Reasons not to use U-Haul

If I wasn't already avoiding U-Haul (due to bad experiences several years ago), I this investigative series by the Los Angeles Times would start me on a boycott.

John Edwards' prescription for disaster

Generally, I like John Edwards. I think many of his ideas are on the right track, and I wish I was able to see him speak while he is in Detroit today. Despite that, one of his health care proposals is so far off the mark that it has to be addressed.

First, his good idea: requiring health insurance companies to justify their rates by forcing them to spend at least 85% of premiums collected on health care. A handful of states, including New York and Florida, already have such laws, and this idea is ready for nation-wide implementation.

But Edwards' idea for controlling the cost of drugs would be a disaster. Edwards' plan would remove long-term patents from breakthrough drugs, allowing generic drugs to be produced much sooner. Unfortunately for Edwards (and for all of us, if this piece of his plan is implemented), removing long-term patent protection removes most of the incentive for pharmaceutical firms to conduct expensive research and development. Not only would patent removal lead to a decline in R&D (and hence in new drugs brought to market), but since branding would be the only difference among firms' products, we would probably see an increase in drug advertising -- exactly the opposite of what we should be working toward.

Northwest Airlines employees strike

Shares of Northwest closed down 10 cents, or 1.8 percent, at $5.38 Friday on Nasdaq, as the Aircraft Mechanics Fraternal Association, representing 5,400 mechanics, cleaners and custodians, went on strike.

I have to confess my surprise at this. I thought a strike, particularly a really crippling strike, would have been just the thing to tip the struggling airline into bankruptcy. Although bankruptcy is usually viewed as a negative, in this case it would allow Northwest to dump their pensions on the PBGC and restructure all their labor contracts. Today, bankruptcy could be a competitive tool in the airline industry.

Tags: airlines, business, strategy, Northwest, strike, bankruptcy

GM discount is brilliant (but Chrysler, not so much!)

Here's why:

As has been widely reported, the top-line impact of GM's "employee discount for everyone" ad campaign has been a 41% increase in sales for June. Some people have theorized that, like other recent campaigns to boost sales, this would come at the expense of profits.

An employee discount is typically 3% to 4% below invoice. However, in offering the employee discount to everyone, GM rescinded its previous $3,000 to $4,000 cash-back incentives, so the end price may be the same or even higher.

In other words, they are making as much or more money per car, and selling many more cars. Brilliant!

Chrysler has gone GM one better by offering the employee discount to everyone, in addition to $3,000 to $4,000 cash-back incentives. The figures aren't in on how this is affecting sales volume (although Chrysler, as well as most other automakers, lost sales in June when only GM was offering the employee discount), but this double discounting can't be good for the bottom line.

Tags: business, Chrysler, GM, strategy

"Higher Standards, Lower Prices"...at Wal-Mart?

After getting whallupped by Target for the last several months, it seems that Wal-Mart has learned something about shoppers.

People want cheap merchandise but they don't want to feel cheap.

KMart had so much trouble with this concept that they went bankrupt. Wal-Mart's sales have been down lately, but they have years to go before bankruptcy might be an issue.

Here are the numbers: Target's same store sales (a key industry indicator, measuring sales at stores open at least a year) increased 5.1%, lead by strong women's clothing sales. Wal-Mart's were just 2.5%, below company forcasts for the second consecutive month.

Currently, Wal-Mart attracts more low-income customers than Target, with nearly a third of Wal-Mart shoppers earning less than $25,000 a year. The world's biggest retailer is now trying to accelerate growth by appealing to a broader, and well-heeled, group of shoppers.

In a bid to appeal to high-income shoppers, Wal-Mart's upping the fashion and quality quotient on apparel, home goods and other items. The goal is to let customers know Wal-Mart is a destination for trendy and fashionable items at a good value, said spokeswoman Karen Burk.

Part of me hopes Wal-Mart is successful (the part of me that owns their stock!), but the "upscale discount" market is more crowded and more demanding than "low price at any cost". In addition to Target, Meijer has done quite well lately with the slogan: "Higher Standards, Lower Prices" (and a clever supporting advertisement for their produce selection).

Tags: Business, Strategy, Wal-Mart, Target, Meijer

The de-Carly-ization plan

Carleton S. "Carly" Fiorina's successor CEO at Hewlett-Packard, Mark V. Hurd, has recently made some big announcements about the direction in which he hopes to take the company.

On June 13, HP announced it would separate its printer and PC divisions. In part, this increased separation may make other PC manufacturers more willing to bundle HP printers with their machines. Hurd seems to have opted for product focus rather than synergy, a strategy that is also apparent in HP's sales force.

Hurd has announced a sweeping reorganization in HP's sales force; a move that will undo a major element of Fiorina's strategy. Fiorina attempted to create an integrated sales force selling bundles of HP products to corporate customers. Hurd intends to return to a more product-specific focus. The change could lower HP's selling costs, since less central coordination would be required. More important, HP would no longer be sending generalist account reps up against the focused salespeople from the likes of Dell and Lexmark.

Hurd is also prepping the company for big layoffs, expected to total 15,000 people, intended to match the efficiency of rivals such as Dell. According to one insider, "The board replaced Carly because it wanted to focus on execution. Mark is doing just that."

This is obviously just the beginning, as Hurd has only been on the job for 2 1/2 months. But these seem to be steps in the right direction.

Tags: Business, Strategy, HP, Fiorina, Mark Hurd

Banks v. Realtors

"Why Would Consumers Want Big Banking Conglomerates to Take Over Local Real Estate?" read the full-page Washington Post advertisement on Wednesday. The ad listed several newspaper clippings highlighting stories of banks' past bilking of their mutual fund clients and their more recent epidemic of fumbling customers' confidential account information. This ad was just the most recent in a series of full-page print ads from the National Association of Realtors (NAR) to further its ongoing turf war with the American Bankers Association (ABA).

Speaking to the House Financial Services Committee, ABA Chairman and Executive Vice President of Wachovia Betsy Duke made the obvious point in favor of allowing banks to compete with real estate agents in the lucrative business of selling houses: letting them compete will increase competition. Hard to argue with that one.

NAR President Al Mansell (the CEO of Coldwell Banker Residential Brokerage, a subsidiary of Cendant) took a swipe, accusing bankers of irresponsible lending practices and failure to protect customer account information. He also implied that bankers might subjugate the best interests of consumers to the pursuit of profits.

The question is how the banks differ in that regard from the real estate cartel's aim. Real estate agents continue to charge 6% commissions for the sale of homes in a market where homes don't just sell themselves, but often do so for more than the asking price. Meanwhile, the NAR is fighting an insurgency by online and discount real estate brokers who charge less than the 6%. "Full-price" agents deny discount agents access to databases of houses for sale, refuse to show properties being handled by discounters, and more.

Are banks really going to be worse for consumers than Realtors already are?

Wal-Mart ethics code overturned

Good citizen Wal-Mart recently had their ethics code overturned by a German labor court. The code banned relationships between Wal-Mart employees and created a hotline for co-workers to turn in offenders. Under German (and European Union) law, employee councils must sign off on a wide range of workplace conditions, from hiring and firing to the position of desks in an office.

Wal-Mart claims that the guidlines are intended to maintain a safe workplace.

Concorde flies again

CNN is reporting that the Society of Japanese Aerospace Companies (SJAC) and the French Aerospace Industries Association are making plans to revive the Concorde, starting fresh with a larger cabin to seat 300 passengers, lighter-weight components, and more modern power plants. None of which will make the Concorde economically viable.

The problem is the the Concorde begins with an already small potential market (people taking transcontinental flights) and then charges through the nose for saving several hours and providing a high-end experience. There are only so many people who will buy this; the problem will be plane utilization (the percent of time spent in the air vs. time spent on the ground).

I think the Concorde is one of the most elegant-looking planes ever built, but in the real world you have to turn a profit.

The new "Big Three"?

Just weeks after the US Supreme court reversed Arthur Anderson's conviction for obstruction of justice (too late; the company was also found guilty in the court of public opinion, from which there is no appeal), we now get news that KPMG is also facing a criminal indictment for obstruction of justice and the sale of abusive tax shelters. Shortly after Arthur Anderson's conviction, former Securities and Exchange Commission Chair Arthur Levitt said "I don't believe that Anderson is any worse than any of the other firms." Perhaps he was right, but not in the way he intended!

If KPMG falls, the Big Five accounting firms will be down to three: Deloitte, Ernst & Young, and Pricewaterhouse Coopers. Meanwhile demand for accounting and consulting services continues to rise in the wake of Sarbanes-Oxley. Will we see a new firm rise to join their ranks, or will America have a new "Big Three" now that Chrysler is foreign-owned?

Before and since the Enron collapse, Max Bazerman, George Loewenstein, and Kimberly Morgan have argued that this is a problem that will not go away until the US accounting system is fundamentally changed. They have suggested three key changes which would go a long way toward creating both the appearance and fact of auditor independance:

1. Auditing firms should only provide auditing services.
2. Auditing contracts should be of a fixed duration with fixed compensation, during which time the client cannot fire the auditor. At the end of the contract term, the auditor should not be rehired; rather, the major accounting firms should rotate clients.
3. Companies should be prohibited from hiring accountants who have worked on their audit engagement. (Sarbanes-Oxley established a one year "cooling off period" which is insufficient.)

"Wal-Mart Honored for Corporate Citizenship": Not a typo, not a joke!

When I read the headline "Wal-Mart Honored for Corporate Citizenship" I expected one of two things:
1. Some overzealous reporter took The Onion seriously OR
2. An editor left out the word "worst".

But it appears to be a legitamate Wal-Mart press release. It looks like the honoring organization, the National Confectioners' Association, primarly considered volume of charitable giving.

Of course Wal-Mart makes so much money that its easy for the volume of their giving to be large. This obviously didn't take into account Wal-Mart's actions, and comparisons of communities to Nazis.

Overcharging for overdrafts?

If you are one of the few Americans lucky enough to have not overdrawn your bank account in the last several years, you may be surprised by what I am about to say.

Overdraft fees are big business.

Even if you have overdrawn, and are aware of the fee (frequently ranging from $25 to $35 per item, plus a daily fee up to $10) you still may not have realized just how big an income stream they are for banks. Many banks earn fully half of their revenue from fee income, of which overdraft charges are the majority.

Predictably enough, as fees have risen, so have consumer complaints.

One of the stickiest complaints rises from banks paying items against overdrawn accounts. Many consumer groups have asserted that a payment against an overdrawn account is essentially a loan, and that in many cases the fee charged is an effective annual percentage rate (APR) in excess of 100%. Such groups want overdraft fees made subject to usury laws limiting the APR that can be charged, and in Indiana this is already occurring.

This is problematic both on concept and implementation. Because overdraft charges tend to be a flat fee regardless of the amount of the overdrawn item, it is somewhat fallacious to look at the effective APR. Customers are charged the same amount whether the item is $10 or $1000 and whether they are overdrawn by $5 or $500. Firms in many other industries also charge fees which might be considered ususious by this standard. Late fees are standard practice for utilities, landlords, and cell phone providers, just to name a few. In any of these cases, a late fee charged may amount to an effective APR in excess of usury limits.

If overdraft fees are subjected to usury laws, banks have a very simple solution. If the item is returned unpaid due to insufficient funds, no loan can be construed and usury limits can not be made to apply. Banks can continue to charge the same fees, but would deny any item that overdraws an account by any amount. For most consumers this would be much worse than the current practice, because they will pay the same fee to the bank, plus the payee may charge them returned item and late payment fees.

The Federal Reserve presented a reasonable alternative solution Thursday, improving fee disclosure requirements under the Truth In Savings Act. The new requirements, which take effect on July 1, 2006, will now require banks to specify when opening accounts the kinds of transactions for which they might impose overdraft fees. They also require banks that promote the payment of overdrafts in ads to disclose in periodic statements the total fees for paying overdrafts and for returning items unpaid. Ads must disclose the types of transactions covered, the time period consumers have to cover overdrafts, and the circumstances when overdrafts will not be paid, and cannot call an overdraft service a line of credit.

Consumer advocates want overdrafts regulated under the more stringent Truth in Lending Act, forcing banks to call paid overdrafts a loan - its "true nature," as the Fed put it. The Fed said it may revisit this issue.

Zero plus zero equals....

Yesterday US Airways and America West Airlines announced their intent to merge, forming the nation's fifth largest passenger airline. How well will these two firms integrate?

According to the US Department of Transportation these two airlines ranked 17th and 18th out of 19 airlines in complaints per 100,000 passengers for the first three months of this year. "We've corrected problems before; we can correct them again," according to America West spokesman Carlo Bertolini said. According to US Airways spokeswoman Amy Kudwa, "We've had a renewed focus on on-time performance."

US Airways has filed for bankruptcy twice in the last three years, and both companies continue to struggle financially, with junk bond debt ratings. Moody's Investors Service said that even after a merger, the two companies would continue to face a difficult operating environment.

It sounds like these two companies are on the same page - unfortunately for them it's not the right one!