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A Dark Kodak Moment


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A DARK KODAK MOMENT

A surprise Fuji attack has helped stall the company's turnaround and buffeted its stock

George M.C. Fisher is furious. Earlier this year, longtime nemesis Fuji caught the Eastman Kodak Co. chief executive off guard with a surprise attack on the U.S. color film business. Fuji cut prices by as much as 50% on multiple-roll packs, in some cases selling four rolls of film for $4.99 at Kmart stores. "Their marketing is crazy" fumes the 56-year-old Fisher. "If they want to put their brand in the mud, let them fight it out with the low-end guys," he adds.

Crazy or not, Fuji's move has helped stall the turnaround that Fisher launched when he arrived at Kodak in December, 1993. On July 16, Kodak reported an abysmal 16% drop in second-quarter profits on an anemic 2% gain in sales from continuing operations. That was well below Wall Street's expectations, and Fisher previewed more trouble ahead: a likely fall in full-year operating profits below last year's $3.1 billion. Kodak's stock dropped to $68 a share, a 52-week low. Fisher's own options lost $100 million in value within hours of the earnings announcement. The Kodak CEO is "in the trenches, and he's having trouble executing," says Merrill Lynch analyst Robert P. Curran, who pulled his buy rating on Kodak after the news.

It's not the kind of Kodak moment Fisher expected. The highly regarded former Motorola Inc. chairman spent two years restructuring, cutting 14,700 jobs, and selling off $8.9 billion in noncore assets such as Eastman Chemical Co. and the copier business. His plan to revive 118-year-old Kodak pushed the company's share price to an all-time high of $94 in February, nearly double where it stood when Fisher took over.

SEEING RED. What went wrong? For starters, Kodak's push into digital photography is taking longer and costing more than expected. Digital imaging, Fisher's most ambitious effort, has rung up $100 million in red ink this year. Also, the Advanced Photo System that records digital data about each exposure got off to a poor start last year. Kodak budgeted a $100 million marketing campaign for APS this year, but losses have been higher than planned. Meanwhile, a stronger dollar has cut into expected gains overseas.

Then there's Fuji. Kodak has repeatedly accused the Japanese photo giant of unfair trade practices in the U.S. and Japan. But while a formal trade dispute remains unresolved, Fuji has been grabbing business from Kodak in both color film and photographic paper. After losing a dumping case in 1994 in which Kodak convinced the U.S. government that Fuji was selling photo paper in the U.S. at one-fourth the price it was charging in Japan, Fuji invested more than $1 billion in new manufacturing facilities in Greenwood, S.C. Last year, Fuji opened a paper plant at the site and has since grabbed back the 20% share of the U.S. photofinishing business it had before it lost the dumping case. A color film plant at the South Carolina site will start production later this year.

In the meantime, despite a 3.7% tariff on all imported film, Fuji has turned up the heat. Price-cutting resulted in a 28% increase in shipments of Fuji color film through June 22 of this year, while Kodak's dropped 11%, according to Information Resources Inc. Making matters worse, the market is contracting, in part because consumers buy huge quantities of disposable cameras, says IRI.

Fuji is not just winning over cost-conscious consumers. "Fuji is steadily eroding Kodak's lead in the professional [photography] market," says Ray Pryor, vice-president for operations at Chicago's Gamma Labs, a large photofinisher. One reason: Fuji has been generous with free samples, Pryor says.

ON A ROLL. Analysts expect Fuji to continue gaining ground. "The momentum is all in Fuji's court," says Prudential Securities Inc.'s Alex Henderson. He expects Fuji's gains in the U.S. to push it past Kodak in worldwide market share by 1998 or 1999. Kodak's 1996 share was 40%, vs. 35% for Fuji, but the gap has now narrowed to 39% vs. 37%, Henderson says.

Fuji's U.S. consumer-marketing vice-president, Paul A. Hudak, denies he's waging a price war against Kodak. While he admits that Fuji charged unusually low prices in this year's first half, he says such pricing schemes will disappear in the second half.

Fisher claims Fuji can afford to slash prices because it has a profit sanctuary in Japan, where it has a 70% market share and, Kodak asserts, controls film distribution and pricing. Kodak's charges to that effect, filed in May, 1995, are under review by the World Trade Organization.

But even a favorable outcome for Kodak won't alter the competitive landscape in the U.S. anytime soon. That's why Fisher says that Kodak will continue responding to Fuji with aggressive promotions of its own. Still, he acknowledges that Kodak may continue to lose market share to its Japanese rival.

Ultimately, Fisher needs to counter those losses with new sources of revenue. The source he thought most promising--digital imaging--is behind schedule. Fisher had predicted that Kodak's digital business would be profitable this year, but instead the losses are widening. One reason, says Fisher: "The scope of our digital effort has expanded dramatically" since he took over. Many of Kodak's digital products are still in the lab, though a key one--an Internet-based digital photo service--is set to debut later this year.

Fisher maintains that the second-quarter debacle reflects only short-term glitches, not a problem with his strategy. "When you're trying to do as many things as we're doing, there's bound to be some things that don't improve as fast as you planned," says Fisher. He adds: "I don't have the slightest hesitation that we're on the right track."

He has believers, too. "He's a tough guy to bet against," says Erick Lucera, who follows Kodak for Independence Investment Advisors in Boston, which manages $26 billion in pension-fund assets. "He's investing for the long term, and that's what he needs to do."

Other analysts believe Kodak will continue to lose share to Fuji. And Prudential's Henderson predicts that competition will be so stiff in digital imaging that Kodak may never see a big payoff from its investments.

Fisher has no patience for the skeptics. "People that get weak-kneed because they can't earn what the Street expects them to earn don't have a future," says Fisher. And though he has been mentioned as a leading candidate to become chairman of troubled AT&T, he vows to stay at Kodak until at least 2000. "There's no way I could ethically or morally leave this situation," he says. Those words might assure Kodak employees. But investors are now looking for tangible results from a strategy that, for now, has drifted out of focus.By Geoffrey Smith in Boston, with Brad Wolverton in Atlanta, Ann Therese Palmer in Chicago, and bureau reportsReturn to top


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