Month / April 2019

by Frank Maduri

Viva France: Amazon & Casino Group Announce Partnership

Amazon took a significant step in growing their foothold in the grocery market in France by announcing a partnership with Casino Group on Tuesday. The strategic deal will integrate Amazon pickup lockers into Casino owned grocery store locations. This will allow for customers to order products on Amazon and then pickup in the store.

Amazon will also start carrying more of the grocery products carried by Casino and their stable of grocery store chains. The agreement will also allow for Amazon to expand their Prime Now grocery delivery service, which they began with Monoprix (Casino Group’s grocery store chain which is comparable to a French version of Whole Foods) in Paris with great success. The delivery service will expand beyond Paris into surrounding areas in the next twelve months.

The Casino Group is currently in the middle of a cost cutting scenario which has fueled speculation that the chain might be poised for a consolidation with Amazon. These types of business deals could potentially lay the groundwork for that type of scenario to take place. The company is one of the largest retailers in France with grocery stores under the names: Hyper Casino, Casino Supermarche, Leader Price, Vival, Monop, Monoprix, and Spar among others.

The retail grocery business in France is the third largest market in the E.U. behind the United Kingdom and Germany. However, Amazon has a very small share of the overall market in France with some estimates around 17% of the retail grocery channel business.

Amazon has made the strategic business direction of entry into the grocery channel a priority. A recent post on this site detailed the online retail giant’s decision to launch brick and mortar grocery stores besides Whole Foods, to compete with the mainstream retail grocery players in key cities as a test market for the concept.

Amazon could be making a play here for Casino Group to enter the French grocery market more aggressively. That would certainly have an impact on that business and would benefit the consumer with lower costs on many products because the other players would have to compete with Amazon on price.

Amazon is currently the dominant ecommerce player in France and this agreement with Casino Group will strengthen that position for them and allow for some new conveniences in the shopping experience for the French consumer. The Casino Group, in their press release, indicated that the partnership will allow them to reach a wider demographic of customers as well as provide customers with an enhanced service.

This partnership, if proven successful, could be a harbinger of things to come with Amazon potentially looking into similar agreements with major grocery retailers in Germany and the UK in the months ahead.

It will remain to be seen if Amazon does present a formal bid to purchase Casino Group, and how that scenario would be perceived by the French government regulatory personnel and the public at large.

In my view, it could be seen as another disconcerting way that Amazon is growing to have too much control over many areas of industry. It is getting to the point that it could be very problematic for several key areas of industry throughout the world if Amazon failed at some point. That should give society some cause for seeking a pause on some of their growth activity.

They do provide the consumer with a great service, and they are efficient at what they do in the ecommerce area, but they are pushing their influence into everything and that should at least cause us to start to question where this will all eventually lead, and the possible ramifications of a single company growing to that level of influence.

(Some background information and statistical data provided by CNBC, Yahoo! Finance, and Reuters)

by Frank Maduri

Follow Up: CBS – Viacom Merger Talks Intensify Again

This follow up piece seems like a recurring dream, something you remember doing and then find yourself doing again, the CBS-Viacom merger talks are back in full swing. The earlier work on this site about the merger focused on a variety of angles: the business implications of the deal, the consumer impact of the deal, the changes in the media industry, the inner workings of the CBS feud with National Amusements, the power struggle at the top of the company, and finally the potential for CBS to be purchased by a tech company.

This piece will look at the current situation as well as why some of those other aspects did not ultimately come to fruition. The power struggle and the resistance of CBS from being merged with Viacom has shifted since Les Moonves was dismissed as CEO last Fall after sexual misconduct allegations mounted against him.

The business landscape has changed as well with Disney obtaining the 21st Century Fox subsidiary units and movie studio, and AT&T merging with Time Warner to create Warner Media. These maneuvers have certainly put some pressure on Shari Redstone and National Amusements to determine how CBS is going to stay competitive in an ever-changing media dynamic.

Furthermore, the situation at CBS has changed since the talks began a few years ago, where the network side of the business was home to huge ratings hit shows. The viewership has moved away from network broadcast programs to the streaming and premium cable channels. This has seen series from Netflix, Amazon, and other streaming providers take ratings share away from the “Big Four”.

In addition, the hit series from HBO such as “Game of Thrones”, Epix, Starz, Showtime, and other premium networks all have produced original content that have siphoned viewership away from the networks, and with that goes a portion of the advertising revenue.

It is not like CBS does not have series programs that capture viewers. However if you look at the ratings for the 2018-19 television season, CBS series have performed at a downward trend. The following data supports that and is most definitely driving CBS and Viacom back to the negotiating table:
“Big Bang Theory” 18 to 49-year-old demographic down 17% year-over-year and down 8.2% of viewers overall.
“Young Sheldon” 18 to 49-year-old demographic down 21.7% year-over-year and down 11.3% of viewers overall.
“NCIS” 18 to 49-year-old demographic down 11.1% year over-year and down 6.6% overall viewers.
“Mom” 18 to 49 -year-old demographic down 15.2% year-over-year and down 7.7% of overall viewers.
That is alarming when the top four shows on the network are down in the coveted 18 to 49 and overall metrics. The network has other shows in the top ten shows of their lineup including “NCIS : Los Angeles” and “Man With A Plan” that are also down significantly in both categories.

The other issue is that aside from “Big Bang Theory”, which is in its final season, all of the other series mentioned have been renewed for next season. The network introduced just eight new series this TV season so far, and most of those concepts are cancelled already. The reality is that CBS has had a great run at the top of the ratings book for a while, but they need fresh new concepts. The whole lineup needs to be revamped.

The business is changing and they have to adapt with that in order to stay relevant. The network has also been struck with a stretch of bad luck. The Super Bowl this past February was the lowest scoring championship game in history, and viewers checked out of it, so ratings were down for the biggest television event of the year.

The network also has the rights to the NCAA men’s basketball championship and those ratings were down because the two teams in the championship (Virginia and Texas Tech) were not a ratings draw for the average viewer.

The internal politics of the dynamics there, which has been covered previously on this site, adds another layer of turmoil. The parent company of both CBS and Viacom is National Amusements International (NAI). The dismissal of Moonves means that CBS needs to appoint a new CEO, these new negotiations over the Viacom merger will hold up that process.

The speculation is that the merged CBS and Viacom would most likely be run by Bob Bakish, who currently runs Viacom because he has a close relationship with Shari Redstone who runs NAI in place of her father who is ill and not in the picture. The combined company would either continue to grow using the content and synergies between the two entertainment entities, or they could fetch interest by a larger investor who could buy the whole combined company.

In prior coverage of this topic, CBS was reluctant to merge with Viacom because they were hopeful that a larger “new media” company would purchase them from NAI. They even had a window negotiated to get that type of deal done. In my view, I had speculated that CBS would be purchased by Verizon to propel their expansion into the content that every media company is looking to capture.

There were others who speculated that Amazon would purchase CBS because of their existing business relationship/partnership for streaming of certain content on Amazon Prime Video. That also did not materialize. The fact is that the “new media” or tech companies are focusing on developing their own content and they are not interested in purchasing the assets of another company.

It is similar to football and getting a quarterback, most teams do not want to acquire another team’s guy that has already been in another system, the team would rather draft their own guy and build them up from the foundation according to the principles and techniques that they coach as an organization. The tech companies do not want someone else’s productions, they want to build up their own productions.

It is in this light that the jump-started negotiations between CBS and Viacom should be viewed. The reality is that CBS would have been purchased already if a potential buyer was interested. The combined unit would bolster the content holdings of the company as a single entity with much more cable television content from BET, MTV, CMT, Comedy Central, Nickelodeon, among others.

The reality is that while this merger might not be the ideal one for either side because of all of the history and the bad blood between the two companies (made complicated by the fact that they are both underneath the same parent company in NAI) it is the only deal on the table right now. Both entities are heading toward a scenario where they will not survive as separate units.

The impact for the consumer if the two companies should merge could go either way because CBS/Viacom could potentially negotiate better deals with advertisers and for cable rights carriage fees which could lower the cost of some cable or satellite packages.

However, it could go the opposite direction and the combined entity could decide to park streaming content into CBS All Access, which is a subscription based streaming application and they could hike up the membership fee. The combined CBS/Viacom could also create their own apps for each network or put them all on a combined stand-alone streaming application for the Viacom properties and then charge a membership fee for that content.

In the end, the next few weeks to the next couple of months could yield some big news in the media industry. The board members opposed to this deal have been removed, these negotiations seemed poised for a completed merger between two companies with a deep history of resentment. The dust will settle and then we will know whether this combined company will help or hinder the average viewer. We will also know whether this merger will have limited or significant impact on the industry overall.

Stats, some background information courtesy of Fox News, TV Series Finale.com, Nielsen)

by Frank Maduri

Follow Up: CVS Merger With Aetna Under Scrutiny

The recent developments with the Federal court system and Judge Richard Leon have the potential to rollback the $70 billion merger of CVS with Aetna. In other posts on this site, this merger has been detailed from the beginning.

The renewed scrutiny from Judge Leon centers on the condition of the sale went it was originally approved which states that Aetna would be required to sell Medicare prescription drug plans that they currently administer. That was the deal made with the anti-trust regulatory bodies involved in this blockbuster merger.

The hearing is set for Thursday, when Judge Leon plans to hear testimony from various entities including representatives of the American Medical Association (AMA), who are opposed to the merger. Judge Leon is attempting to determine whether the sale of Aetna to CVS is within the public interest.

CVS is a large retail pharmacy chain and healthcare provider that also manufactures their own product lines. Aetna is a huge health insurance company with a Pharmacy Benefit Manager (PBM) arm as well. The deal from the beginning has struck some in the general public as a conflict of interest.

Earlier this week, another prominent judge called the potential for the CVS-Aetna deal to be reversed “catastrophic” to the industry. The merger is seen as lifeline of sorts for both companies amid a changing healthcare landscape that Amazon has shifted already and is looking to tilt completely in the coming years.

The move is seen as necessary to bring a stream of steady foot traffic through the CVS retail stores which they will need to compete with Amazon. This will be achieved by funneling those with Aetna health insurance coverage to have their prescriptions filled by CVS.

In an earlier piece, I detailed the potential pitfalls to that approach and I maintain that it is unfair to limit the choice of a consumer especially with healthcare related products that might put them into a scenario that is very inconvenient for them or a family member that is covered under their policy.

The proponents of this deal moving ahead will point to the recent struggles of Walgreens and their revised earnings adjustments as well as their recent adjustments to their overall annual forecast, which was revised down due to a decrease in customer traffic through the brick and mortar locations primarily. The industry media folks and the financial analyst types were speculating that Walgreens has to do something, they have to make a move to essentially “lock in” a customer base for prescriptions similar to the Aetna – CVS agreement.

The detractors will state that the insurance providers for healthcare should not be mingled with the retail pharmacy giants because of the changes it will bring to consumer choice, potentially to pricing of medications, and a host of other concerns. They would also maintain that Walgreens would be met with resistance if they tried a similar path to CVS.

It also should be noted that Walgreens expended time, energy, and money on a long-term pursuit of merging with Rite Aid, which met with so much push back that it was eventually disbanded by Walgreens. Then, Walgreens spent money to obtain many Rite Aid locations and transition them to the Walgreens brand in order to strategically grow their presence in certain markets.

The speculation will continue around United Health Care (UHC) being one of the last major health insurance players left that could become a partner for Walgreens, though it is difficult to see that they would sink money into a merger proposal until they have the precedent of the CVS-Aetna deal to utilize to their advantage.

The implications for this hearing today and the decision that rests with Judge Leon will have far-reaching consequences in either way he decides to proceed. The approval of the merger with the conditions would set CVS up to grow their customer base and could give Walgreens the proof it needs to move forward in a new direction of their own, given their current situation.

The deal could be scuttled which would send shockwaves through the industry and potentially give Amazon an advantage for entry into the market. It will be fascinating, so stay tuned.

(some background information courtesy of Reuters, Barron’s, and Fox Business)

by Frank Maduri

Kellogg Sells Cookie Brands To Ferrero

The news on Tuesday that Kellogg has an agreement to sell several brands to confection maker Ferrero, came as no surprise to many in the food industry. The iconic cereal maker had been working for months to sell the cookie brands of their business to a willing buyer. The total amount of the transaction is reported in several sources as $1.3 billion.

Ferrero will obtain Keebler, Famous Amos, Murray’s, and some other smaller brands from Kellogg. This will allow Kellogg to focus more specifically on their core business focus of breakfast cereal and snacks. They want to create a niche in both of those industry segments, that quite frankly, they could not achieve in the cookie segment of the business.

The cookie business is very competitive with Nabisco leading the pack with some top selling brands. Kellogg executives determined that the cookie brands were not a good fit for their overall business model. I have food industry background, and personally I did not understand why Kellogg purchased Keebler, Famous Amos, Murray’s, and other brands to get into that business. In my view, it never made sense that they would enter such a competitive landscape and it seemed to distract their marketing focus away from cereals and salty snacks. Those two areas have been segments of the business where the company has done very well.

Kellogg, according to a report by CNN, reportedly had $900 million in sales from their cookie brands in 2018 but that yielded just $75 million in operating profit. That demonstrates the challenges of being in that industry segment and the overhead costs involved from packaging, production, and marketing costs.

Conversely, Kellogg has had success since it acquired the Pringles snack brand from P&G. The iconic potato chip brand was a lower-performing brand that was a bit of an afterthought at P&G. The attention that Kellogg provided has turned into a powerhouse brand that has helped drive profits.

The Pringles brand along with Cheez-It, Pop Tarts, and Rice Krispie Treats are called the “power brands” by the CEO of Kellogg. This is where they will bring some very specific marketing and advertising techniques into greater intensity now that the cookie business is not siphoning off dollars.

Ferrero completed this deal so that they can gain a better foothold into the North American market. The foreign confectioner specializes in Tic Tac, Nutella, and Ferrero Rocher among other smaller brands. They took an opportunity to obtain some nostalgic brands that truly represent a slice of Americana with Keebler and the Keebler elves baking up “magic” in the oven in the iconic tree.

Famous Amos has been highly visible in parts of America for decades for their signature chocolate chip cookies. The move to Ferrero could potentially increase their entry into the convenience store chains along with Tic Tac and some other confectionary products. Ferrero most certainly has some strategic plans for the brand to make it more visible in different channels.

Ferrero will also gain the agreement to manufacture the ubiquitous Girl Scout Cookies, which are currently made by a subsidiary bakery within the Keebler business structure. That piece of business could be significant for Ferrero in an increasingly competitive cookie market.

Kellogg will shift their focus back to another core business area: breakfast cereal. The sales of cereal have been sluggish overall, but the company maintains that by exiting the cookie business they can bring some new emphasis and innovations to the cereal aisle.

Some people might have a problem with a foreign based company holding the rights to some quintessentially American brands such as Keebler, Famous Amos, and the Girl Scout Cookie that we all love to partake in. However, times are changing, and Kellogg is trying to distinguish itself within a highly competitive industry.

In fairness, Ferrero is attempting to do the same thing, they need to grow and diversify their brand holdings at the risk of being consolidated by a larger fish in the food industry pond. This transaction will help Ferrero increase their visibility and their sales volume in North America, where the cookie business is projected to grow after some years of flat results.

The consumer wins in this deal because Kellogg is going to focus on even further improving their core businesses of snacks and breakfast cereal brands. Ferrero will have a fresh perspective and will bring some new innovations and energy to the Keebler and other cookie brands that Americans have grown up with over decades. It is certainly one of the larger deals in the food industry in 2019 and could shape the directions of both companies for years into the future.

(some background info and stats courtesy of CNN and PR Newswire)