A New Cold War? Why the U.S. and China Would Both Lose


With each passing day, the U.S.-China standoff is looking less like a trade war and more like a “new cold war” between the world’s two most powerful countries, writes Wharton Dean Geoffrey Garrett in this opinion piece.  
With escalating threats of higher American tariffs on more Chinese imports, followed inevitably by Chinese tit-for-tat retaliation on American exports, talk of a trade war is everywhere. But the Trump administration’s strategy is about far more than trying to level the playing field in trade, with potentially much worse consequences for both countries, and for the global economy and global stability.
The U.S. claims that Chinese trade is unfair — because of government subsidies, restricted American access to the Chinese market, and manipulation of the Chinese currency, among other things — and hence merits tough tariffs. But that is only the beginning.
The Trump administration goes on to assert that the entire Chinese model of economic development is illegitimate, and antithetical to the open and free global economy supported by the U.S. – because the Communist Party government’s reach extends to every aspect of the Chinese economy.
Add to this the last Trump contention: China’s aspirations to become a global leader in technology are a threat to American “national security” because so much of modern technology is potentially “dual use,” with both commercial and military applications.
While pre-Trump policy was constantly looking for win-wins with China, Trump believes there are no win-wins, only win-loses. For America to win, China must lose.
With each escalating assertion, the situation is looking less like a trade war and more like a “new cold war” between the world’s two most powerful countries.
Here are some of the unprecedented tools the U.S. is marshaling to use against China:
  • Section 301 of the 1974 Trade Act justifying American tariffs because Chinese practices are “unreasonable” and “restrict U.S. commerce.”
  • Section 232 of the 1962 Trade Expansion Act giving the U.S. the right to impose tariffs because Chinese behavior is a “threat” to American “national security.”
  • The U.S. National Security Strategy, which late last year labeled China a “revisionist power” determined to undermine the U.S.-led global order.
Less noticed, but at least as important, are other recent American actions against Chinese (and China-influenced) companies, all of which the administration based on national security grounds:
  • Blocking Alibaba’s acquisition of MoneyGram
  • Outlawing the sale of ZTE and Huawei phones in America
  • Blocking the Broadcom-Qualcomm merger
This is a radical departure from the clear and consistent central tendency of American policy towards China since Richard Nixon first went to Beijing over 40 years ago. No matter who has been in the White House since then, the consensus position has been that the best way for America to further its national interests is to increase economic interconnections with China.
This has been viewed as a win-win-win for the U.S.: good for the American economy, good for promoting economic and political reform in China, and good for global peace and stability by tying China into the global system.
Then-President Bill Clinton made this case explicitly in his successful push to get China into the World Trade Organization. Here is what he said in a speech in March 2000:
By joining the WTO, China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values, economic freedom … When individuals have the power not just to dream, but to realize their dreams, they will demand a greater say.
Fast forward to today. The Trump team has just written to the WTO about the threat China poses to the organization, and to the global economy — a 180-degree about-face from the Clinton position:
Since joining the WTO, China has repeatedly signaled that it is pursuing economic reform. Unfortunately … [for] China, economic reform means perfecting the government’s and the Party’s management of the economy and strengthening the state sector, particularly state-owned enterprises. As long as China remains on this path, the implications for this organization are decidedly negative.
This is just part of Trump’s essential repudiation of the entire post-Nixon consensus on China.
“[The] Trump administration’s strategy is about far more than trying to level the playing field in trade, with potentially much worse consequences for both countries, and for the global economy.”
According to Trump, American economic engagement has neither increased political freedoms in China nor reduced the government’s role in the economy. Indeed, things have gone backwards under President Xi Jinping, this thinking goes. China’s rise has cost countless good American jobs without giving American companies and products enough access to the Chinese market, he argues.
Moreover, Trump contends, China is determined to acquire American IP and know-how by any means necessary to ramp up its technological sophistication, which it in turn will use to drive its military power and global influence.
While pre-Trump policy was constantly looking for win-wins with China, Trump believes there are no win-wins, only win-loses. For America to win, China must lose.
With the exception of Treasury Secretary Steve Mnuchin, you will rarely hear anyone on the Trump team acknowledge the clear benefits the U.S. has derived from being so involved in China’s economic rise in the last four decades:
  • Cheaper and more plentiful products assembled, made or sourced in China — from all the “made in China” products on Walmart shelves to every Apple device: a win for the American consumer.
  • A growth market for American multinationals — think not only Boeing planes made in the U.S., but also General Motors vehicles made in China: a win for American companies.
  • Lower U.S. interest rates because of well over $1 trillion in Chinese savings poured into U.S. Treasury bills: a win for the American economy.
Instead, the Trump team makes a different point. Even if the U.S. has benefitted in some ways from China’s economic rise, China has gained much more.
There is no doubt relatively open access to the American market has been the major driver of Chinese economic growth since at least its entry into WTO — a major win for China. At the same time, access to the Chinese market has always come with real strings attached for American firms.
So, what should the U.S. do about this underlying asymmetry in U.S.-China economic relations?
The traditional American approach in seeking to increase access to the Chinese market has been more carrot than stick, more encouragement in private than public calling out, more rhetorical cajoling than tariffs and sanctions. Prior presidents have shared Trump’s objectives. They have just gone about trying to achieve them very differently.
“While pre-Trump policy was constantly looking for win-wins with China, Trump believes there are no win-wins, only win-loses. For America to win, China must lose.”
Trump’s approach is the exact opposite — lots of sticks and very few carrots. A one-two punch of open public criticism and tough unilateral policy moves.
So, what will be the consequences of Trump’s about-face on China?
America may win the trade war (i.e., getting some concessions from China) in the short term because its bargaining position is stronger. The Chinese economy is looking more fragile today than in the past 20 years, whereas the American economy is very strong. Access to the American economy is more important to China than access to the Chinese economy is to America. China probably has no alternative than to make some concessions to the U.S. These concessions are probably in China’s long-term interests, anyway.
But if Trump wins some concessions in the trade war, he should stop there. Escalating his attacks on China towards a new cold war would be a lose-lose of gargantuan proportions.
Efforts to quantify the costs of the trade war begin with the costs to American consumers of higher priced goods but quickly move to label the trade war as something that could potentially tip the American economy into recession. I don’t see that happening.
But take the Trump administration’s position to its logical conclusion: Because the Chinese economy is unfair, illegitimate and a threat to American national security, the U.S. should reverse 40 years of economic engagement and systematically reduce the connections between the two economies.
Here is the fundamental difference between America’s cold war with the Soviet Union and its conflict with China today: The Soviet economy was completely isolated from, and irrelevant to, the Western economy led by the U.S.
In no small measure because of U.S. policy since Nixon, China today is absolutely at the core of today’s global economy. As the graph below indicates, China today accounts for more than one-third of all economic growth in the world. The U.S. simply cannot afford to turn its back on China.
So, my advice to the Trump administration is simple. You have some real and legitimate beefs about the Chinese economy. You probably are in a stronger bargaining position to get some concessions than in recent years.
But the risks to the global economy of a full-frontal attack on the Chinese economy are incalculable. There is a reason U.S. policy has been so consistent for so long — it is in America’s interests for China to do well. Rather than bluster on Twitter and make precipitous policy threats, it’s better to remember then-President Theodore Roosevelt’s motto for the U.S. more than 100 years ago: “Speak softly and carry a big stick.”
(This article originally appeared on LinkedIn.)

Crossing $1 Trillion: What’s Next for Apple?

Apple valuation


Former Apple CEO John Sculley and Erik Gordon from the University of Michigan discuss Apple's $1 trillion market capitalization.
Consumer electronics giant Apple is finding itself in a whole new race after last Thursday, when its share price rose to $207, making it the first U.S. company to cross $1 trillion in market capitalization.
As Apple and its CEO, Tim Cook, set their sights on the future, experts from Wharton and elsewhere point out that the company does face some challenges: Apple’s smartphone sales have slowed (although margins have gone up); it has no big-bang product around the corner, notably in augmented reality or artificial intelligence (AI); its R&D investments are lagging; and its next big leap may take place under a different CEO.
Meanwhile, other tech giants such as Amazon, Google’s parent Alphabet and Microsoft are close runners-up in the trillion-dollar race, heralding a new era of large, cash-rich companies. Platforms and ecosystems are critical to success in the next round, and some predict that Amazon looks poised to become the first $2 trillion company, especially with its ability to seemingly enter any industry it chooses to.
Credit Where It’s Due
At least the first $500 billion of Apple’s market cap should be credited to the firm’s previous CEO, the late Steve Jobs, according to John Sculley, who was CEO of Apple from 1983 to 1993. During a recent interview with the Knowledge@Wharton show on SiriusXM, Sculley recalled his first meeting with Jobs at Apple in 1982: “[He] was thinking about something that nobody else in the high tech world thought was even important — he wanted to build a personal computer, because he thought the future of computing was going to be for non-technical people to be able to have something easy to use [to] do all kinds of amazing, creative things…. Those foundational principles that Steve created way back in the early 1980s are still the foundational principles that Apple sits on today.”
He then gave Cook “a lot of credit for the next $500 billion,” and explained why: “He came up with a strategy for loyalty with shareholders that is incredibly powerful, just like Steve came up with a strategy for loyalty with consumers.”
That said, “Apple doesn’t have a next act that we’re aware of after the iPhone,” said Sculley. “Steve Jobs had the brilliance to realize that you could do photography in an entirely different way with a handheld device, and that you could send photos to another device. And that led to all the things we [have today]. The question is, what comes next?”
“If we believe that design is not going to be enough, and deep tech is going to be a differentiator … Apple should speed up its investment in R&D.”Gad Allon
According to Sculley, Cook is probably right when he said in an earnings call last year that augmented reality will be the next big area of action in consumer technology. He noted that from the standpoint of shareholder value, Apple may not need a blockbuster product anytime soon, “but it is going to need it in maybe five or seven years” — when AI, augmented reality and “other foundational things that will probably be part of what comes next after iPhone will happen….”
At present, Apple lacks “a significant depth or innovation in the areas that are going to be significant in the future,” noted Wharton professor of operations, information and decisions Gad Allon. Apple is lagging in AI and AI-based products such as Siri, and sales of its HomePod speakers are slow, he added. “If we believe home and TV are the next battle, Apple has not figured out these, and if we believe mobility — or car as a platform — is the next battle, Apple is losing there as well.”
Apple has been lagging in its R&D investments as a percentage of revenues, behind its competitors including Amazon, Google and Samsung, said Allon, who is also director of the Jerome Fisher Program in Management & Technology at the University of Pennsylvania. This is notwithstanding the fact that Apple has increased its R&D investments significantly over the last few years, he added. “If we believe that design is not going to be enough, and deep tech is going to be a differentiator in some of these key areas, Apple should speed up its investment in R&D.”
Erik Gordon, a professor at the University of Michigan’s Ross School of Business who joined Sculley on the Knowledge@Wharton radio show, agreed that augmented reality will be the arena for the future of consumer technology. “It’s going to be fabulous, and it’s going to be very cool, but I don’t think it’s in Apple’s next product cycle,” he said. “But keep in mind that Apple has good technology capabilities and they have more cash probably than the U.S. government to invest. They can keep shareholders happy over the next four or five years – they can just keep them happy with stock buybacks; they have so much cash.”
A Wartime CEO
Gordon said that he sees Apple as a contender in the markets where AI and augmented reality will reign. “Apple will be a player in the next round,” he predicted. “But it might be a new CEO because it’s not Tim Cook’s strong point.”
Tim Cook is a “peacetime CEO,” according to Allon. “He got the firm in very good shape with a deep, innovative product line, and his main role has been executing the plan. He has a great user base that is absolutely addicted to Apple’s products. Tim Cook has done pretty much what he needed to do to deliver on this.” That said, Apple’s next CEO “will have to be a wartime CEO — one that is getting a few depleted cash cows with the need to recreate the next innovation.”
“[Augmented reality is] going to be fabulous … but I don’t think it’s in Apple’s next product cycle.”–Erik Gordon
The task for Apple’s next CEO would be significant, Sculley said. “I wouldn’t want to be the next CEO coming in after Tim Cook, because the next CEO is probably going to have a very challenging strategic set of issues over the next four, five, six or seven years —  eventually this model will be a challenge because there [will need to be] innovation.”
If Apple fails to seize the moment and gain leadership in augmented reality or another new technology, some other company will, Sculley said. “As AI and machine learning become more and more integrated into everything, [the next leader] will be [a company] like Google, which has clearly invested incredible amounts [into] R&D and great talent. Will they be able to productize it better than Apple? The next CEO who follows Tim Cook is going to have to focus on those kinds of issues.”
Amazon Closing In
Gordon pointed out that Amazon has performed better than Apple on the stock markets. “Amazon actually in some ways has a better market cap growth story; its market cap now is somewhere around $890 billion, which is about 90% of Apple’s,” he said. Seven years ago, Amazon’s market capitalization was only a third the size of Apple’s market cap. The pace at which that has grown clearly makes it “the rocket ship” in market cap growth, he added. Other large technology companies are close, such as Alphabet with a market cap of nearly $870 billion, and Microsoft with $830 billion, he noted. “So we have a group of really large new-generation companies.”
Gordon did not see any natural limit to how large those companies could become. “They have their fate in their hands,” he said. “As long as they creatively reach out and do new things, I don’t know why [$1 trillion] would be a ceiling. For example, Amazon, which seems to be willing to try almost anything — how to put a cap on them?”
Amazon is Sculley’s pick for the next big winner. “Apple may be the first $1 trillion company, [but] Amazon probably is a more likely candidate to be the first $2 trillion company,” he said. “I would agree with [Gordon] that Amazon has been able to invent line of business after line of business after the line of business. I think Jeff Bezos is the most competent CEO in the world right now, and it doesn’t look like he has any intentions of slowing down.”
“Jeff Bezos is the most competent CEO in the world right now, and it doesn’t look like he has any intentions of slowing down.”–John Sculley
Apple’s Strengths
Apple put up a strong show in its latest fiscal 2018 third-quarter earnings report last week, posting a 40% growth in earnings per share and a 17% growth in revenues, year-over-year. Gordon parsed those to highlight some trends that underscore Cook’s contributions. For example, he noted that revenues have grown smartly although smartphone sales growth was almost flat in the third quarter. “Their success has been getting people to buy more expensive phones, so the average selling price has gone up,” he said. He noted that the ability to sell $1,000 phones may have seemed far-fetched five years ago.
Apple has also been vastly more profitable than others in its industry, Sculley said. “Apple only has 15% of the physical smartphone market, but it’s got about 95% of the profits in the smartphone ecosystem,” he said. “Apple is leveraging its ecosystem — a consumer experience so good between the different devices — and leveraging that service revenue.” At the same time, smartphone users have slowed down their pace of upgrading their devices, said Sculley. “We haven’t seen the replacement cycle [being] as rapid as it’s been in the past.”
According to Sculley, Cook has done “a very good job” building shareholder loyalty. “He does it because he has 10 times as much cash ($285 billion as of December 2017) as Amazon does. He’s buying back stock — about $100 billion this year. They give a big dividend. They don’t try to be the innovator of what’s coming next and take risks. They trail innovation by a couple of years. So the iPhones don’t necessarily have the latest new technology, but they do a really good job when they deploy it and they do it at scale.”
Apple has also in recent quarters increased its emphasis on services, said Gordon. Although services form a small part of its revenues and profit, they tend to have high profit margins, he noted. In recent earnings calls, the company has encouraged equity analysts to focus also on that part of its business. He pointed to one survey, which showed that 38% of a sample of 1,000 iPhone users had additional iCloud storage; about 18% stream Apple Music — about the same number of iPhone users that stream Spotify — and about 23% buy AppleCare protection plans for their devices. However, Gordon did not expect the services push to compensate for the next blockbuster product. “They will need something else to regenerate growth after they’ve bought back all the stock they want to buy back,” he said.
Allon is convinced that “Apple has been, and will be, a product firm.” He said the services are used to help and sell more products, and gain a bigger share of the wallet from existing customers. “But Apple makes money by selling better products than any other firm,” he said.
“The big question is: What’s the next category of products — Home? Car? Augmented reality? Apple is trying to play in all of these, but we have not seen a game-changing product yet….”–Gad Allon
According to Allon, Apple’s “only truly innovative product” in recent years was the Apple Watch; the HomePod was “too late to the market,” and although the iPhone is doing well, that is not where growth will come from. “The big question is: What’s the next category of products — Home? Car? Augmented reality? Apple is trying to play in all of these, but we have not seen a game-changing product yet there from Apple, and it is definitely losing ground.”
Platforms over Products
Platforms will be more important than products for the next tech leader, according to Sculley. “[It’s] being driven by all kinds of new innovations — in drones, in precision medicine and robotics. All of these are opening up huge opportunities to completely re-imagine what industries will be like. The most fundamental to all of them are the business architectural platforms. Apple obviously has an important platform, but so do a lot of other companies.” With more and more innovation occurring in the platform space, he saw “the opportunity for more Apples, more Amazons, more Microsofts over the next decade.”
Scanning the future for the smartphone market, Sculley said he expected the industry to become more and more commoditized. Chinese companies are likely to have an edge in that scenario, because of the speed at which they are able to scale production, he added. “We don’t know how to scale a business that fast in the U.S. So there are going to be different ground rules for creating these extraordinary, successful companies in the future that are different than the models that we’ve used in Silicon Valley up until now.”

Like Walmart's Chief Customer Officer From Amex, Retailers Tap Outsiders To Remake The C-Suite

Walmart made news this month for hiring its first-ever chief customer officer, plucking Janey Whiteside from American Express, where she oversaw benefits, services and customer engagement for the financial services company.
The nation’s biggest chain is just the latest merchant to tap talent from other industries and retail disciplines for top-level posts.
This month alone, the Neiman Marcus Group named Darcy Penick, the CEO of Amazon’s fashion subsidiary Shopbop, president of its Bergdorf Goodman luxury department store, just as The Container Store hired John Gehre of San Antonio-based grocer H-E-B to be its executive vice president of merchandising and planning, the first time the storage and organization retailer filled a key role with an executive from outside the company.
Retailers, shaken by how pervasively digital technology informs consumers’ path to purchase, are shaking up senior ranks to meet the still-unfurling demands of a changed shopping landscape.
Pre-Internet economy merchants are gambling on these outsiders to bring a fresh eye and best practices from other sectors in the race to stay relevant and meet digital-economy consumers’ heightened expectations.
“I think it is the natural and right progression, given the size and scale of the transformation that is underway,” said Chris Walton, a retail consultant and former vice president of Target’s Store of the Future, who is also a fellow Forbes’ retail contributor. “The playbooks legacy retailers used don’t work anymore,” he said.

“So they the go outside the [retail] industry, or they take the other approach which you don’t see as much, but should – [tapping] someone within retail interdisciplinary and curious —[like bringing in a drugstore merchant to run a department store] that has actually touched traditional merchandise, e-commerce, store operations and product development."
Walmart Breaks From Tradition With Amex Hire  
Walmart plucked Janey Whiteside from American Express to be its first-ever chief customer officer. (Photo by Keith Tsuji/Getty Images For American Express)
For Walmart, long known for a C-suite composed of career employees who rose from the stock room to the corner office, turning to an American Express executive to fill a newly created role is yet another expression of its corporate-culture revamp.
That revamp blossomed in 2016 with the acquisition of Jet.com and the hiring of its founder and former Amazon executive Marc Lore to run Walmart.com, kicking off an acquisition binge of hipper startup e-tailers like Bonobos and Modcloth as it pursues younger, more affluent consumers.
Now Walmart is turning to Whiteside to leverage her experience at a financial services firm at a mass discounter.
The new chief customer officer role is pegged to “looking after our brand and thinking through the customer journey — from acquiring new customers to their shopping experience and resolving any issues they may have," Walmart's letter to employees on Whiteside’s hire read, according to Reuters.
At the high end of the retail-shopping spectrum, Bergdorf is mining Penick’s expertise honed at Amazon, the nation’s largest online merchant and the retail sector’s biggest disruptor, to navigate its digital growth.
Her appointment comes as Neiman Marcus Group CEO Geoffrey van Raemdonck aims to grow digital sales from 35% to 50% of the business, which he sees as integral to fueling Bergdorf’s global growth.
“The unprecedented change in our industry requires us to reimagine how we serve customers and drive growth,” he said in a statement. “Digital technology has already had a fundamental impact on the way consumers experience brands and shop … To reach a new era of growth, we’re doubling down on innovation …completely focused on being digital-first.”
From Selling Suave Shampoo To Stella McCartney Slacks
As executive vice president of CVS, Helena Foulkes was integral to the retailer’s makeover from a traditional drugstore chain into a destination for health-and-wellness geared fair built largely around higher end private-label products.
By naming Foulkes CEO this year, The Hudson’s Bay Company is betting that a merchant who oversaw items like Suave shampoo and Sudafed sinus sprays can revive shopping venues selling Saint Laurent slingbacks and Stella McCartney slacks.
Richard Baker, executive chairman of HBC, which owns department stores such as Saks Fifth Avenue and Lord & Taylor that have lost their luster, is looking to Foulkes’ “transformational” leadership skills to  “invigorate the business with a new perspective.”
Foulkes has earmarked the European market for growth at HBC (which also owns Canada’s Hudson’s Bay and Germany’s Galeria Kaufhof), but where it has underperformed.
She’s also shoring up its senior ranks with digitally experienced executives from outside the department store world.
These include appointing chief marketing officer Bari Harlam from BJ’s Wholesale and CVS in a bid to ground HBC’s marketing in data-driven consumer insights; naming Stephen J. Gold chief technology and digital operations officer from CVS in its efforts to create a seamless bricks-and-clicks consumer shopping experience; and luring Vanessa LeFebvre, vice president at hot apparel e-tailer Stitch Fix, to be president of Lord & Taylor, “a change agent with strong experience leading a digitally focused strategy,” Foulkes said during HBC’s June earnings call.
“With these leadership changes … I believe we now have the right team to drive actions necessary for profitable growth.”
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I've been a business journalist specializing in the retail industry for over a decade, covering consumer news, company profiles and industry analysis pieces, as well as the intersection of business news and shopping, fashion and social trends. 
 I was the retail and con...

Zara's Big Ship-From-Store Push Underscores Retail's Bricks-Serving-Clicks Movement

Zara, the lion’s share of the Inditex Group, the world’s biggest apparel merchant by sales, is considered a master at fast-fashion, churning out catwalk-inspired looks via a sourcing model that is the envy of its runway-to-rack rivals.
But it’s a latecomer to the ship-from-store retail movement.

(photo by John Keeble/Getty Images)
Following in the footsteps of retailers from Walmart and Target to Macy’s and J.C. Penney, Zara will convert 2,000 stores in 48 countries to fulfill online orders in an effort to reduce out of stocks on e-commerce orders, boost sales of full-priced items, and better compete with the speed and convenience of Amazon, which is quickly gobbling up apparel market share, the Wall Street Journal reported.
Retailers have been scrambling to wring profits out of online sales, which notoriously crush margins.
Now the big merchants are working to transform what had once been considered a liability in competing against online retailers — unencumbered by store-operating costs — into an asset: their fleet of physical locations.  

Zara’s ship-from-store program also coincides with shoppers’ mounting demand for faster and faster delivery, including same-day delivery and even two-hour delivery.
The argument for ship-from-store posits that retailers with a critical mass of stores can deliver online orders from a location near a shopper’s home more quickly than is possible from a limited number of far flung warehouses.
For example, DSW's stores fulfill 50% of the shoe retailer’s online orders, and the company expects that to rise to 75% to 90% five years from now. Its 500-plus stores within 70% of the U.S. population is an edge Amazon can’t rival, CEO Roger Rawlins told me.

The method theoretically enables retailers to fulfill online orders more profitably by reducing shipping costs.
Zara's ship-from-store push is designed to support an accelerating online business: Zara.com went live in India, Thailand, Malaysia, Vietnam and Singapore in 2017, and in Australia and New Zealand this year.
At Inditex’s annual general meeting last month, Pablo Isla, CEO, dubbed the company’s integrated store and online model the “strategic cornerstone” of the retailer’s sustained growth.
The model is laying the foundation for what he called “100% customer focused” innovations.
These include same-day delivery service in seven cities (Madrid, London, Paris, Istanbul, Shanghai, Taipei and Sydney); a next-day delivery option available in Spain, France, the UK, China, Poland and South Korea; new automated in-store pick-up points for orders placed online; and plans for the integrated management of stock in all 48 of the markets where Zara has an online presence by the end of 2018.
“All of Inditex’s brands benefit from a robust integrated store and online platform,” Isla said.

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I've been a business journalist specializing in the retail industry for over a decade, covering consumer news, company profiles and industry analysis pieces, as well as the intersection of business news and shopping, fashion and social trends. 
 I was the retail and con...

Forbs Barbara Thau