67 76 consumer roundtable 2 23 15.qxp 2/19/2015 5:51 pm ... · more manufacturers go vertical with...

ConsumerGoods & RetailRoundtable

February 23, 2015 • An Advertising Supplement to the Los Angeles Business Journal

This special advertising supplement did not involve the reporting or editing staff of the Los Angeles Business Journal.

THE world of consumer goods and retail has been heating up and hasclearly become one of the fastest growing and most vibrant businesssectors in Southern California. The landscape of managing such busi-nesses has rapidly evolved as well – with laws, regulatory protocols,

best practices, consumer and business needs and industry trends seeminglychanging by the season. To take a closer look at how this sector works, weasked several experts in the field to weigh in for a roundtable discussion. Wehope you’ll find the resulting dialogue to be an insightful resource – whetheryou are looking to buy, sell, launch or grow a business in this industry.

Andrew ApfelbergPartner & Co-Chair,

Branded Consumer Products

Industry Group

Greenberg Glusker

Ron FriedmanRetail & Apparel Practice

Co-Leader Partner

Marcum

Michael A. GeibelsonPartner

Robins Kaplan LLP

Noel MassiePresident

UPS, South California District

Scott P. ShawShareholder

Call & Jensen

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68 AN ADVERTISING SUPPLEMENT TO THE LOS ANGELES BUSINESS JOURNAL FEBRUARY 23, 2015

◆ How would you describe today’s overall cli-mate for retail in Southern California? Howhave things improved over the last five years?

SHAW: After some challenging years in the past,it now appears that the retail climate inCalifornia is poised for growth. We can seesome improvement from emerging retailers whoare opening new doors and looking to expand,while we see some larger national retailers strug-gling financially. The emerging retailers aredeveloping both e-commerce and brick-and-mortar, and are simultaneously building bothplatforms. They seem to understand their nichein the retail landscape and are making signifi-cant progress. Digital marketing and advertis-ing are also becoming increasingly important,as consumers are becoming more accustomed tobuying products without physically seeing andtouching them.

APFELBERG: Retail in Southern California isvibrant, though not always with respect to sales.Our region is still viewed as a tastemaker. As aresult, manufacturers, distributors, retailers andcustomers are actively watching what we aredoing and trying to get a foothold. Theincreased scope of web-based purchasing hasmeant, though, that a local company is notalways the one to make the sale even thoughthey may have been the one to put forth theproduct that is garnering attention.

FRIEDMAN: The current retail climate for mostretailers remains challenging, with the last fiveyears showing slow signs of improvement.Consumer belts are still tight, with averagehousehold income declining and costs holdingsteady. Retailers continue to respond withmore discounting, which has a direct impacton their bottom lines.

◆ How have recent trends in consumer behav-ior and purchasing habits affected the con-sumer goods industry?

GEIBELSON: Trends in Reverse Showrooming,Disintermediation, and Recurring Revenue havecreated a new normal in the consumer goodsindustry. Reverse Showrooming involves con-sumers researching online and buying in a store,either in a traditional sense, or through a “ship tostore” model or a “pick up in store” model.Disintermediation refers to direct-to-consumersales, which have been facilitated by faster andcheaper shipping. Recurring Revenue modelsinvolve subscriptions for all manner of consumergoods and services. All of these sales practiceshave dramatically changed retailers’ relationshipswith their customers. They have also magnifiedthe need for a compliance program that ensuresthat products are consistently advertised andpriced across channels, and in accordance withapplicable law. While each of these trends pres-ents a heightened opportunity to develop the cus-tomer relationship, they also heighten expecta-tions and present opportunities for disappoint-ments…and class actions.

APFELBERG: Because of the increasing sales onlineand the ease of price comparison in that plat-form, companies have had to alter their strategyfor building brand and making sales. No matterwhat the price point, savvy companies are tryingto create a memorable brand that clearly conveystheir value proposition and distinguish them-selves from their competitors. They are trying tocreate a “reason” to buy their product. Manycompanies are deciding to embrace rather thanfight the fact that an increasing percentage ofsales are made online and via mobile devices.Restoration Hardware is a great example of one ofthose strategies of turning stores into a showroomand making the sale online.

FRIEDMAN: Consumers are looking for discountsand will not spend unless they feel like they aregetting a bargain. Consumers walk the aisles in-store, but then they pull out their smart phonesto comparison shop online. They are aggressiveabout finding the best price before committing toa purchase. The industry needs to be more cre-ative in attracting customers. Retailers need tomake social networking and the internet an inte-gral part of their business plans. The local retailstore may become a thing of the past as more andmore manufacturers go vertical with their ownretail stores. We are starting to see a trend where-by retailers are starting to manufacture merchan-dise for their own stores to increase gross profitmargins. As the manufacturers go vertical, theretails are going to need to respond and producemerchandise with the store brand to competewith the manufacturers.

SHAW: Some trends, and their impact on the con-sumer goods industry are: 1) Going Mobile. Theability to stay connected away from the homeand office has never been easier – and online andmobile advertising has never been more lucrative.The reason is obvious – online and mobile salescontinue to grow exponentially. This trend hasimpacted the consumer goods industry on virtu-ally every level – from advertising, to production,and delivery of goods. 2) Bargaining. Deal giantslike Groupon and Living Social, as well as count-less online sites and apps offer steep discounts forconsumer goods. There is such an abundance ofdeals such that consumers increasingly don’texpect to pay the full price for goods. The result-ing demand for more and more deals meansbrands will need to integrate these with customerloyalty programs. 3) The Sharing Economy.Consumers have become more resourceful inearning extra cash from selling anything fromextra room space to renting their own tools.Consumers regularly sell unused or under-utilizedgoods on eBay, Craigslist and other sites. Thiscreates more competition for the consumer goodsindustry but also provides additional cash to con-sumers for the purchase of newer goods.

MASSIE: More consumers are shopping online.That's why UPS partnered with comScore todevelop the UPS Pulse of the Online Shopperstudy—an insider's guide to what consumers arelooking for and what drives shoppers to choose

one retailer over another. Here are some of thetrends found in the study:• Free shipping continues to be the most pre-

ferred option when checking out online.• 93% of online shoppers have taken action

(such as add more items to cart, choose slowesttransit time offered, or join loyalty programs)in order to qualify for free shipping.

• Online shoppers want to see total purchaseinformation at checkout, including shippingcosts, and the majority prefer to see theexpected arrival date rather than the numberof days to arrive.

• More than half of online shoppers have cho-sen “ship-to-store” with 4 in 10 making anadditional purchase while in the store.

• Returns options heavily influence con-sumers’ likelihood to complete a sale, withrestocking and shipping fees being the mostimpactful deterrents.

◆ What changes in legislation are expected tohave the greatest impact on retailers and man-ufacturers of consumer goods?

APFELBERG: Legislation along with continuedawareness of the properties of materials and adesire for organic and non-harmful componentswill drive up costs of manufacture (hopefully inline with the public’s willingness to pay a pre-mium) and use of such decisions for brandingpurposes. For instance, the current review byregulators of sunscreens could be a game chang-er for the industry.

GEIBELSON: The Legislature and numerous inter-est groups are looking hard at Proposition 6567California’s Safe Drinking Water and ToxicEnforcement Act – that requires warnings forproducts that cause cancer or pose reproductiverisks. Prop 65 has resulted in innumerable claimsrelated to consumer goods containing a listedsubstance. Most settle quickly because they aretoo expensive to defend, although manufacturersand retailers frequently contest whether theamount of the substances in the subject productscan ever actually cause harm. Regardless, thewarnings are now everywhere, causing people toquestion their utility. Changes to laws and regula-tions related to accessibility requirements underthe Americans With Disabilities Act andCalifornia’s Unruh Act and Disabled Persons Actmay also have a significant impact on retailers.Access suits continue unabated and are at thispoint a virtual tax on businesses even after per-forming CASp inspections unless prompt remedi-ation is performed.

◆ What are the main challenges and opportu-nities facing retailers and manufacturers ofconsumer goods doing business in Californiacompared to other states?

SHAW: Employment laws and workers compensa-tion are common challenges for retailers inCalifornia. On the one hand, California is tryingto encourage growth and promote jobs, but onthe other hand the laws are at times anti-employ-

CONSUMER ROUNDTABLE

‘Consumers have become more resourceful in earning extra cashfrom selling anything from extra room space to renting their owntools. Consumers regularly sell unused or under-utilized goodson eBay, Craigslist and other sites. This creates more competitionfor the consumer goods industry but also provides additional cashto consumers for the purchase of newer goods.’SCOTT P. SHAW

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FEBRUARY 23, 2015 AN ADVERTISING SUPPLEMENT TO THE LOS ANGELES BUSINESS JOURNAL 69



er. It is well known that most manufacturing isdone overseas. Some companies in the past fewyears are really trying to bring jobs and manufac-turing back to California, and they are doing well.Consumers will typically pay a premium forgoods manufactured in California. If companiescan successfully navigate the legal mine field formanufacturing in California, they will see anamazing opportunity to create quality productswith a meaningful story behind the products.

GEIBELSON: Class actions and the protection ofconfidential information (including customerlists, business plans, and processes) from competi-tors present the main challenges in Californiacompared to other states. California’s prohibition(with limited exceptions) on noncompetitionagreements makes the protection of trade secretsand confidential information more difficult andmore delicate. And California’s liberal class actionrules and its Unfair Competition Law and FalseAdvertising Law continue to pose an unparalleledchallenge for retailers doing business here. Thebusiness risk posed by these laws is amplified bystatutory damages for violations of law that causeno injury, such as requesting personal identifica-tion information (including ZIP codes) as part ofcredit card transactions, and recording customerservice calls without customers’ consent. Theselaws have also emboldened public prosecutors toseek dramatic changes in company proceduresover miniscule pricing errors.

APFELBERG: Challenges include higher tax rate,human capital costs and risks of litigation.Opportunities include being able to create newproduct categories and have them rapidlyadopted by a community that thirsts for some-thing new and better. Southern California willalways be among the handful of regions aroundthe world that are ahead of the trends. We alsoare home to many celebrities and athletes whocan influence others through their use orendorsement of a product.

◆ What do you project will be the major issuesand risks facing retailers in the next 3-5years?

MASSIE: Retailers’ major issues in the next 3-5years will be to effectively streamline their supplychain in order to operate as efficiently as possible.With the globalization of sourcing raw material,manufacturing, and distribution, it is imperativethat retailers have a sound strategy for all levels oftheir supply chain. Retailers should consult withtheir global logistics partners to devise, imple-ment, and monitor an effective operating plan -from “concept to products on their shelves”.These phases should include a comprehensiveplan for goods, funds, and information. In addi-tion, the shift of offline to online retail representsboth a risk and an opportunity for retailers. Tomitigate the risk retailers must look for opportuni-ties to differentiate themselves from the mass ofonline retailers by connecting more closely withconsumers. There will be significant opportuni-

ties to engage with consumers through socialmedia and other one to one forums that improvecustomer loyalty. Retailers must realize that theirwork isn’t done once the sale is made. They mustcontinually try to engage with consumers in ameaningful, valuable way.

FRIEDMAN: Retailers are going to be challenged bybranded manufacturers opening their own retailchannels of distribution through web sales andtheir own retail stores. Manufacturers see anopportunity to capture gross profits at both thefabricating and selling levels. How will retailerscompete with this? They will need to follow thetrend and start manufacturing and developingtheir own brands. They will also have to create anenvironment in the store that will entice cus-tomers to visit on a regular basis, which mayencompass setting a place for people to socialize.Booksellers like Barnes & Noble, for example,were early to recognize the advantages of this,and more retailers will begin to adopt this modelof interfacing with their customers and providingways for customers to interface among themselveswithin the brand environment.

GEIBELSON: In addition to more frequent butsmaller class actions, data breaches like therecent ones at some of the nation’s largest com-panies will continue to present risks to retailersof all sizes. The concept of Big Data is exciting.But after it is collected, it is often unused, or isused ineffectively or incompletely. Too manycompanies keep data for the sake of participat-ing in the Big Data frenzy without accountingfor or handling its risks. If the data is not beingused, delete it. And if the data is not going to beused in the future in an intentional and strate-gic way, don’t collect it.

SHAW: Some issues and risks include: 1) Employeeturnover – or lack of worker continuity.Employees coming in and out of your business asif it were a revolving door creates big problems forhuman resource professionals who must constant-ly find and train new staff, which can eat up valu-able time and resources. 2) Auditing. Retail busi-nesses are regularly engaged in competition withone another, and this competition can createprice wars, forcing a need to keep tight controlover inventory and other important data. Theretail industry is often faced with inefficient andpoor auditing plans that make competing withother companies difficult. Existing auditing sys-tems may be outdated and provide inadequateaudits needed to stay competitive. 3) EconomicUncertainty. The retail industry as a whole islargely dependent upon the economic wellbeingof the nation. As the nation prospers and peoplehave more money to spend, the retail industrygenerally flourishes. However, in more difficulteconomic times, the retail industry is often facedwith potential shrinkage. The current economicoutlook appears good, but it is difficult to predictwhen a downturn will occur. 4) Technology.Keeping up with the pace of modern technologyis another problem the retail industry faces. For

instance, retail point of sale technology oftenuses computer systems that are several yearsbehind the computer industry as a whole. Also,the inability of retail industry technology to keepup with initiatives such as mobile digitalcoupons is a problem that the industry regularlyfaces. Given the rate of turnover and the con-stantly changing economic environment, con-stantly upgrading and keeping their equipmentand networks running on the newest technolo-gies can be difficult for retail leaders.

◆ How about consumer goods manufactur-ers? What challenges do they face in thenext 3-5 years?

GEIBELSON: The tip of the iceberg in false adver-tising class actions has been the “Natural” litiga-tion – cases in which consumers contend prod-ucts are not actually naturally made. While “natu-ral” cases continue to be filed, other buzz wordsare emerging as consumers’ next targets for man-ufacturers’ advertisements – “non-GMO,” “organ-ic,” “gluten free,” and “handmade” to name afew. Given recent changes in class action law, andsince manufacturers don’t always know who theircustomers are, these cases are now being filedagainst retailers as well. As Proposition 65 claimscontinue to be pressed aggressively, manufacturerswill have to redouble their efforts to confirm thattheir products – particularly products they whitelabel, and ingredients or components they buyfrom others – do not contain substances aboutwhich Proposition 65 warnings must be given.

FRIEDMAN:Manufacturers have been finding theirgross profit margins squeezed by the retailers formany years and they are fighting back by goingdirect to the consumer. We are going to see thistrend only increase in the years to come. Brandedmanufacturers are in the best position to expandand change their business models to fit this verti-cal distribution. The manufacturer is now intosocial media, blogging and other new methods toconnect directly with consumers.

◆ Why is important for retail companies toenter global markets online, especially if itappears so complex to do so?

FRIEDMAN: Retailers need to recognize that it istime to bring the mountain to their customers.The customers of the 21st century are conductingmuch of their lives online, and that includes pur-chasing. Baby boomers still like to get in the carand drive to the malls to look for something spe-cial, but that group of shoppers will be spendingless money in the years to come as they approachretirement. Retailers better understand who willbe buying and how to market to that group.Technology has made the world a much smallerplace, and retailers can reach literally anywhere tosell. The local mom and pop retail store is becom-ing a dinosaur, as department stores and manu-facturers increasingly go vertical with their ownretail establishments. Local retailers need to thinkbeyond brick-and-mortar.

CONSUMER ROUNDTABLE

‘Many companies are deciding to embrace rather than fight thefact that an increasing percentage of sales are made online andvia mobile devices. Restoration Hardware is a great example ofone of those strategies of turning stores into a showroom andmaking the sale online.’ANDREW APFELBERG

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MASSIE: Domestic growth in the retail market by2020 is forecasted at 1.7 times that of GDP; 4times for online commerce; and 7 times foronline cross-border. Nearly 95% of the global con-sumers are outside the US, with 59% of them liv-ing in rapid-growth markets. Companies need toensure they partner with carriers that provide anarray of services that are guaranteed on timearound the world and incorporate easy-to-inte-grate, affordable, scalable, turn-key online solu-tions that minimize the complexities of globalcommerce. For example, UPS offers solutions likeUPS i-parcel to ensure that the complexities ofglobal commerce are removed.

◆ What cybersecurity and data privacy chal-lenges are on the horizon?

GEIBELSON: Companies have to remain vigilantand proactive about data breaches on point-of-sale (PoS) systems. That risk is expected toexpand to mid-layer targets including paymentprocessors and management firms, along withthe increased use of ransom-ware – the ability tohijack data and hold it up for significant ransomdemands. With greater retail dependency on thecloud and mobile applications, these data-richapplications will also be targeted. This risk onlyunderscores the importance of demandingredundancies in data sources, and placinggreater legal demands on vendors to account forthese risks. Companies are increasingly partici-pating in Information Sharing and AnalysisCenters (ISACs) such as the Retail CyberIntelligence Sharing Center. ISACs like this havebeen helpful in other industries to share infor-mation about threats, and prevent and minimizethe effects of breaches.

◆ How has social media played a role in thisindustry?

FRIEDMAN: Social media is a fact of life in the 21stcentury and almost certainly beyond. For retail-ers, it is a gift since unlike traditional advertisingthere is no media cost associated with maintain-ing a web site or Facebook, Twitter, Snap Chat orother accounts. Not only is the media costremoved from the equation, social media givesretailers an opportunity to engage with customersin a way that traditional media could only dreamabout. They can start dialogs, implement fre-quency programs, host special events and connectwith customers in a limitless number of ways.Visit a retail web site and you can get a 360-degree view of the store. Want to zoom in on aproduct? Just click.

APFELBERG: It has enhanced the power and reachof bloggers, influencers, public figures and compa-nies whose products are relevant to the part ofthe population that shops online. It is only goingto increase as more and more digital nativesobtain the levels of disposable income to havetheir purchases make a meaningful difference.

SHAW: Social media has revolutionized the con-

sumer goods industry. Consumers buy anincreasing amount of goods online, and throughmobile apps – including social media applica-tions. Online advertising is more pervasive andimportant than ever. Businesses tailoring to thedesires of consumers cannot afford to avoid socialmedia marketing.

◆ What are some of the best ways for a retailerto build its brand and elevate itself from thecompetition?

APFELBERG: The best strategy always comes fromwithin. An honest evaluation of the company,product and perception in the community willinform which of the many brand-building oppor-tunities will be most effective. It must be genuine,resonate with the core and aspirational purchaserdemographic and be communicated in a way thatthey can best hear it (and share it with others intheir network). Examples include cause market-ing, premium products, being emblematic of aluxury lifestyle (for a high price point product) oran edgy/hip lifestyle (for a lower price point prod-uct, product placement in relevant media con-tent, co-branding with likeminded products/serv-ices, cultivating relationships with influentialbloggers and influencers and celebrity or athleteendorsement/investment.

SHAW: Creativity is always important. Like otherbrands, retailers face the same challenges of tryingto establish a brand identity that will remain rele-vant to consumers. Retailers who continue tofocus on innovation will elevate itself from thecompetition. New creative marketing techniquesand strategic business planning will allow retailbrands to elevate themselves from competitorswho remain stagnant.

FRIEDMAN: Retail has always been an experientialbusiness. Whether customers are shopping in-store or online, the purchase experience has asmuch to do with retail success as the price. Thisis as true for online shopping as for brick-and-mortar. To be competitive, retailers need to utilizeevery channel available to connect with their cus-tomers and reinforce the brand experience. Thatincludes maintaining active social media channelsto create as many touch points with their cus-tomers as possible. It also includes pushing outcommunications to reach customers strategicallyand frequently, such as the digital newsletters anddaily or weekly email promotions that manyretailers have incorporated as part of their stan-dard marketing programs. Retailers are also start-ing to manufacture items specifically for theirstores that enhance the brand name. Cafes andfree wifi access give customers the opportunity tospend time in the store, which enhances the rela-tionship and supports point-of-purchase. Drivingcustomer traffic continues to be a focal point forretail PR firms, which are tasked with both in-store and online marketing programs.

MASSIE: The best way for a retailer to build itsbrand and elevate itself from the competition is

to individually connect with its current con-sumer base and seek potential consumers usinginnovative and a multitude of tactics. Retailerscan no longer rely on generic campaigns to reachthe masses of consumers and expect to differenti-ate themselves from their competitors. The exe-cution of omnichannel retailing that allows con-sumers to browse, shop, and purchase from anintegrated set of channels (brick & mortar, cata-log, on-line) that are uniquely designed for indi-vidual consumers will be the leaders in their per-spective retail industries. In addition, having theability to provide various means of shopping(desktop, tablet, smartphone, etc) will give theclear advantage to any retailer. Essentially, creat-ing a differentiated and seamless shopping expe-rience across all channels.

◆ Can you define “omnichannel” and discusshow it impacts a retailer’s financials?

MASSIE: Omnichannel is a multichannelapproach to the buying experience that seeks toprovide the end consumer with a seamless shop-ping experience whether it is a click (web) orbrick (store) transactions. Consumers expect to beable to research, review, buy, pick-up, receive andreturn anywhere with any device. Options such as“ship from store” create margin improvementopportunities while “ship to store” creates therevenue generation since consumer tend to pur-chase additional items at the time of pick up.Also critical, is the reduction of stock outs acrossbuyer access points. If items are not available,consumers will seek other options and may notreturn to you for future purchases. Other impactareas include returns and optimizing of your dis-tribution network.

◆ How important is celebrity branding, invest-ment or endorsement to building a brand forconsumer goods?

FRIEDMAN: Celebrity endorsements can beextremely effective if they are either spontaneous,based on actual personal experience with a brand,or if they are supported by a marketing budgetthat is sufficient to truly imprint the value propo-sition with the target customer. Retailers ofcourse benefit from the product demand thatsuch campaigns can create, but there is no freelunch. They are paying for the campaign in high-er wholesale costs and ultimately the productmust appeal to the customer with styling and fit.

SHAW: Combine beauty and business, and youcan create a powerful brand. However, celebri-ty branding is a luxury, not a necessity. Intoday’s social media driven world, entrepre-neurs can develop their own celebrity cache bywriting books, becoming experts in their indus-try, and using social media to harness thepower of their brands.

APFELBERG: This is a very important componentto building brand because, if done properly, it canbe extremely effective in a short amount of time

CONSUMER ROUNDTABLE

‘Reverse Showrooming involves consumers researching online andbuying in a store, either in a traditional sense, or through a “ship tostore” model or a “pick up in store” model. Disintermediationrefers to direct-to-consumer sales, which have been facilitated byfaster and cheaper shipping.’MICHAEL A. GEIBELSON


and result in immediate sales. Celebrities andathletes now have large followings of people whoaspire to be like them (and therefore use thesame products) or who respect their opinions(and therefore will buy something that thecelebrity or athlete creates or thinks is good).There is a built-in community of these folks thatinteract on the celebrity’s Facebook, Instagramand other social media outlets who, in turn, willinfluence one another. This is why there must behonesty and close alignment between the prod-uct and the person that is endorsing it, creatingit or whose name/image/likeness is incorporatedinto the product, packaging or advertising. Theexclusivity that you get from the celebrity or ath-lete in connection with their endorsement meansthat you have a legitimate barrier to competition.None of the other companies in the marketplacecan have a product that is closely associated withsuch public figure. Even if the products them-selves are similar, this is a distinguishing factorthat cannot be overcome.

◆ What are some of the best practices for abranding or endorsement campaign promotinga consumer product?

SHAW: One of the best practices is to have a con-sistent multi-level campaign across numerouschannels. Consumers are reactionary and whenthey are consistently seeing a branding messagefrom different channels, the message is imprintedin their minds. Often companies with successfulbranding or endorsement campaigns will also cre-ate a back-story to help promote the product.

APFELBERG: Always start with an analysis ofcelebrities that have influence with the core cus-tomer demographic. Then do the same with theaspirational demographic as well as the other realstakeholders in the success of your business (e.g.,distributors and retailers). Next determinewhether a license or an endorsement deal willbest suit the company’s strategic plan and budgetas well as the desires and schedules of the celebri-

ties that are being considered. Have meaningfulconversations where both sides can share goalsand expectations for the relationship. Only thendo you want to draft and sign documents.

◆ What advertising and sales practices posethe biggest threat for class action suits againstretailers and manufacturers of consumergoods?

GEIBELSON: Representations about the price andquality of products as being “on sale” or “up toX% off” or from regular inventory (in outletstores) have spurred a recent wave of classactions. Performance representations have alsobecome increasingly attractive to plaintiffs.Recurring Revenue sales models such as subscrip-tions and negative options – where charges con-tinue periodically until canceled – are also anemerging threat. Retailers’ failure to provide nec-essary disclosures and make canceling easy andaccessible will surely continue to induce class


GreenbergGlusker.com

Guardians of the BrandOur Branded Consumer Products Group actively partners with middle-market

apparel, food & beverage, health & beauty, home furnishing and consumer

electronics companies to grow their brands and profi tability.

Katy SpillersAndrew Apfelberg

• Outside general counsel

• Intellectual property & licensing

• Celebrity endorsements

• M&A and fi nance

• Tax and pre-transaction planning

CONSUMER ROUNDTABLE

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‘The execution of omnichannel retailing that allows consumers to browse, shop, and purchase from an integrated set of channels(brick & mortar, catalog, on-line) that are uniquely designed forindividual consumers will be the leaders in their perspective retail industries.’NOEL MASSIE

67 76_Consumer_Roundtable_2_23_15.qxp 2/19/2015 5:51 PM 3


actions. With respect to edible products, the tipof the iceberg in false advertising class actions hasbeen the “Natural” litigation. Other buzz wordsare emerging as consumers’ next targets for man-ufacturers’ advertisements – “non-GMO,” “organ-ic,” “gluten free,” and “handmade” to name afew. Given recent changes in class action law, andsince manufacturers don’t always know who theircustomers are, these cases are now being filedagainst retailers as well.

◆ What advice would you offer to an early-stage manufacturer seeking growth capital?

APFELBERG: Seek more than money.Understandably, it is really difficult to find some-one to back a company without a long trackrecord. However, early-stage companies needother things just as much as capital. They needrelationships, mentoring, branding, managementteams and key employees and education on run-ning a larger business in this particular industry.Try to find backers that can provide some or all ofthose in addition to cash.

FRIEDMAN: Early stage companies need to look tofamily and friends for initial startup capital. Oncethey have established themselves with sales andhave demonstrated an ability to manage theirbusinesses, then they can look for outside financ-ing. The best source of funds will come from thefactoring community, which has always been ableto support start-up and growth-stage companiesshort of capital. The factors will loan money onaccounts receivable and inventory to somedegree. These companies should be working withan outside accounting firm that can assist withfinancial reporting, forecasting and introductionsto the capital markets.

◆ How effective are acquisitions in the brandedconsumer products space in creating value?

APFELBERG: If there is strong alignment betweenthe products of the buyer and the seller, thenthere can be significant value created. One brandwill be viewed through the eyes or in combinationwith the other. Thus, they both speak to the samedemographic (e.g., Apple and Beats by Dre) then itcreates positive goodwill and resulting sales. Ifthey do not speak to the same demographic, thenboth brands suffer because of confusion in themarketplace over who the company and products“really are” as well as potential feelings of rejec-tion or disappointment by the customers andstakeholders. Nobody wants to see their grandfa-ther wearing the same shirt as they are.

◆ What are some main challenges in the grow-ing Direct to Consumer retail market?

MASSIE: All carriers have faced this difficulty.The carrier goes to your house and leaves anote saying “We Came By With Your Package.”It’s costly for the carriers and diminishes thecustomer experience. The great news is the car-riers realize there is a new era in home delivery.

Consumers want their delivery on their time.They may even want to setup a confirmed 2-hour window for their delivery. UPS has a solu-tion called My Choice that allows consumers toget home deliveries on their schedule. MyChoice provides the consumer a new level offlexibility and control over home deliverieswith both a free and a paid membership.Retailers should also consider creating a strate-gy to encourage consumers that will not behome to consider other delivery options likedelivering to work or alternate delivery loca-tions like The UPS Store.

◆ What are the key issues that arise in brand-ed consumer M&A or financing -- and how canyou prepare in advance to address them?

APFELBERG:Major issues include brand confusion(as discussed in the prior question), competitionfor shelf-space and internal resources (e.g., designteam, promotional dollars) among the family ofproducts and whether the expected synergies (e.g.,increased buying power, more efficient operations)are realistic within the timeframe set forth in themodel prepared to analyze the potential acquisi-tion. The single best thing you can do to prepareis to do self-analysis of what you need/want out ofan acquisition target in order to accomplish yourcompany’s strategic plan and view each potentialseller through that lens. If they do not fit well,then pass on the deal even if it is an excitingopportunity or good value. The next best thing isto prepare in advance an integration plan andteam and encourage the seller to do the same. Theclosing is not the finish line of the race; it is trulyonly getting out of the starting blocks.

◆ What should investors look for when consid-ering getting involved in a branded consumerproducts company?

FRIEDMAN:Management is one of the mostimportant considerations in determiningwhether to invest in a branded company. If theacquirer is looking for management to stay onand continue to run the business, pick partnersyou like, respect and can work with. Life is tooshort to be battling with management; yourgoals and visions need to match up. Also, look atthe brand and determine if it is growing or stag-nant. As an investor, you need to know what youbring to the table that can help drive the busi-ness to the next level of success.

APFELBERG: The traditional considerations ofwhether the company has a sustainable businessmodel and skilled management team alwaysapply. In addition, you need to think about whatthis brand stands for, its current and likely futurerelevance and how it can (or cannot) evolve overtime. Without a long runway for the brand tohave meaning and expand then the likelihood ofa meaningful liquidity event is lessened. If thecompany has co-branding or celebrity license orendorsement deals, consideration needs to begiven to how the investor feels about being associ-

ated with such people and whether the celebritywill remain enthusiastic about the company orproduct once the investor comes in. If the pres-ence of an investor makes the celebrity less eagerto promote the product or do the extra things thatare impactful but may not be required under thecontract then the value of that license/endorse-ment will be significantly diminished.

◆ How important is it to train retail employ-ees on workplace legal matters before theybecome lawsuits?

SHAW: Very important. In many cases, your retailemployees are your eyes and ears into your day-to-day operations. Having trusted employees thatcan identify potential legal issues before theybecome hurdles can save you a lot of money.Employment class action lawsuits are rampant inCalifornia, but they can often be avoided withproper training and counseling. Retailers in par-ticular are a target for employment and consumerclass actions. Retailers need to meet at least year-ly with their legal counsel to review and analyzenew laws so they can update their employees andplan accordingly.

GEIBELSON: There are generally two types ofplaintiffs in class action lawsuits: professionalplaintiffs, and unhappy customers. There is noprotection from the former other than compli-ance with the law. But there are a whole lot ofclass actions that never would have been filed ifcustomer service was taught throughout theorganization as way to protect the bottom line inaddition to its own merit. It’s a simple and self-evident premise that is always too conspicuous,and commonly too expensive in its breach. If cus-tomers were more often given respectful explana-tions of company policy (assuming company pol-icy complies with the law), fewer class actionswould be filed.

◆ Some people view merchant services as acommodity. Why is that a mistake?

MASSIE: In today’s ever-changing mobile market-place, a low cost alone isn’t enough. Customersexpect to make purchases whenever they want,with multiple payment options. And while retail-ers want to make it easy for them to do business,it makes it harder for the retailer. They need busi-ness partners that provide retailers with access tosafe, feature-rich payment processing. These retail-ers should be requesting simple-to-set-up mer-chant services programs with unmatched flexibili-ty and secure, comprehensive data management.

◆ Gift cards provide a significant source of rev-enue to retailers. What are the most importantissues associated with launching a gift cardprogram (legal, accounting, etc.)?

GEIBELSON: Before anyone sells a gift card inCalifornia, there is no substitute for reading theCivil Code starting with Section 1749.5. Exceptunder specified circumstances, gift cards sold in

CONSUMER ROUNDTABLE

‘To be competitive, retailers need to utilize every channel available to connect with their customers and reinforce the brand experience. Thatincludes maintaining active social media channels to create as many touchpoints with their customers as possible. It also includes pushing out communications to reach customers strategically and frequently, such asthe digital newsletters and daily or weekly email promotions.’RON FRIEDMAN


California (as opposed to gift certificates given awayas part of a loyalty program, for example) cannothave expiration dates or service fees. And mostimportantly, employees have to be trained that if agift card is valued at less than $10, they have togive the customer its value in cash on request.

◆ Culture can be very important to a company.Can you talk about what this means and howdoes a manufacturing company or retailer holdon to their culture as they grow?

SHAW: Company culture is often overlookedwhen a company begins to experience growthand they are trying to ensure legal compliance.Successful companies understand that they can-not and will not sacrifice their culture. A compa-ny’s culture is its DNA, so it is very important tomaintain the culture through growth. It can bechallenging at times to maintain the companyculture, but it is arguably the key element to sus-tainable growth.


CONSUMER ROUNDTABLE

Why Transparency is Critical toEffective Distributor-ManufacturerCollaboration

By KULLEN BIRKELAND

EFFECTIVE collaboration between manufac-turers and distributors has never beenmore important. Customers are increas-

ingly demanding high-quality items, timelydelivery and low costs. Successfully aligningthese three elements — quality, schedule andcost —is essential. This requires a strong,transparent relationship between the manufac-turer and distributor.

Transparency in the real world

For example, when a Southern Californiadistributor of precision tooling wanted toexpand its product line, the company knew itneeded to either invest in new equipment andtraining, or acquire a competitor with thedesired capabilities. After considering acquisi-tions and doing extensive competitive marketanalysis, the distributor ultimately decided topartner with a manufacturer, and become theU.S. distributor for that manufacturer. The man-ufacturer gained a first-time U.S. presence, andthe Southern California distributor gained anew product line. Since the distributor alreadyhad a significant sales presence and understoodthe industry, it was a natural fit.

But what made the relationship truly produc-tive was the level of transparency. The two com-panies trusted one another with informationabout competitive intelligence, margins, expecta-tions, inventory, pricing, potential uses of theproduct, catalog numbers, collective benefits, cus-tomer responsiveness, and many other areas out-side the purview of a normal distribution rela-tionship. Both parties went in with eyes wideopen to the possible risks and long-term competi-tive challenges. Key to the relationship’s successwas the mutual trust and shared commitment togetting the best result for their customers.

Effective collaboration is greatly enhanced bythe ability to communicate and collaborate withsupply chain partners in real time, rather than byold-school, untimely methods such as spreadsheetsand paper documentation. Having online visibilityand access to distributors’ documentation, sourcinginformation and audits gives supply chain partners— and customers —confidence in both the suppli-er’s business practices and the end product.

Why is transparency important?

Transparency enhances collaboration andmakes distributors more valuable to manufacturers

Continued on page 76



by lowering the risk of disintermedia-tion, a common worry among distrib-utors. Disintermediation is whenmanufacturers go directly to the enduser, bypassing a traditional distribu-tor. In a recent survey by ModernDistribution Management and GrantThornton, 76% of participants indi-cated that this practice was a concern.

Transparency has other advan-tages. Sharing operational informa-tion enables both sides to achievehigher margins, get to marketfaster, boost the competency andmarket connection of sales staff,and lower distribution costs. TheCalifornia distributor already had astrong presence in its market, there-by reducing costs significantly.

That’s not to say that there aren’tpotential setbacks, such as exposingyour client base or product line to anuntrustworthy competitor. Identifying

a reliable partner with mutual businessinterests can be a challenge. Also, overtime, one party may choose to movein another direction. The partnershipneeds a structure and agreement thatsets clear terms, including how to dis-solve the relationship if one or bothparties want out. Ideally, even if thepartnership ends, both parties willhave gained knowledge and benefitsthey can leverage going forward. Aswith any relationship, there will bechallenges along the way, but trans-parency will help resolve issues in anopen, collaborative manner.

A mutual benefit

When it’s done right, trans-parency in the distributor-manufac-turer relationship can be a gamechanger. It can enable distributorsto go beyond warehousing andstorage to offer a full continuum ofservices, such as sales, customerservice, repairs, replacement parts,

support in various languages, etc.These added capabilities make dis-tributors more valuable to manu-facturers, and may allow them totake a bigger cut of the profits.Close collaboration — aided bytransparency — also enhances dis-tributors’ long-term viability andreduces the risk of disintermedia-

tion. The more value and compe-tency distributors deliver to manu-facturers, the more conducive it isto mutual information-sharing.Ultimately, transparency enhancesdistributors’ value proposition.

Kullen Birkeland is the Los Angeles OfficeManaging Partner for Grant Thornton LLP.

CONSUMER ROUNDTABLE

PREPARE | EXECUTE | DELIVER

YOUR SOLUTION BEGINS HERE:

Tips for Transparent Manufacturer-Distributor Relationships• Take steps upfront to make sure you are working with a trusted collabo-

rator and a coveted business partner.• Anticipate challenges and include those considerations when you

document agreements.• Inevitably, issues will arise. Continue to monitor these arrangements

and address issues early and directly. • Consult your professional services firm for insights and practical

solutions to reach your objectives.

‘When it’s done right, transparency in the distributor-manufacturer rela-tionship can be a game changer. It can enable distributors to go beyondwarehousing and storage to offer a full continuum of services, such as sales,customer service, repairs, replacement parts, support in various languages,etc. These added capabilities make distributors more valuable to manufac-turers, and may allow them to take a bigger cut of the profits.’KULLEN BIRKELAND

Continued from page 75


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