areas in Oregon, Washington, California, New Mexico, Texas, Tennessee, Michigan, Florida and the District of Columbia.

•Home chargers require garage upgrades. An electric car such as the Leaf can be charged from a standard 110- or 120-volt home wall socket, but it will take at least 20 hours to get a full charge. So most electric car buyers will want to install 220- or 240-volt chargers to cut that to an overnight six to eight hours, which can cost $1,200 or more, though a federal subsidy is available. Many urban apartment dwellers or others without home garages may be hard-pressed to find a place to install a charging station that would make electric cars practical for them.

•Stable gas prices. Average prices for regular gasoline have been fairly stable and haven't exceeded $3 a gallon in two years, undercutting one of the key economic incentives for buying an electric car.

•Sticker shock. The first electric cars are going to go on sale at a time of economic malaise that has cut consumers' willingness to splurge on pricey new cars. Electric cars' high-tech, powerful electronics and compact lithium-ion batteries are expensive. At $41,000, the Chevrolet Volt is about the same size — and shares components with — the new Chevy Cruze gas-engine compact that starts at $16,995. Less-established makers may have to charge even more. Coda, a Santa Monica, Calif., start-up maker has priced its 120-mile-range, compact all-electric car at $44,900.

The prices can be partly offset by federal tax incentives for buying an electric car — for buyers whose income qualifies — which essentially knocks up to $7,500 off the cost. Some states, including California, also offer tax breaks for some buyers.

But that might not be enough to persuade average car buyers to pay more. Nearly two-thirds of U.S. consumers in an online survey by Nielsen said they don't want to pay more for an electric car than they would for a similar gasoline-powered vehicle.

•Unknowns. While gas-electric hybrids have been on the road for about a decade, all-electric cars and plug-ins use complex new hardware and software and much more powerful lithium-ion batteries. As with any new technology — or any new car model of any kind — long-term reliability, cost, performance and resale value can be projected but remain unknown. Consumers tend to be conservative — regardless of automaker promises or warranties — with such a long-term purchase, typically the second-biggest they make.

•Range anxiety. For all-electrics cars, the estimated range before it needs a recharge is an average that varies with weather extremes, traffic conditions and driving style. And while the typical U.S. commute — 40 miles or fewer — should be no problem with current battery technology, longer or unexpected trips can raise "will I get there and back" worry. That concern, and the unsuitability for longer travel, limits the market for an electric-only car that wouldn't meet all vehicle needs.

Buyers 'need convincing'

Given that backdrop, automotive executives and analysts are thrilled that early adopters have shown as much interest as they have in electric cars.

Nissan hit its target of 20,000 potential buyers who have plunked down a $99 deposit for its fully electric $32,780 Leaf, which starts deliveries next month. They are expected to claim all of the automaker's production during its first fiscal year. On a smaller scale, BMW found enough affluent, curious drivers to lease 450 Mini E electric cars in a test on both coasts that started last year.

The challenge will come after early-adopter demand is met. Even though General Motors and others rolled out primitive electric cars in the 1990s — remember The Jetsons-esque Saturn EV-1? — many people profess not to know much about the new generation. Only 58% of those surveyed by GfK Custom Research North America said they know about electric cars and potential benefits. Typical motorists may focus on electric vehicles' shortcomings instead.

"When I talk to people, neighbors and friends, they need a little more convincing," says Rich Steinberg, manager of electric vehicle operations for BMW North America. It "comes back to range anxiety: 'Why would I want a car that would go (only) 100 miles?' "

General Motors is pursuing those gun-shy consumers. Its Chevrolet Volt, also due to begin deliveries next month, differs from other electrics with its onboard generating capacity. The car is a plug-in that can run up to 50 miles on electric power alone with a full charge in its batteries. But unlike its pure electric rivals, Volt has an auxiliary gas engine to generate power for the electric motor so you can keep driving like a conventional car. That's different than today's hybrids, which have limited electric power-only capability and in which the gas engine drives the wheels in combination with the electric motor.

But automakers already are showing there is also a market for pure electrics. Tesla, a start-up based in California's Silicon Valley, has sold about 1,300 of its $109,000 roadsters since they went on sale in 2008. A four-door sedan — cheaper but still premium at about $50,000 — is planned in 2012.

Beyond Leaf and Volt, Ford Motor will have an electric version of its compact Transit Connect van, primarily for commercial use, on sale next month. It will have a range of 80 miles. In 2011, Ford plans an electric version of its Focus compact car.

Toyota has teamed with Tesla to develop and sell an electric version of Toyota's RAV4 crossover in the U.S. in 2012. Chrysler is planning an electric version of the Fiat 500 minicar. Mitsubishi expects to sell its small i-MiEV electric sedan next year.

And new companies and importers — including Fisker, Wheego and Detroit Electric — also have electric vehicles on the way.

The Obama administration has proposed to require that the fuel efficiency of new vehicles rise to an average of 47 to 62 miles per gallon by 2025. The proposal comes only a year after it set federal gas mileage rules that raise the 27.5 mpg average required now to a 35.5 mpg average by 2016.While progress to the 2016 standard can be achieved mostly with smaller, lighter vehicles and smaller, higher-tech engines, hitting the higher numbers would force automakers to turn to electricity.

In the past, automakers had to be dragged "kicking and screaming into building electric cars," says Roland Hwang, transportation program director for the Natural Resources Defense Council, an environmental advocacy group. "Now it's a matter of survival for them."

Baby steps

To get potential customers used to the idea of electric cars, Nissan has launched a 23-city tour to familiarize consumers with the Leaf and to offer test drives.

In Los Angeles, teacher Valarie Payne and lawyer Anton Labrentz were enthusiastic after a spin around the shopping plaza in tony Century City. They are the type of young, affluent urbanites Nissan is targeting with the car. "I was very impressed," says Payne, 28. "It's very cute."

But they say they don't know how they would install a charging unit in the garage of their townhouse. And Labrentz, 31, who drives a BMW, says, "I don't have room for a second car."

Web entrepreneur Ben Goldfarb, by contrast, has a Leaf on order and plans to use it for his 30-mile round-trip commute. He will keep his Lexus for long trips.

Worries? "Being an early adopter, you take some risks," says Goldfarb, 51.

"But the pushback is after (the early adopters), the next group of consumers," says Craig Giffi, U.S. auto practice leader for consultant Deloitte. "You are going to be in that gray zone for a number of years where ... cost (of the vehicle) and relatively short ranges are going to keep people at a distance."

Automakers aren't discouraged. Think, a Finnish electric car company that plans to assemble vehicles for the U.S. in Elkhart, Ind., says there is room for many competitors.

All are feeling their way, though, says Michael Lock, Think's marketing executive for the U.S., "This is the embryonic stage of this industry."

Sunday, November 7, 2010

Holiday Merchandes and Sales coming later than Last Year

USA Today

Last year Santa Claus was fighting the grim reaper for shelf space. Candy corn was in a battle with candy canes. And among all those spooky decorations were Christmas trees sparkling with lights.

By the time Halloween hit in 2009, it was beginning to look a lot like Christmas.

Sales, promotions and ads abounded as early as July as retailers pushed holiday merchandise and so-called "doorbuster" Christmas deals, trying to grab any dollar tight-fisted consumers were willing to spend.

So far this year, there aren't too many icicles and snowflakes.

Christmas merchandise is sparse, if it's there at all, and ads promoting the holidays are slim.

"What retailers really have recognized is last year didn't work at all," says Marshal Cohen, chief industry analyst with The NPD Group. "They went out last year early, but it was just so early that by the time the holidays came around, it was just too stale."

While the strategy seemed like a good one, it didn't propel sales. Last year's holiday sales rose a modest 3.6% over 2008. And looking back, retailers realized it was mid-November before consumers really started spending, Cohen says. During tough economic times, consumers tend to buy closer to the time they need an item.

Take the upcoming holiday season: Sixty-three percent of consumers said they wouldn't start shopping until November, according to the National Retail Federation. Less than 13% said they started before September.

That could signal another tough holiday season. The retail federation is predicting holiday sales will rise 2.3% to $447.1 billion and average consumer spending will see a slight increase from $682 to $689. In 2007, consumers spent more than $780 each.

"Pessimism among Americans about the upcoming Christmas season is off the charts," says Britt Beemer, founder and chief executive officer of America's Research Group.

That means retailers are keeping inventories lean. They won't overbuy, so they won't have leftover merchandise — but they also don't want to run out of merchandise too early in the holiday shopping season.

Before Halloween, a tour of big-name stores such as Walmart and Target in Indianapolis showed no Christmas merchandise and no displays pushing holiday deals. Target says it is following its typical timetable, though some shoppers disagree.

Simon Property Group, the nation's largest mall owner, is putting up its Christmas decorations next week, the same as always, Les Morris said.

Cohen says practically all major retailers had at least some Christmas displays out by Sept. 18 in 2009. Many were pushing the holidays well before then.

Sears is among the few continuing that trend this year, some analysts say.

Like last year, it put up its Christmas Lane at 372 stores right after the July Fourth holiday. It's also leading the way with early promotions, starting its holiday deals this weekend with a DieHard wheeled battery charger for $69.99, regularly $119.99, and a sapphire with diamond ring for $29.99, regularly $99.99.

Other retailers had planned to do some early sales as well but have backed off, Beemer said.

"I sure haven't seen it," he said. "Seems to me they are holding back."

The lack of holiday promotions may be related to the unending flow of election campaign ads that has made it tough for retailers to get ad space.

Guglielmi also said Halloween falling on a Sunday has a lot to do with the lack of holiday ads so far this year because most merchandise sales run Sunday to Sunday.

"While it may vary slightly by store, you will see the holiday merchandise and in-store signage in stores next week," spokeswoman Tara Schlosser said. "We are setting the merchandise on a schedule consistent with previous years."

Janice Schafer disagrees. As she shopped Wednesday at the SuperTarget in Fishers, Ind., she said she was sure some holiday goods were out in October last year.

"I swear I bought Christmas ornaments before Halloween here last year," Schafer said. "I was here today looking for a wreath for my front door. Guess I'm out of luck."

Saturday, November 6, 2010

Brewers reap Rewards despite less Drinking


Anheuser-Busch InBev NV and smaller rival Molson Coors Brewing Co reaped higher third-quarter profits from the U.S. beer market they dominate, even as consumers drank less beer.

Price increases, cost savings and sales of premium brands were the key in North America for AB InBev, the world's largest brewer, and MillerCoors, the combined U.S. operations of world No. 2 brewer SABMiller Plc and No. 6 Molson Coors.

AB InBev -- maker of Budweiser, Stella Artois and Beck's with almost half the U.S. beer market -- said overall core profit rose 9.1 percent, slightly short of expectations, with a 9.6 percent improvement in North America and a 6.4 percent drop in Europe.

Molson, whose brands include Coors Light, Blue Moon and Molson Canadian, reported third-quarter earnings higher than market expectations, driven by profit improvements in its key markets of Canada, the United States and Britain.

AB InBev shares fell 3.2 percent in Brussels, while Molson shares rose 4.3 percent in New York.

AB InBev sold 4.1 percent more beer globally in the July-September period than a year earlier, driven by a 12 percent surge in key market Brazil, but suffered declining volumes in North America and Europe.

Molson, which lacks large businesses in emerging markets, saw overall volume decline 4 percent in the quarter.

"You're not going to get growth in developed markets," said Morningstar analyst Philip Gorham. "These major brewers that want to grow their top line have to be in emerging markets ... Emerging markets are driving growth in almost every consumer staples industry."

Gorham said that a key driver for Molson's surprising profit performance was cost cuts related to the 2008 formation of MillerCoors, which is expected to achieve $750 million of cost savings by the end of 2012. The total stood at $564 million by the end of September.

AB InBev, formed in November 2008 from InBev's takeover of Anheuser-Busch, has set a target of $2.25 billion of cost savings by the end of 2011.

Chief Financial Officer Felipe Dutra said AB InBev is likely to exceed its $500 million target for this year but has no plans to raise the overall target.


U.S. consumers broadly embraced lower-priced beers during the recession, but have recently been trading up, executives from both companies said on Wednesday.

Dutra said AB InBev's top-end beers were even winning over some wine and spirits drinkers, although stubbornly high unemployment had led to lower overall volumes.

In the key 21-27 age group, the jobless rate, at 18 percent, was almost double the U.S. national average, something the company was watching closely, Dutra said.

"The overhang on our category continues to be unemployment of our key beer drinker," said MillerCoors Chief Executive Leo Kiely. "That's got to turn around before we see the whole category become more buoyant."

Still Kiely said he is encouraged by sales trends of the company's "premium light" beers, such as Coors Light and Miller Light.

Earlier this year, Molson bought a stake in a joint venture with a Chinese brewer and entered Vietnam and Russia.

Chief Executive Peter Swinburn said Molson is learning from these moves and should now be able to make new forays at a faster clip.

"We're in a position, both from a knowledge base and a financial base, that we can now accelerate to a much greater extent our market entries," Swinburn said in an interview.

"But are we going to spend $4 billion or $5 billion on buying a business in India? Absolutely not, because we don't have that expertise yet and I think it would be too risky a use of shareholder money."

Molson raised its 2010 free cash flow target to $900 million from $760 million, due to timing issues.

It also said that during the first month of the current fourth quarter, sales to retailers rose at a low-single-digit rate in Canada and slightly in the United States. Sales fell at a mid-single-digit rate in Britain.

AB InBev sounded an upbeat note on the months ahead, with core profit growth set to be "materially" better than in the third quarter because it spent heavily at the end of last year on U.S. product launches, a cost it would not be repeating.

Friday, November 5, 2010

Delta Attendants' Union Rejection May Be Voided by U.S.


Delta Air Lines Inc. flight attendants’ vote to reject union representation may be nullified by a U.S. labor board controlled by Obama administration appointees, according to a senator and an analyst.

The National Mediation Board, which in August ordered a new election for technicians who work on simulators for Delta, will take similar action after reviewing flight-attendant allegations of company interference in balloting, said Ray Neidl, an analyst at Maxim Group LLC in New York. “The deck is stacked in the union’s favor,” he said in an interview.

Democratic appointees of President Barack Obama gained a majority on the three-member board last year, and in May eased rules for organizing elections in the airline industry. Given that stance, the panel will probably order a revote by flight attendants, said Senator Johnny Isakson, a Georgia Republican.

“Nothing tells me they won’t do that,” Isakson said in an interview. “To come around and revote again, it’s a lack of respect for the employees.”

Nullifying the vote results announced Nov. 3 would present a new challenge to the position of Atlanta-based Delta as the least-unionized major U.S. carrier. The flight attendants rejected union representation with 51 percent of the 18,760 votes cast against organizing.

A mediation board spokesman didn’t return a telephone call for comment. The board referees relations between labor and management at railroad and airline companies under the 1926 Railway Labor Act.

Claims ‘Ridiculous’

A spokeswoman for Delta, the world’s second largest airline after United Continental Holdings Inc., declined to comment on what the board may do. “Claims of interference are ridiculous,” said Gina Laughlin, the spokeswoman.

The union plans to file interference charges by a Nov. 12 deadline, or seek an extension if the organization needs more time, said Pat Friend, president of the Association of Flight Attendants. Union leaders are discussing whether to seek a revote or a recount, in which votes cast via company computers would be disqualified, possibly changing the outcome, she said.

The computer ballots may have allowed the company to track whether employees voted, a violation of their privacy, Friend said. “We expect that this board will in fact investigate,” she said. “I believe they will ultimately agree with us that there was egregious interference.”

Laughlin of the airline said, “Delta did not track anyone’s votes.”

Previous Efforts

Harry Hoglander, a former pilot-union official who became the mediation board’s chairman in July, twice sided with the flight attendants’ union when it brought interference charges following losses seeking to organize at Delta in 2002 and 2008. In the first case he called for a new election and in the second urged additional investigation.

Hoglander was overruled both times by the board’s Republican majority. He declined to comment on the Delta allegations.

Obama gave the board a Democratic majority by adding former flight-attendant union President Linda Puchala, who replaced a former lobbyist for Northwest Airlines.

The Democratic-controlled board found in August that Delta tainted the organizing election for 91 flight-simulator technicians by announcing a pay increase and holding “coercive” one-on-one meetings. The board ordered a revote.

The workers in February had rejected representation by the International Association of Machinists, with 40 voting in favor. In the revote, the union lost support, with 18 voting for representation, Delta announced Sept. 16.

Republican Opposition

Hoglander and Puchala also made a change that lets employees form a union with majority approval from those who vote, rather than most of all workers in a class. Unreturned ballots are no longer counted as “no” votes. The change was made over protests from the panel’s sole Republican, Elizabeth Dougherty, a former White House special assistant.

The board’s political bent that began with the George W. Bush administration “is here to stay,” said Kate Bronfenbrenner, a labor professor at Cornell University in Ithaca, New York. “This board is clearly very divided.”

The board made a political decision in 2008 when it found no basis to further investigate Delta flight-attendant allegations, contrary to evidence, Bronfenbrenner said. In the upcoming case she said she the board will follow the law.

Given the board’s May action to change voting rules, it will be watched carefully as to how it handles the flight- attendant protest, said William Swelbar, a research engineer specializing in air transport at the Massachusetts Institute of Technology in Cambridge.

“I see this board as having to tread very lightly,” Swelbar said. “There’s a lot of credibility to win or lose.”

Neidl said a revote probably will produce the same result, a defeat for the union organizers. “Delta is a strong entity,” he said. “They can survive nicely with or without a union.”

Republican Election Gains May Stall Business’s Immigration Push


Intel Corp., Hilton Worldwide Inc. and other companies seeking a larger number of legal foreign workers through changes to immigration law likely will find their push thwarted by the Republicans’ sweeping election gains.

Lawmakers who will lead the debate in the new Republican- controlled U.S. House say they want to focus on securing the border and cracking down on illegal immigration, rather than other matters. Only after it is shown that fewer illegal immigrants are coming across the U.S.-Mexico border will they consider the revisions to immigration law sought by businesses, they say.

Representative Steve King, an Iowa Republican slated to head the House Judiciary Committee’s immigration policy subcommittee, said in an interview that he opposes lifting visa caps for lower-skilled foreign workers because doing so would depress U.S. workers’ wages. He said he would support increasing the number of visas for higher-skilled workers only if the potential employees meet criteria to boost the U.S. economy.

That means they should be young, well-educated and be able to speak English, King said. “That’s the indicator of whether they can assimilate into the broader society,” he said.

The business agenda calls for increases in worker visas for skilled and unskilled labor, along with more employment-based “green cards” -- proof of permanent residency in the U.S.

Political Change

Corporate officials and lobbyists must deal with midterm election results, in which the Republicans have won a majority of seats in the House, according to network projections.

“We’re as anxious as anyone else to see how it shakes out and whether this will be on the agenda next year,” said Peter Muller, director of government relations at Intel Corp.

Technology companies such as EBay Inc. and Cognizant Technology Solutions Corp. want Congress to lift the cap on H-1B visas for skilled workers. Since the start of the 2004 fiscal year, when a three-year temporary increase in the cap to 195,000 expired, the annual limit has been at 65,000. In fiscal 2010, the cap was reached in nine months.

Companies also want to lift the limit on employment-based green cards, now set at 140,000.

At Intel, about 6.5 percent of the company’s 40,000 U.S.- based employees hold temporary visas granted foreign workers, and the company helps those workers apply immediately to get green cards. “We want to keep them ideally for their entire career,” Muller said.

Still, the wait often is eight to 10 years, causing uncertainty both for the workers and for their employers.

Lower-Skilled Workers

The agenda for restaurant and hotel industries is focused on seasonal, lower-skilled workers. Jonas Neihardt, a lobbyist for McLean, Virginia-based Hilton, is pushing for a simpler system to verify the legal status of workers and a boost in the number of H-2B visas for non-farm seasonal employees, now capped at 66,000. Neihardt is urging that changes be made before the economy improves.

“We’re anticipating when things get better we’ll need more of those types of workers,” he said.

Senate Democrats in April outlined a rewrite of immigration law that, along with proposing a crackdown on drug trafficking and illegal immigration at the U.S.-Mexico border, sought changes that included a pathway to permanent legal residency for some of the estimated 11 million undocumented people in the U.S. It also called for a new three-year visa for temporary, low- skilled workers with an annual limit that adjusts with the economy, as well as immediate green cards for foreign students who get advanced degrees in engineering or math from a U.S. university.

The effort was hamstrung when Senator Lindsey Graham, a South Carolina Republican, stopped working with Democrats on a compromise, urging them to wait until 2011.

Latino Vote

Corporations are holding out hope that the importance of the Latino vote in the 2012 presidential elections will cause congressional Republican leaders to support a broad bill next year.

“It will be an uphill battle, but it could be that the Republicans would see that it’s to their advantage to get this issue behind them,” said Randy Johnson, vice president for labor policy at the U.S. Chamber of Commerce.

That hope belies the views of some of the Republicans ascending to power.

In the House, King is in line to replace Representative Zoe Lofgren as immigration subcommittee chairman. Lofgren, a California Democrat and one-time immigration lawyer, supports the comprehensive approach to rewriting policy.

King, 61, said he favors a piecemeal approach, with the initial spotlight on border security. He also wants to help draft legislation that would revoke birthright U.S. citizenship for so-called anchor babies of illegal immigrants.

Business Deductions

His priorities for business include a measure that would boost taxes on employers found by the Internal Revenue Service to have hired illegal immigrants. Those companies wouldn’t be able to treat the illegal workers’ wages and benefits as a deductible business expense, and they would also pay a penalty.

“It takes a $10-an-hour illegal and turns them into a $16- an-hour illegal,” King said.

Representative Lamar Smith, a Texas Republican expected to become chairman of the Judiciary Committee, said in an interview that while he would favor holding hearings about foreign worker visas and other immigration issues, next year he wants to draft legislation dealing only with border security.

“I’m still of the mind we have to secure the border first,” he said in an interview.

In 2007 Senator Jon Kyl of Arizona, the chamber’s No. 2 Republican, worked with Democrats on a comprehensive immigration bill that failed. He said in an interview that he won’t support anything beyond border security until the fight against illegal immigration improves in parts of his state.

“There has to be more of an effort to actually secure the border -- not just to spend money, not just to say we have more resources than ever before,” he said.

Kyl also said companies must realize that the recession -- which became the nation’s worst since the Great Depression -- changed the immigration debate.

He said labor unions are more opposed to expanding the pool of foreign labor now than before. “The temporary-worker program has gone backwards in terms of a consensus,” Kyl said.