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Will They Get The Gray Out?


"We think it's a new world. Hostile takeovers can work." -- Larry Ellison, Oracle CEO, after PeopleSoft acquiesced to his company's hostile bid following an 18-month fight

Don't like what you read in the news? Write it yourself. That's the premise behind Wikinews (en.wikinews.org), an experimental free news site launched in December. Based on collaborative Web software called wiki, it lets anyone submit original or summarized articles, or chime in on a posted story.

It's the latest attempt at what some call "citizen's media." The key difference between Wikinews and other Web news outlets, such as blogs: The articles must be judged objective by a reader review and can be removed. Says Jimmy Wales, director of the backer Wikimedia Foundation: "Let's go back to the fundamentals of good journalism."

Challenges abound, from a review process still in flux to issues of libel and copyright. It may take a while for citizen reporters to rewrite the news business.

At a Seattle Rite Aid (RAD), there's a wide selection of hair-care products from Nexxus, Paul Mitchell, Redken, Rusk, and Sebastian. Across the country, a Duane Reade in Manhattan has just as ample a supply. Trouble is, these products are intended for sale only through salons.

A six-week investigation by BusinessWeek found a thriving gray market in professional-grade hair-care goods. A spot check of retailers nationwide -- including CVS (CVS), Duane Reade, Eckerd, Rite Aid, Target (TGT), and Walgreens (WAG) -- found many items marked "for salon sale only."

Makers of salon-only products allege retailers are selling goods that have been improperly diverted. Up to $800 million of the industry's $29 billion yearly product sales may be diverted or counterfeit, says Steve Sleeper, executive director of the Professional Beauty Assn. He says sales of such bogus goods are growing at nearly twice the industry's 3% annual rate.

How do retailers get hold of the goods? They buy from wholesalers, who obtain the items from "collectors." These individuals buy the products from salons, possibly in violation of their exclusive sales contracts with manufacturers, offering a quick 20% profit over salons' costs.

No law prohibits retailers from selling a salon product. "Each is readily available and purchased legally on the open market," says Walgreens' spokesman Michael Polzin. CVS, Duane Reade, Target, and Eckerd also say they use legal sources. Rite Aid did not return calls.

Manufacturers argue that consumers are at risk. Makers can't recall items or guard against counterfeit products. But the big issue is brand erosion: Companies build their reputations through exclusivity -- setting high prices because their products are sold only by professionals. If they can be found alongside Alberto VO5 and Pantene, what sets them apart from cheaper rivals?

It's an issue manufacturers can't ignore. John Paul Mitchell Systems has launched a multimillion-dollar ad campaign urging users to stick to salons for the real thing. Instead of product ads, "we're spending that money educating consumers," says CEO John Paul DeJoria. The alternative? More sales down the drain.

Corrections and Clarifications

In "Will they get the gray out?" (Up Front, Dec. 27), we should have noted that a Rite Aid (RAD) spokesperson says the company obtains its hair-care products from legal sources.

Rank-and-file employees are expected to get record low pay increases for 2004 -- an average of 3.3%, says human-resources consultant Hewitt Associates (HEW). But not so for the nation's chief executives. A study of 68 companies that already have filed proxies found that the median increase was 8.8%, bringing overall pay packages to nearly $7.3 million. That's up from a 5.2% hike in 2003.

Pay consultant Equilar found that median option grants fell 19%, to $3.2 million, as companies prepared for option expensing in 2005. But median base salaries rose 4.1%, to $908,269; bonuses climbed 32.6%, to $975,000; stock grants grew by 34%, to $2.7 million; and long-term incentives jumped 72.1%, to $773,719.

Among the highest paid: H. Lee Scott Jr., CEO of Wal-Mart Stores (WAL). He took a 20% cut in total pay in fiscal 2004 -- and still walked away with nearly $23 million, including a $4.2 million bonus, a $6.7 million restricted stock award, and options valued at $10.5 million, according to Wal-Mart's proxy. The company says Scott earned his bonus by meeting goals for pretax profit, but declined additional comment.

For corporate honchos, "it's going to be another good year," says Mercer Human Resource Consulting's Steve Sabow. Some things never change.

The Internal Revenue Service could spoil the holiday supper. Many companies used to dole out turkeys this time of year. Now, says publisher Bureau of National Affairs, 41% give out coupons, which can be redeemed at any store for a turkey or whatever else an employee wants. But the IRS recently judged that gift certificates, unlike actual birds, are a cash equivalent -- and thus taxable. That'll be a deterrent to seasonal giving, says Washington tax attorney David Fuller, though more specific certificates may avoid cash equivalency. Still, seems a Grinchy thing to tax turkeys for workers. But those 50-yard line NFL seats for execs -- still tax-exempt.

Ready for mobile TV? In January, Fox (NWS) will introduce one-minute "mobisodes," based on its hit show 24, for Vodafone (VOD) cell-phone users in most of Europe. A few months later the TV series is expected to be on phones of Vodafone's U.S. partner, Verizon Wireless (VZ).

The mobisodes, tailored for small screens with more closeups and larger text, won't likely offset falling network ratings. But as folks spend more time away from home, TV execs are eager to lure eyeballs. It's Hollywood's first made-for-cell show, but Fox says deals with other carriers are coming.

Harvard professor Michael Porter is an unlikely champion of inner cities. Author of the B-school text on strategy, he seems more boardroom than bodega. But the nonprofit he founded in 1994 uses economic data to dispel myths about urban neighborhoods to attract corporate investment. A new study by his Initiative for a Competitive Inner City says that retail spending in densely populated urban areas is $25 million per square mile, compared with $3 million in metro areas.

How did Porter, 57, come to this cause? After the 1992 Los Angeles riots he saw officials try to craft social policies to ease tensions caused by poverty. But Porter thought "the effort was not based on sound economic principles."

Porter's message is getting through: Home Depot (HD) has some of its best sales at its new store in Boston's Dorchester. Next, he hopes to dispel more myths with a list of the top 10 cities with urban economies outpacing the overall city.

Video-game makers are in for some extra-happy holidays this season. How do we know? We went right to the Big Man himself. From the Hillsdale Shopping Center in San Mateo, Calif., to Atlanta's Lenox Square Mall to the Roosevelt Field Mall in Garden City, N.Y., BusinessWeek's newsbreakers have once again braved throngs of shoppers to ask Santa Claus's reps which goods are topping kids' wish lists this year.

The Santas report that boys are asking for Sony's (SNE) PlayStation 2, Nintendo DS, Microsoft's (MSFT) Xbox, and myriad games for those consoles. Spider-Man and Power Rangers are still in demand. For younger boys, Thomas the Tank Engine is tops.

New this year, several Santas say girls want video games, too. Barbie continues to be the most sought-after doll, followed by Bratz and the American Girl and Dora the Explorer collections. Also in the mix: traditional games and dolls from Candy Land to Cabbage Patch Kids.

The little ones are ever more efficient with their increasingly lengthy requests. A practical Texas child brought Dallas Santa Cecil Ethridge, 61, a catalog with dozens of pages neatly earmarked.

The real Santa Claus -- you can check his driver's license, where his birthdate reads 439 A.D. -- works the Willow Grove Park Mall in Willow Grove, Pa. He has noticed that children's lists have gotten almost as long as his beard. But it's not that kids have gotten greedier, he says, it's just that parents are wealthier. "Kids are taking advantage of that to ask for more," says Claus.

Not all have material requests: A Dallas child asked for an end to the war in Iraq. Of course some things even Santa can't fix.

It appears that House Armed Services Committee Chairman Duncan Hunter can get away with accounting tricks that could land a CFO in hot water. In the recently passed defense authorization bill, Hunter boosted military spending without raising the Pentagon's budget. How? When the California Republi-can cut accrued expenses for retiree health benefits -- what the Pentagon will owe down the road -- it worked like legislative legerde-main. Presto -- $12 billion available now for such items as surviving spouses' benefits and privatizing military housing.

Auditors would never let a company do that. "I don't know how you would get away with it," says analyst Dan Mahoney of the Center for Financial Research & Analysis, an independent watchdog group.

Hunter argues that Uncle Sam is good for the money: "Nobody's saying we're not going to pay the bill. The question is whether it comes from Treasury or Defense." In Washington, there's no penalty for ignoring fiscal prudence.


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