In The Headlines
Cord Cutting Becomes Serious for Big Media
Media stocks recently took a battering when investors appeared to lose faith in entertainment companies as fears intensify about clients scaling back on traditional cable packages. Some industry watchers say the worst is yet to come, as big media’s strategies for adapting to the fast-growing streaming model could be making its troubles worse, at least in the short term. The media conglomerates once insisted that so-called cord cutters—people who forgo big cable bundles in favor of Internet video—would have very little impact on the overall market. Now, however, the traditional outlets are working fast to adapt to the new environment.
Fears that more and more consumers will abandon the bundled cable model were highlighted when Walt Disney said the ESPN network, once thought to be isolated from the negative impacts of cord cutting, saw subscriber figures fall during the second quarter. The company reduced its growth expectations for the cable television segment, which includes the sports broadcasting network. Efforts by companies like Disney to partner with online services like Netflix and Hulu are just making their problems worse, said Rich Greenfield, a media analyst at BTIG Research. Disney does not think so. CEO, Bob Iger, said in an interview that he views “Netflix as friend not foe,” adding that he saw no reason to “try to beat Netflix.” In fact, Disney will allow Netflix to stream some of its top programs—including the popular ABC drama How to Get Away with Murder, and plans to license its 2016 film slate to the company.
That could do more harm than good in the long run, according to Greenfield. “All of these companies have been very interested in monetizing the one company that’s paying lots of money for good content, which is Netflix,” Greenfield said in an interview. But licensing content to streaming providers will ultimately make consumer interest in watching linear television decrease at an even faster pace, he said. “This is really the industry literally doing it to themselves and you’re seeing the pain that’s just starting,” Greenfield said, adding that its current survival tactics will ultimately hurt advertising and drive people toward outside on-demand platforms. “This is a classic prisoner’s dilemma game,” Greenfield continued. “This whole industry is struggling as advertisers are looking more to mobile devices.”
Many larger media companies have taken approaches similar to Disney’s, trying to benefit from the popularity of streaming platforms like Netflix and Hulu, while others have attempted to create their own platforms. “There’s a secular shift going on in media, a shift in consumption of information to entertainment, we’ve seen it in advertising for the last several quarters. There’s been a worry that you’re going to see it in affiliate fees, which are directly tied to the number of subscribers to those channels,” said research analyst Chris Marangi, who covers cable, satellite, and entertainment companies for Gabelli Funds. Affiliate fees (revenue generated from distributors) had been a saving grace for Disney and many of its peers, but those are forecast to fall across the board, according to some estimates. If that happens, the natural next step will be for the media companies to turn on each other and self-destruct, according to John Rose, a consultant with the Boston Consulting Group.
Netflix topped estimates during the second quarter, adding a record 3.28 million net new additions, bringing its total number of users to 65.6 million. And Netflix is not the only threat. In a note released earlier this week, Morgan Stanley analyst Benjamin Swinburne warned that television spending could turn negative if Facebook joins Google’s YouTube as a real replacement for TV. Television is still considered the ultimate advertising platform, but that will likely change in the coming year as advertisers and financial investors notice the underlying softness in the media industry, according to Rose.
Perhaps seeing the writing on the wall, most big media companies have begun experimenting with over-the-top services. Time Warner’s HBO network recently announced an agreement with Verizon that would allow the carrier’s Internet subscribers to access HBO Go without subscribing to a cable package. CBS also recently launched a stand-alone streaming version of its premium cable channel Showtime. Last month, Comcast announced a new video streaming service that would allow its Internet users to watch live TV from about a dozen networks without purchasing a cable bundle. The service, called Stream, will launch in Boston at the end of the summer with a price tag of $15 a month. Comcast plans to make Stream available everywhere within its footprint by early next year. Satellite provider Dish Network is betting on its new Sling TV service, a slimmed-down, $20-a-month package that aims to reach customers who do not want to pay for more expensive traditional TV service.
Despite the majority of the networks beating analysts’ expectations on both sales and earnings, investors are growing skeptical. Recently, the S&P media sector had its worst week since 2008 when it declined 21.87%.
Citations
1. http://cnb.cx/1IAffn7 – CNBC
2. http://on.wsj.com/1M3wrWz – Wall Street Journal
Is Aldi’s the New Trader Joe’s?
Aldi became one of the world’s biggest food retailers using a simple formula of no-frills stores offering a small assortment of products at rock-bottom prices. After decades of expansion in Europe, it followed the same strategy in the U.S., where it gets about $8 billion in annual sales and is growing from 15% to 20% a year, estimates Jim Hertel, managing partner at food-retail consultant Willard Bishop. The low-end discounter is now working to also make itself more attractive to a different consumer: the type that shops at Trader Joe’s.
Both supermarket chains are controlled by different factions of Germany’s billionaire Albrecht family, but there is more than just a clan rivalry at play. Aldi U.S. Chief Executive Officer Jason Hart has seen American shoppers become more concerned about the content and quality of the foods they eat. So his chain recently added organic quinoa and coconut oil, chia seeds, and grass-fed beef. It is also testing cage-free eggs and sriracha sauce to pull Americans from not only traditional supermarkets, but also specialty chains. Aldi’s own SimplyNature all-natural and organic line has become its fastest-growing brand. Says Hart: “This isn’t your grandmother’s Aldi. We’re attracting more consumers.”
The grocer, with 1,400 U.S. locations, is set to compete head-to-head against established West Coast foodie favorites such as Trader Joe’s and Sprouts Farmers Market. Next year, Aldi will enter California, and it plans to reach 2,000 locations nationwide by the end of 2018. Aldi’s reputation as a low-end retailer has changed since the recession, says Hertel. “People got forced into it and realized that it was good quality food and great value,” he says. “The perception started to change.”
The secretive company was founded more than a century ago when Anna Albrecht opened a small store in Essen, Germany. In 1948 her sons, Karl and Theo, took over and expanded to 30 locations in seven years. The name was shortened from Albrecht Discount to Aldi in 1962, the year the Albrecht brothers split the chain into separate companies—Aldi Süd and Aldi Nord—following a feud over whether to sell cigarettes. Closely held Trader Joe’s is owned by TACT Holding of Monrovia, Calif., which is held in a trust by the Albrecht family branch that owns Aldi Nord. Aldi Süd oversees Aldi’s U.S. locations and those in the U.K. and Australia. Globally, there are about 9,950 Aldi stores. Aldi made its U.S. debut in 1976 in southeastern Iowa with just 500 items (it has about 1,300 core products now). In 1998 it had 500 stores in the U.S. and a decade later expanded beyond the Midwest to Florida and Connecticut. Hart, who took over as CEO in April, plans to have 45 stores in Southern California by the end of 2016.
Americans, who spent about $33 billion on organic goods last year, according to the Nutrition Business Journal, increasingly expect to find them at both traditional supermarkets and discounters such as Aldi. The store plans to give them such goods but at the extreme discounts it is known for. In Chicago, it sells a regular can of tomato sauce for 25¢, while bananas are 38¢ a pound. Hart says Aldi’s prices are as much as 40% below that of traditional grocery stores, and 25% less than big-box discounters such as Wal-Mart Stores. A July grocery price survey by Bloomberg Intelligence found Aldi to be cheaper than other discounters including Wal-Mart and SuperValu’s Save-A-Lot chain. A basket of 78 private-label items, including cereal and sour cream, was $121.59 at Aldi, compared with $149.58 at Wal-Mart and $133.66 at Save-A-Lot.
The chain, which Hart says primarily targets 25-to-45-year-old moms plus anyone looking for a deal, keeps its costs low. Aldi stores are small, averaging just 10,000 square feet of retail space—about a third the size of a Walmart Neighborhood Market small-format grocery. Multiple, large barcodes are emblazoned across most items at Aldi, making checkout faster for cashiers. As few as four employees can run a store, and customers bag their own groceries—with the store charging from 4¢ each for a paper bag to $1.99 for a reusable eco sack if they do not bring their own.
Although Aldi is based in Germany, it is seeing most of its expansion in other areas as consumers worldwide look for low prices in smaller, easy-to-shop stores. “Its growth really comes from the U.S. and also from the U.K. and Australia,” says Denise Klug, an analyst at Planet Retail in Frankfurt. “In European markets and in some industrialized nations, big boxes in general are losing their importance.” Discount grocery competition is about to increase in the U.S. as Germany’s Schwarz Group moves toward the American debut of its discount Lidl chain before the end of 2018. Lidl, which copied Aldi’s limited-assortment/low-price format in the 1960s and is expanding quickly now, is Aldi’s biggest competitor globally, Klug says. Lidl has been more willing than Aldi to try new things, she says, and may be able to lure shoppers with fresh fish, upscale wine, and in-store bakeries. “It will be very adventurous for them to go into the U.S.,” Klug says. “This might also be the reason why Aldi is really accelerating their expansion.”
Citations
1. http://bloom.bg/1W5cS4V1 – BusinessWeek
The Good News Is . . .
• Consumer credit rose a strong $20.7 billion in June, and includes a strong gain of $5.5 billion for revolving credit which is where credit cards are tracked. Strength in credit card use may point to a special lift ahead for the nation’s retailers. Non-revolving credit rose $15.2 billion reflecting strength for vehicle sales and student loans, which are tracked in this report.
• Aetna, Inc., a leading diversified health care benefits companies, reported earnings of $2.05 per share, an increase of 21.3% over year earlier earnings of $1.69 per share. The firm’s earnings topped the consensus estimate of analysts by $0.23. The company reported revenues of $15.1 billion, a 4.4% increase. Management attributed the company’s results to strong revenue growth, cash flow, and operating margins particularly in its government segment.
• The Belgian chemical company Solvay said that it had agreed to acquire its American rival Cytec Industries for $5.5 billion in cash or $75.25 per share. The deal is expected to widen Solvay’s scale, particularly in sales to the aerospace sector. Cytec also complements its business serving the automotive market. Cytec, which is based in Woodland Park, N.J., makes specialty chemicals and materials, including composite materials used in the aerospace industry.
Citations
1. http://bloom.bg/1Dl6vPO – Bloomberg
2. http://cnb.cx/1gct3xa – CNBC
3. http://aet.na/1J4NfO1 – Aetna, Inc.
4. http://nyti.ms/1MUfNr8 – NY Times Dealbook
Planning Tips
Guidelines for Understanding Combination Life / LTC Insurance
An estimated 7 in 10 Americans will need some form of long-term care, and the costs can be quite high. Long term care insurance policies can be expensive and are becoming more difficult to find as many insurers have abandoned this market. But long-term care insurance is not the only way to fund long-term care expenses. Life insurance policies that offer long-term care (LTC) coverage, known as combination life / LTC insurance policies, are becoming an increasingly popular alternative. Below are guidelines to help you better understand these policies. It is a good idea to consult with your financial advisor when considering the purchase of one of these policies.
Definition of a combination life / LTC policy – A combination life/LTC insurance policy is a universal life insurance policy with an optional LTC benefit rider. Policy premiums can be paid upfront or in installments, and the premium rates are locked in at the time of purchase. There is also a refund feature available to buyers who change their minds after all premiums have been paid.
How combination life / LTC policies work – Most combination life / LTC products require a single premium payment to begin coverage. To buy a meaningful long-term care benefit, you will have to write a check for $50,000 or more for a life combination policy. Some carriers allow you to spread your premium payments over two years. In exchange for that up-front payment, you get immediate access to a life insurance death benefit, typically about two times the amount you paid. Your up-front payment also guarantees coverage for any future long-term care expenses you may incur, usually up to about six times your investment.
Considerations – Combination life / LTC products are not standardized and long-term care payouts vary widely depending on carrier and policy. So it is important to shop around and know exactly what your benefits will be if you require long-term care. You will also have to submit health information to the carrier to see if you qualify for coverage. As with standard long-term care coverage, the sooner you apply, the cheaper the policies may be, depending on your health.
Advantages – The main advantage of the combination life / LTC product over a long-term care policy is that you will get some benefit from the premiums even if long-term care coverage is not needed. Combination products can also be more affordable to buyers in their 60s than long-term care policies.
Return of premium – Most combination life / LTC policies offer a guaranteed return of premium. The return of premium offered by most lump-sum combination policies applies to the upfront payment that you make to fund a life insurance policy with an accelerated death benefit. Money-back guarantees are offered for both single-premium policies, in which you pay in one lump sum, as well as flexible-premium policies that can be fully funded with annual payments over several years. Typically, this is a rider that you must purchase. If you change your mind after purchasing a life combination policy, the sum of your premium payments can be returned to you, reduced by the amount of any loans, withdrawals or benefits paid. These policies have surrender charges. So if you change your mind within the first several years, it could impact the amount of money you get back.
Citations
1. http://bit.ly/1vlRuHw – Bankrate.com
2. http://bit.ly/1gVrPGT – Insure.com
3. http://cnb.cx/1gqCDf8 – CNBC
4. http://bit.ly/1PfgmNA – RetirementRevisedcom
5. http://on.mktw.net/1PfgnB6 – MarketWatch.com
