Archive for January 28th, 2009

Doubts on stimulus plan mount … combo of bad fundamentals and bad marketing

January 28, 2009

Below is a summary of the proposed stimulus plan.

Ken’s Take: (1) No question but that a stimulus is needed to kick the economy back into gear (2) But, a stimulus should stimulate, not be used as a trojan horse to advance a socio-political agenda (3) the Dems made a mistake throwing everything — including the kitchen sink — into the plan — especially controversial stuff like abortion aid and global warming studies and  (4) the Dems make a mistake everyday letting Reid & Pelosi out in public to explain the plan (5) If I were a GOP rep, I’d vote no on the plan — it’s going to pass anyway — conspicuous benefits are unlikely (it’ll be more TARP-talk: “would have been worse without it) — so, let Obama-Reid-Pelosi own it (“we won – we write the laws now”)  — and let them get the credit in the unlikely event that it does work.

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Excerpted from WSJ, ” Doubts on Obama Plan Mount” & “Stimulus Bill Near $900 Billion”, Jan. 27, 2009 

The economic stimulus package proposed by Democratic House leaders totals $825 billion and includes three broad pieces: a $365.6 billion spending measure for such brick-and-mortar projects as highways and bridges; a $180 billion measure to boost jobless benefits and Medicaid, and a $275 billion tax-relief package, which includes a plan to give a $500 payroll tax holiday to all workers (a proposal from Mr. Obama’s presidential campaign).

The Congressional Budget Office estimates that $169 billion (~ 20%) of the $825 billion in stimulus will hit the economy before the end of September and that the bulk of it will show up in 2010 and 2011.

CBO also said that government borrowing prompted by enactment of the plan would add another $347 billion, pushing the estimated cost of the stimulus plan to more than $1 trillion, including interest.

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The estimates point to one of the challenges of formulating an effective plan. Tax cuts can be implemented quickly, but many economists think they wouldn’t stimulate much new spending because consumers and businesses are so keen on saving. Government spending would generate economic activity more quickly, but it is hard to ramp up right away.

The one thing that is certain to flow from the stimulus is a large increase in the federal debt. Large government budget deficits are showing signs of starting to nudge interest rates on government debt higher, from very low levels.

If that persists, it could eventually damp some of the stimulus-plan’s benefits. Higher government rates raise the cost of borrowing not only for the Treasury, but also for many private-sector borrowers, since corporate bonds and mortgage bonds are often benchmarked to Treasury yields.

Bond markets have been hit by a flood of new supply of Treasury debt in the past few weeks, a factor that some traders say has pushed up rates. The yield on a 10-year note hit 2.519% Tuesday, up from a little over 2.00% at the end of 2008.

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It’s projected that deficits in 2009 and 2010 will reach between 10% and 12% of gross domestic product, respectively, roughly double the previous peacetime records set in the Reagan years. It added that federal debt will soar from about 70% of GDP to more than 90% of GDP.

Economists say that the rise in debt will eventually lead to slower economic growth and diminished standards of living in the U.S.

Full article:
http://online.wsj.com/article/SB123311521129023245.html?mod=article-outset-box 

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Posted in Financial Crisis, Gov't Spending, Government & Politics, Taxes | Leave a Comment »

Uh-oh … College endowments plunge… get your checkbook.

January 28, 2009

 Ken’s  Take: (1) On average, colleges apply 4.5% of their endowments to annual operating expenses … so, in most recent years (i.e. excluding 2008), schools were simply reinvesting most of their endowment income … not applying it to operations, (2) Begs the bigger question: why does it cost $25,000 to $50,000 in annual tuition to provide a private college education? Maybe shrinking endowments will get universities to attack their low productivity (of faculty and staff), and wasteful spending (e.g. recent reports on university contributions to the Clinton Library). Not likely, though..Tuition creep has become a way of life, and pretty soon, universities will qualify for more taxpayer funding via TARP or ‘infrastructure rebuilding’.’   …

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Excepted from WSJ, “2009 College Endowmwnnts Drop”, Jan. 27, 2009

College endowments have suffered a sharp blow in the financial crisis, with aggregate investment losses of at least $94.5 billion, according to a new survey.

The losses likely understate the severity of the hit schools have taken, since they don’t include losses in illiquid, hard-to-value investments that many schools have loaded up on. .

Some folks have questioned whether schools were hoarding their money at a time when tuitions were placing a heavy burden on middle-class families.

Endowment income is a critical part of budgets at colleges, especially at private schools … which, on average, spend 4.6% of their endowments annually to support operations.  that number is expected to increase to 6% because of endowment losses.

[Colleges Rich and Poor Lose Big]

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Loyalty programs lose their umph … at least for airlines

January 28, 2009

Excerpted from WSJ, “Plunging Value of Fliers’ Miles Saps Loyalty” By Scott McCartney, Dec 9, 2008

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The plunge isn’t as severe as your 401(k) or home appraisal, but the value of frequent-flier miles has dropped so far that airline programs no longer drive customer loyalty as strongly as they used to … But now, a handful of airlines … are launching tweaked programs they hope will rebuild ties with fliers.

The percentage of online buyers who say they are loyal to particular travel companies fell to 25% this year from 31% in 2006 … Customer loyalty for airlines … are worse than for hotels and cruise lines. And travelers buy tickets based on price and schedule more than ever instead of choosing to fly a particular airline.

“Airlines are shooting themselves in the foot…Their loyalty programs are just not worth what they once were to consumers.”

The biggest force driving the erosion of loyalty is the loss in value of frequent-flier miles … Airlines have raised the price of awards and tightened availability of the cheapest award levels, forcing travelers to jump to more-expensive mileage levels to claim seats…

To be sure, frequent-flier programs still drive loyalty for some road warriors… And they still make lots of money for airlines … The programs have grown more profitable as airlines have made it more difficult to cash in miles and added fees and surcharges to awards…

Not surprisingly, research …s hows growing dissatisfaction with mileage programs…Some airlines are addressing these flier gripes and revamping their programs …

Industry watchers say it may be risky to continue to degrade frequent-flier programs … airlines need to re-examine if they have squeezed frequent-flier programs too tightly. He says airlines have ignored trends in other industries where loyalty programs are stronger, and made their rewards more expensive and more difficult to redeem than other loyalty programs.

“Airline passengers get whacked by a lot of sticks, but there are not a lot of carrots out there for them” … airlines need to reinvigorate their customer-service efforts across the board, improving service at the airport and on board aircraft … frequent-flier programs could be more valuable to airlines as stronger drivers of loyalty if carriers revamped their confusing and frustrating redemption schedules, and gave consumers better benefits for purchasing loyalty.

“The idea of trying to reward people for loyalty is good … but it has become too complex and frustrating in the airline industry.”

Edit by SAC

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Declining customer loyalty adds pressure to the airlines already heavy financial woes.  Passengers no longer see the value in the customer loyalty programs that were originally created to increase customer loyalty.  As such, frequent-flyer programs may be profitable for the airlines in the short-term, but in the long-term customer lifetime value is likely to decline having a great impact on the airlines’ bottom line.

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Full Article:
http://online.wsj.com/article/SB122877921525689525.html

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Posted in Airlines, Customer Satisfaction - Loyalty, Mktg - CLTV | Leave a Comment »

Battling Private Label Rivals with Innovation …

January 28, 2009

Excerpted from BrandWeek,”OTC Drugmakers Seek Cures” by Elaine Wong, November 9, 2008

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Makers of branded cold and flu remedies are seeking their own antidotes for flagging sales. But will cash-strapped consumers cough up more money for “innovation?”

Tylenol is launching Tylenol Warming Liquids … that treat cough, sore throat and other cold symptoms via a formulation that delivers a warming sensation…

P&G is introducing Dayquil Plus Vitamin C, which includes 150% of the daily dose of the vitamin in the mix…

Robitussin … is promoting its DM Max mucus relief formula…“Robitussin DM Max has a double dose of mucus-fighting medicine”…

The efforts come as sales of most major OTC brands have declined by low-to mid-single and double digits thanks to advances by private label competitors. Sales of Children’s Tylenol, fell 14.2%…Robitussin’s … medications dropped 8.8%. Private label also prevailed in the tablet and packet category, up 18%…

Meanwhile, retailers have stepped up marketing efforts for their brands. Unlike previous cold/flu seasons … the drugstore is experiencing significant private label growth. The uptick reflects a mix of savvier retail marketing efforts, combined with a smarter and cash-strapped consumer, according to industry analysts.

“It’s the one category where it’s very clear and easy to see that the active ingredients in both national and store brands are identical” … Efforts like these are nothing more than attempts to gain greater market share. Research on vitamin C, in particular, shows no real effect in fighting or preventing colds. “It’s a cheap and easy way to distinguish your product from someone else’s”…

Edit by SAC

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OTC drugmakers know the benefits of choosing a private label OTC product with the same ingredients is clear for cash strapped consumers and are using innovation to add value to their products.  The brands must give consumers a reason to purchase their brand over less-expensive labels. This is becoming increasingly difficult as a recent Neilsen study showed that 62% of consumers perceived private label brands to be equal to name brands. 

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Full Article:
http://www.brandweek.com/bw/content_display/news-and-features/shopper-marketing/e3i8a864b21b4f19fc5d31ca97a9df8da2f

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Posted in Mktg - Brands, Mktg - Brands - Private Label, Mktg - Pricing, Mktg - Product & Innovation, Retailing | Leave a Comment »