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Up to 6,000 To Be Laid Off After Earnings Drop; Pro and Consumer Divisions to Merge

by Jerry O'Neill & Dan Havlik

In a telephone press conference to discuss the merger, Freund said he was not sure yet whether the merger would result in additional layoffs. "It's a little bit too early for us to tell what the implications will be," Freund told reporters. He later said that the merger would result in the closing of Kodak's Miami office and possibly relocating employees from that location to its Atlanta offices. (Kodak later confirmed Freund's statement, announcing that it will move its consumer photography Latin American office from Miami to Atlanta later this year.)

When asked whether the merger sends a signal to its competitors that it was ceding ground in the professional market, Smith-Pilkington responded by saying "Absolutely not."

"[The Professional market] is ours to lose," she asserted. "Do I believe our competition will try to make hay out of this? I'm sure they will. We probably would too."

The Digital Effect
While SARS and a weak economy have been blamed as part of the reason for Kodak's dismal financial performance in the second quarter of 2003, digital cameras, according to some analysts, may be a bigger reason. And though SARS may eventually go away, digicams are here to stay.

Kodak's net income for the second quarter was only $0.39 per share, just a fraction of the year-ago figure of $0.97 per share. Sales were unchanged compared with Q2 2002, at $3.352 billion-but if foreign exchange effects are excluded, sales were actually down six percent. The company announced it will have to "increase and accelerate" its already aggressive cost-reduction program.

Bad news from the Far East was part of Kodak's explanation for its weak performance. The company said the SARS outbreak in China cut sales of consumer film and photographic paper in that giant nation by half, compared with 2002.

CEO Dan Carp said, "In April, our guidance assumed that the effect of SARS on picture taking would be much less than it has turned out to be. The SARS outbreak, as well as concern about geopolitical tensions [such as the war in Iraq], is keeping people from participating in activities that foster picture-taking. Travel and leisure spending is weak, for example, and that means fewer pictures are being taken worldwide. While many of our commercial operations and our consumer digital business continue to perform relatively well, their success at this point doesn't fully offset the present earnings difficulty that our traditional consumer business is experiencing."

In the U.S. and Europe, sales of consumer film and paper were also "moderately lower" than expected, which Kodak attributed to "persistent economic weakness, a somewhat more competitive pricing environment, and the increased popularity of digital photography."(Kodak's U.S. retail film sales were about eight percent below 2002.)

In short, the numbers say it all. In 2002, Kodak was at the top of the Dow Jones industrial average. This year, it's in the cellar.
The unnerving part for Kodak, and for those in the photo industry who depend on silver halide photography for a living, is that maybe SARS and the economy weren't the big culprits causing the drop in film sales. Maybe it was largely due to the continuing shift to digital.

The most significant comment Kodak made was to admit for the first time that the shift to digital photography is hurting Kodak's consumer photography sales "quite significantly" and there is no doubt that part of the company will have to shrink.

"The performance of these businesses point to a fundamental shift at Kodak," Carp told reporters. "We are evolving from a historical film company into one that is aggressively pursuing the vast potential of digital imaging across all of our operations."

Combining the Professional and Consumer Divisions
In a recent interview, Kodak spokesman Gerard Meuchner told the press, "We are at a point where we are looking to invest more of our resources in our growth business. To do that, we have to adjust the cost structure of the film business to fund those investments in the growth areas."