CONSUMER STRATEGIES REPORT March 25 2003

al berrios & co. CONSUMER STRATEGIES REPORT 03.25.03: We made heroes of "Neutron" Jack and "Chainsaw" Al

>> "Why would you trust a guy named Grubman?" - Jeffrey Rudman, Chair, Corporate and Securities Litigation Group, Hale & Dorr discussing corporate governance

As we enter Q2, al berrios & co. is in the final stages of transformation. Next week, we will officially relaunch this publication with a new name, subscription focus, and reorganized information. (Yes, it's still free and without ads.) Although much of this is already live (in beta), it won't be official until next week. Please feel free to offer your opinions.

On April 16th, between 4-5pm, I will be a lecturer in "Great Marketing Minds - Lessons in Marketing Excellence, One Interview at a Time" hosted by our friends at Jane Tabachnick eMarketing. This series is a way to improve your understanding of issues relevant to today's small enterprise. Please check out more at http://www.greatmarketingminds.com.

Today's REPORT is slightly more personal and readable than usual, as we cover Hip Hop, new survey stats on price discounting, media bias during times of war, and corporate governance recommendations.

With the success Eminem, there has been debate amongst serious Hip Hop community members whether or not his success is attributable to his skin color. I say yes. It's the same with Yao. It's the same with Tiger. They're popular not just because of their amazing skills, but because they don't fit the typical artist or athlete mold. They are fresh and unique, and that's what consumers purchase. An unexpected consequence of the penetration of Hip Hop into mainstream culture has resulted in higher education institutions from Harvard to University of California at Berkeley offering students the opportunity to learn about Hip Hop and how to become Hip Hop turntablists. Hip Hop and DJ'ing, it appears, is now the cool things to do, whether you're white or black, urban or suburban. Ultimately, race has nothing to do with understanding and living the lifestyle of Hip Hop.

BOTTOM LINE: With the proliferation of better technology and MP3s, it is now easier for young consumers to create their own mini-studios in their homes. The cost of music, whether to create it or own it, has fundamentally affected the way an entire generation of consumers values music. (Let's not forget, DJs get records for free.) Yes, music is important, but if anyone can do it or own it for free, is it right to continue to assume consumers will forever pay for it? Hip Hop, because of its popularity and ability to be enjoyed by any culture or lifestyle, is the genre and lifestyle that will put an end to the music business as we knew it. New genres that evolve will evolve from Hip Hop. Artists that demonstrate superior talent will continue to be treated like royalty, with few making substantial riches from performances and brand extensions into restaurants, fashion, movies, television, publications, and foods. As the culture continues to grow, The Source and XXL will no longer be the only "watchdogs" (in fact, there current feuding is leaving their duopoly practically free for competitors) as new publications start-up to reach new audiences for new artists and advertisers (i.e. HipHopDX.com). Is this an audience you should be reaching? Coca-cola believes it is ("Real" campaign). Lugz (urban footwear company) believes it is ("FMF-1 Funkmaster Flex driving shoe campaign). The Army believes it is, too.

Consumers love coupons, but only 2.94% use coupons frequently, as opposed to 41.48% that never use, according to a recent survey by Diana Dang for al berrios & co. Based on our analysis, retailers don't have to price below a competitor to win consumers over, as long as there is perceived value. Consumers are also more likely to abandon a sale if they perceive even the slightest inequality (i.e. entering a code online at checkout or shopping club discounts that aren't applicable without being a member). In fact, because 68% of survey respondents are members in frequent shopper clubs, this leads us to believe that consumer behavior has clearly been altered in two ways: consumers find it more convenient to belong to a discounting program if it'll save them time and consumers alter their spending habits with future knowledge of discounts. Without being able to accurately forecast demand, how can retailers leverage strategic price discounting to improve sales and margins?

BOTTOM LINE: Dynamic price discounting at checkout is the golden goose, but first, you have to convert that consumer into your customer. Then simply understanding a customer's historic shopping patterns is no guarantee that you'll understand what drives their individual demand and at what price. (i.e. does over-discounting name brands permanently damage brand value?). There's no question that the probability customers will buy increases when you leverage historic data, however, consumer behavior has been altered to perceive discounts to be better than revised pricing. Therefore in order to retain customers with your discounting, while not destroying your margins, it is important to: 1) strategically increase certain prices, while offering discounts to all your customers; 2) not make discounts allowable only via coupons, but rather automatically at checkout; 3) make consumers aware of your discounting, but with a clear deadline; 4) merchandise discounted items with non-discounted items that are alternatives or complimentary to the discounted items, because even if a customer doesn't purchase these other items at checkout, you have made them aware of the price, which you can discount later and give them a clearer sense of comparison.

I overheard my mother reassuring her friend over the telephone that war helps the economy and that it will end the recession. My mom isn't an economist or politician. She's a very traditional Latina with roots still in her home country with deeply religious beliefs. Her friend is similar, yet tells my mom she's about to leave to stock up on groceries because she's afraid of difficult times post-war. With a confidence typical of my mom, though, she claims her son told her not to worry and that once war ends, things will start to improve. My sister tells me most of her acquaintances apparently have historical facts reversed, where WW2 preceded the Great Depression, leading many to believe war is bad, too. How could so many of us have the economy and our own life prospects so poorly understood? During prior wars, the U.S. set up offices to censor and manipulate media in efforts to rally the country against the enemy. Ads ran to clearly define an enemy and their atrocities, turning ordinary civilians into raging warmongers. These offices, The Office of Censorship, The Committee on Public Information, and The Office of War Information, blatantly limited dissent and brainwashed an ignorant public into believing anything they wanted them to believe. Today, the position of Undersecretary of State for Public Diplomacy (formerly held by former Ogilvy & Mather executive Charlotte Beers) shapes the U.S.'s image abroad with tactics like developing broadcast capabilities through which to channel pro-U.S. policy programming while the Assistant Secretary of Defense for Public Affairs for the Pentagon (currently held by Victoria Clarke) shapes U.S.'s image domestically by embedding hundreds of U.S. journalists in our armies so "our side" of the story can be told. In this age of information transparency, information can still be manipulated by hiding it plain site, and it appears that it is working, as Ms. Clarke clamps down on operational information and negative publicity with extreme prejudice and consumers are overloaded on information from ratings hungry news outlets, leading many to not fully understand how war impacts their lives and future.

BOTTOM LINE: As we reported in our coverage of the future of news content, entertainment sells more than information. That being the case, if news media are to recoup their vast investments in war reporting, they must report news that is entertaining (and almost exclusively ominous, unless America is "victorious"), while simultaneously adhere to strict government policies on war-time reporting (a.k.a. censorship). Our Media Influence Model supposes that media is objective and consumers have unlimited choices in where they seek content. However, when media is manipulated and considers the bottom line over their audience, the results are an ignorant public. In a consumer analysis conducted by al berrios & co. last week of consumer sentiments towards the war in Iraq, we discovered that 47.01% were pro-war and 28.18% were anti-war. Pro-war Americans predictably increased in following surveys conducted by news media. But what we found interesting is that 18.40% had no comment and 6.41% were neutral, indicative that perhaps these consumers were unable to decide due to lack or overabundance of information. These consumers, like my mom's and sister's friends, need guidance, reassurance, and confidence that they can behave typically. This guidance comes from their favorite brands. And this is why professionals advise marketers to continue advertising during downturns.

Sarbanes-Oxley changed the way companies operate. They are now required by law to disclose everything they do. Soon, they'll even be required to post the minutes of their board meetings on their websites. It's all in an effort to prevent more Enrons. Although last week's HealthSouth scandal is further evidence that this sort of regulation is necessary for the benefit of the small investor, many don't like it. But what you probably aren't aware of is what it all is, what it all means, how it impacts your business, and what you should do about it.

BOTTOM LINE: 1) Making your business transparent to investors is critical. Public relations consultants have known this for years, but executives never felt it necessary because their company's stock performance was typically tied to their compensation and negative perceptions about their performance couldn't be controlled. Corporations live and die by the perception of their investors, regardless of actual performance, hence the resistance. 2) Being CEO once meant being tough. Our culture made heroes of executives with nicknames like "Neutron" Jack and "Chainsaw" Al, because they got the job done. But no longer is getting the job necessary at the expense of the small investor (including the employee). Now it's supposedly about being "cuddly", approachable, and flexible, compromising his/her management style for the benefit of the millions of constituents, including consumers. They can no longer pad their boards with friends and relatives, even though this is the best approach to getting advice you trust. This is corporate governance, and it is now a top priority for many executives and if it's not, they suffer by losing their jobs. Arthur Levitt said: "There's no room for a director whose only qualification is that he sends his children to the same private school as the CEO…" at a corporate governance lecture I attended last week. No, you don't need personality consultations to become warm and fuzzy. But clear, prudent and transparent communications to all your constituents is critical to achieving your goals successfully. 3) There's no clear empirical evidence that an emphasis on corporate governance attracts investors. In fact, the opposite has been shown: studies show that stock performance still generally depends on perception, with a premium on perceived good corporate governance and that the best boards, according to corporate grading systems, are typically those like Enron's. So if perception is good enough, why bother? Is good corporate governance the latest fad? And how much time should you spend with governance, when you still have a business to run? A key takeaway from the discussion I attended last week on corporate governance is that good corporate governance is a cultural phenomenon. It can't be put in place with regulation. It's the tone set by the CEO. If he's shady, the company will be, too. "What made my store succeed when I was working at one of these brands was a sense of collegiality between shift workers. And this started at the store manager level. If he cared, we all cared". 4) Good corporate governance is not about improving your stock price, but rather, serving your constituents, which ultimately does improve your company's performance. Serving your constituents is a matter of trust and quality and when you have those, your competition will suffer. 5) Corporate governance isn't a fad, but a combination of all of the things you should be doing to attain this trust and quality in your operations. Therefore, the amount of time you should be spending on it shouldn't be additional. You're in "the business of business", and that automatically includes corporate governance.

[6] EVENT REPORT: The New Disclosure Paradigm: And the Promise of Web-Based Communications

Hosted by CCBN, a press-release distributor, two panels and a keynote were featured at the Helmsley Park Lane. The speakers were excellent, the venue, tacky and uncomfortable. Although elegant in a time long ago, there was too much visual stimulation, creating in me a sense of anxiety and stress. The speakers were Hal Shear, President, Chicago Chapter, NACD, Lou Tompson, President, NIRI, David Smith, President, ASCS, Margaret M. Foran, VP, Corporate Governance, Pfizer, Jeffrey Rudman, Chair, Corporate and Securities Litigation Group, Hale & Dorr, Steven Schulman, Attorney, Milberg Weiss, and keynote, Arthur Levitt, former SEC Chairman. The discussion and take away are outlined above in MANAGEMENT section.

Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

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