Memo from the Grinch: The Gas Price “Bonus” is an Empty Tank

RL_11-18-14_1Economists, experts, analysts, consultants, a lot of CEOs, casual observers and even my friend and CNBC regular Jan Kniffen believe lower gas prices are going to goose holiday retail sales. In what some call the “gas bonus,” this means that some $40 billion saved on fuel will end up being spent over the holidays in the nation’s retail stores. This is certainly a happy thought. On a CNBC panel the other day, Kniffen was almost giddy about it. And then when you add in a falling unemployment rate, followed by an increase in consumer confidence — at its highest level since 2007 — stock traders are already chilling the bubbly.

Once again, I find myself the naysayer. Let’s start with the gas theory. The Robin Report Chief Strategy Officer Judith Russell looked at the monthly change in gas prices and retail sales for the past eight years. And as indicated in the chart below, there is neither a significant bump up, nor down, in retail sales accompanying rising or falling gas prices. She even looked at regressions with different segments in retail, and found that there simply does not seem to be a correlation, period. In other words, the gas theory is an empty tank.

Having said that, Walmart had a slight increase in third quarter sales of .5%, for the first time since 2012, which they believe was partially due to lower gas prices. So, one may conclude that the entire discount sector will gain from the gas bonus, putting more cash in its lower-income consumers’ pockets. On the other hand, one might conclude, as I did, that Walmart is clawing back its customers whom they lost to the thousands of smaller neighborhood dollar stores during the recession when gas prices were high and low-income shoppers had a shorter ride to those local stores, thus saving fuel costs. In fact, Walmart said in its 3Q conference call that the Walmart Express strategy (smaller footprint convenient neighborhood stores) is beginning to facilitate their clawback of market share from the dollar stores.

Therefore, this hypothesis would suggest that rather than the gas bonus lifting total spending among low-income consumers across the entire discount sector, it’s simply shifting shares around within the sector.

Click to Enlarge

Click to Enlarge

If consumers do take their fuel savings and decide to spend them, while the discount retail sector may minimally benefit, it’s more likely they will spend more on health care and entertainment, as well as home improvement. And since income growth is flat, they could just as well decide to save the gas “bonus.” In fact, the savings rate has been ticking up.

And there was certainly no additional gas bonus spending among the mid-to-higher income consumer segments. In fact, Macy’s CFO, Karen Hoguet told analysts a week ago, “shoppers are spending more of their disposable dollars on categories we don’t sell, like cars, health care, electronics and home improvement.”

Lastly, the low overall inflation rate, even disinflation in some major merchandise categories, is allowing consumers to get more value for their money, which doesn’t result in an increase in sales, because they’re not buying more stuff per se. Consumers and particularly the growing Millennial cohort are shifting toward a “less is more” mentality, eschewing buying more stuff to seeking more experiential satisfaction out of life, which is why restaurant sales and entertainment spending are strong. And now with a strong dollar, we might see people opt to travel more often. So these dynamics, much of which has to do with a demographic and cultural shift, will also divert any part of the gas bonus that might have made its way into mainstream retailing.

The final word: dream all you want about getting your hands on a piece of the $40 billion gas bonus, but when you wake up on January 1st with a hangover, it won’t be due to the bubbly that the stock traders are currently chilling. It will be due to the fact that the dream was really a nightmare about the passing gas bonus, pun intended).

Lou Gerstner Was Right: Consumer Spending Matters, Not Stock Price

mc_gerstnerUS consumers are discriminating as to where they spend, and while demand has come back in what may seem unexpected categories, there is emphasis on experience and on purchases as investment.

Readers of Lou Gerstner’s book, Who Says Elephants Can’t Dance?: Inside IBM’s Historic Turnaround, or anybody who has heard the legendary former IBM Corp. CEO speak, will remember some sage advice: pay no attention to the stock price.

Let’s expand on this. Pay no attention to the stock market unless, of course, you’re investing in it. But as an economic barometer, the stock market has proven to be a fickle and even inaccurate judge of global economic health. Making cogent statements thereby is a delicate process, and I would argue that the more reliable barometer is consumer spending. The stock market is at best a confirmation of one’s previous calculations, not a factor in any of them.

What drove Gerstner to make the statement was his epic turnaround of IBM in the last century’s final years. Many friends and associates had congratulated him on the company’s resurgence based on a rebounding equity price. Gerstner warned them the number meant little, and the hardest work was yet to do. [Read more…]

Holy Guacamole: Millennial Favorite Chipotle Turns Neurological Connectivity into Gastronomical Addiction

chipotleMy 16-year-old son John’s idea of a gourmet meal is a burger and fries, so I was surprised one evening a couple of weeks ago when, after a busy day that left me no time to cook, I asked him where we should get takeout, and his answer was: “Chipotle.”

Caught off guard, I had to think for a minute. “I don’t think there’s one nearby.”

“Yes there is, in Yonkers,” he said, then added sheepishly,“ and you told me I could choose where to go.” Sighing, I grabbed my purse and keys for the 20-minute drive.

Chipotle (named after a smoke-dried jalapeno pepper) is the wildly successful chain of casual Mexican-style restaurants known for its overstuffed burritos made from healthy and natural ingredients. It was founded more than 20 years ago by Stephen Ells, a graduate of the University of Colorado and the Culinary Institute of America, who moved to San Francisco to work for a famous chef with the dream to open his own restaurant. One day, he noticed an assembly line of workers at a taqueria in the Mission District  efficiently serving a crowd of hungry customers. He decided he could open a similar place to generate the cash needed to fund his fancy dining establishment. He quit his job, moved back to Denver and, after borrowing $85,000 from his dad, opened the first Chipotle in mid-1993. The restaurant, which from the start operated on the principle that fast food doesn’t have to be low-quality and that delicious food doesn’t have to be expensive, offered crafted-to-order burritos made from fresh, locally-sourced ingredients. Within six months, the restaurant was reportedly selling 1,000 burritos per day, 10 times the level needed to break even. [Read more…]

Coty Sinks In Its Claws

shutterstock_152473550When it comes to spending sprees, November 2010 was a doozy for Coty, Inc. In rapid succession, the New York-based, publicly held global powerhouse scooped up the German makeup company Dr. Scheller Cosmetics AG for an undisclosed amount; the touchy-feely Philosophy skincare brand from the Carlyle Group for an estimated $1 billion; and OPI, the pro nail care line famous for lacquers with cheeky names like “Skull & Glossbones” and “Wooden Shoe Like to Know,” for another (rumored) $1 billion.

At the time of those purchases, Coty, then a $3.6 billion entity, was billing itself as the world’s largest fragrance company. By rounding out its portfolio with these brands, the plan was to reduce its reliance on the recession-plagued perfume biz, carve off a bigger slice of Germany’s beauty pie, and inch toward its stated goal of $7 billion in revenue by 2015.

While it would be hard to argue which was the splashier score— Philosophy or OPI, both of which are wildly beloved by consumers— the latter allowed Coty to not only tap an entirely new distribution channel, but also expand its foothold in the supernova that was nails circa 2010. [Read more…]

Sleepless Nights

mattress isolated on the whiteI am not sure about where you live, but around here in southeastern Pennsylvania, it seems like wherever I drive, I am never far away from a mattress store, and a discount one at that.

It makes me wonder how these stores can keep their lights on. Can there really be that many people in this community of half a million that, give or take, need a new bed? I don’t have the answer for the mushrooming growth of retail banks, but do I understand Americans have been buying mattresses in record numbers making the mattress category the fastest growing segment in the $164.4 billion home furnishings business in 2012, according to HFN’s State of the Industry report. In 2013, the mattress segment posted slower but still good growth to reach $9.4 billion.

Mattress Madness

Obviously Americans are sleeping better—or at least investing in record numbers in better beds. And with recent double-digit growth in the category, mattress retailers are trying to squeeze every bit of spring out of the mattress business. Sleepy’s tops out at over 900 stores, and 1800Mattress.com gives ‘showrooming’ mattress shoppers access to deep discounts for most of the leading brands. The leading television channels and even Walmart are getting in on retailing beds. [Read more…]

Retailers and Wholesalers: Yesterday’s Fish Wrap

Direct_to_consumerThe retail and wholesale business models, separately and in conjunction with each other, are collapsing. Along with their demise, the actual terms, retail and wholesale, will literally cease to exist. In fact, as I write this article, major traditional wholesale brands such as The North Face, Timberland and other VF Corporation brands, along with PVH brands, Calvin Klein and Tommy Hilfiger, among many other giant wholesale brands, are achieving faster and more profitable growth in what they are referring to as their DTC (direct to consumer, including e-commerce) business, than through their traditional wholesale to retail to consumer model. Essentially the DTC model that these wholesale brands are adopting is simply the branded apparel specialty retail model that was launched by the Gap, Esprit and other brands in the 1960s. A phrase often used to describe the model is “the brand on the door is the brand in the store.” Likewise, and to some degree in response to their branded wholesale vendors’ accelerating focus on the DTC model, traditional retailers — from Nordstrom and Macy’s to Walmart –- and across all retail sectors, will be forced to transform their business models to better control and accelerate their own brands’ direct engagement with consumers. In fact, Nordstrom and Macy’s, to cite two examples, are proactively beginning to transform their models. [Read more…]

Showrooming: A Death Knell or Hidden Opportunity?

showroomingAccording to the Nielsen U.S. Digital Consumer Report, 65% of all American adults own a smartphone, up from 44% in 2011. This trend, the ever-increasing ability of consumers to access the Internet at their fingertips, was hailed as the death knell for retail stores. Showrooming, the practice of trying out products at a store before making a cheaper purchase online, appears to be a fatal flaw for retail shopping.

What we’ve seen instead, running beyond the popular narrative of doom and gloom, is a vibrant new world of opportunities for retail brands.

And it isn’t just tech start-ups that have come to see this revolution as an opportunity. A subterranean phenomenon in the retail and consumer goods industries is the rise of omnichannel retailing. This phrase might not mean much to the average American, but if you’re a retailer like Macy’s, Best Buy or Target, this new consumer-oriented ideology is quickly becoming a way of life. Omnichannel retailing mirrors what we advertising technology companies would call “multiscreen, coordinated campaigns.” In other words, it aims to make all the avenues for a brand to engage with consumers (whether it’s online, on TV, in-store or even through a catalogue) a cohesive experience. [Read more…]

Defining the Value of Omnichannel Shopping

Mobile banking wallet on screen of smartphone isolated on whiteBefore investing in an omnichannel strategy, retailers need to understand the true value of this consumer shopping behavior and the opportunity it presents. A new MasterCard study suggests the right approach is to start with the customer. How does their omnichannel spending behavior differ from spending in a single channel?

Conventional wisdom suggests that retailers should invest in bolstering the omnichannel experience they offer consumers on the basis that more channels will result in increased sales. Makes sense, but merchants can either invest in an omnichannel strategy and technology because it seems like the right thing to do, or they can make informed decisions based on data that details the value to be gained from key customer segments. Imagine the following scenario: A working mother of two needs a simple dinner solution for the evening. She logs onto Pinterest for “quick kid-friendly dinner” and decides on the “Cowboy Casserole.” The list of ingredients she needs is automatically saved onto her mobile phone, and dropped into her local grocery store shopping app. She opens this app, and decides to pick up the order on her way home. She stops at the store, where her order is waiting in a cart. She notices a sale on blueberries and adds two pints to her cart. She picks up a single-serve sparkling water for her car ride home and a few magazines to wind down later. The kids love dinner and the mom has illustrated the type of behavior that merchants of all classes are moving to better serve. She is an omnichannel shopper. As such, she is highly sought after but not very well understood. [Read more…]

Amazon Finally Gets It: The Next Big Thing For All Pure Digital Players

amazon_openingAmazon’s announcement of its first physical store opening on Manhattan’s 34th Street is not a surprise to me, as I predicted it four years ago in the first edition of my co-authored book, The New Rules of Retail, published in 2010.

The logic was the same then as it is now.  Amazon has a huge database, estimated to be larger than the Pentagon’s — and they know how to use it. The data provide them with laser-sharp knowledge, such as what Jane Doe — who is married with two kids and a dog and is living on the east side of Manhattan (or anywhere in particular) — is eating for breakfast; what brand of jeans she wears; the charities she gives to; the music she likes; and so forth. Therefore, as Amazon rolls out its stores nationally, it can assort each location precisely with those items that are preferred by specific shoppers. The stores will also have screens for downloading information and selecting from Amazon’s massive inventory.

The personalized knowledge that Amazon continues to build on, and that all retailers are pursuing, is collected over time across all accessible consumer browsing and transactional points, and it’s game changing. It tracks consumer-shopping behavior and can be drilled down to individual profiles.  This is the big deal part of the buzz concept, Big Data, because it tells the retailer not only what brands the Jane Does on the East Side prefer, it can also indicate what kind of shopping experience, environment and service they expect. Most traditional retailers have not yet scratched the surface on big data analytics and its laser-like ability to localize, even personalize the shopping experience. It will be interesting to see how Amazon uses its analytical advantage in this area. [Read more…]

Luxury Needs a New Story

luxneedsnewHow Alex and Ani, Saint Laurent and STORY are doing just that

Recently, cracks have begun to show in the “same old story” that serves as the traditional luxury marketing platform. For years, for decades, and in some cases for centuries, luxury brands have been doing the “same old song and dance” for their current and prospective customers. The luxury story, which describes how brands are positioned and marketed, goes like this: exclusivity, design excellence, exceptional workmanship, top-quality materials, and aspiration for brands that one aspires to own and to show off. Things are changing.

In July, Hermes reported a slowdown of sales in its fiscal second quarter 2014. In the same month, LVMH reported first-half year sales were below expectations; and Kering, owner of the heritage Gucci brand, reported a 2.4% decline in the brand’s sale in the second quarter 2014. The only bright spot for Kering was their Saint Laurent brand … but more on that later.

While many fingers point to slackening demand in China as the culprit, American affluent consumers have undergone a dramatic mood swing regarding luxury since the recession, reflected in those disappointing results. That change in attitude is illustrated in Unity Marketing’s Luxury Consumption Index, our measure of affluent consumer confidence based upon quarterly surveys. [Read more…]

Lessons in Luxury From the Middle Eastern Souks

Gold_SoukWhy is buying fine jewelry in the Western World such an intimidating and utilitarian experience? A beautiful piece of jewelry is sensual, romantic, seductive. Why do we feel like we’re purchasing expensive light bulbs instead of a circlet of dazzling diamonds? We can learn a lot from the bazaars and the souks in the Mideast.

Two of the most magical places in luxury retail are the Gold Souk in Dubai and the jewelry section of the Grand Bazaar in Istanbul. The window displays are opulent. There is nothing restrained about the presentation, unlike the minimalist Tiffany windows or vitrines at Bulgari. These Middle Eastern bazaars are the meeting grounds of testosterone and estrogen, resulting in a unique mercantile representation of desire. There is a sheer physical smell of the power to buy here, and there is a visceral joy in being the retail host for luxury and craftsmanship. Contrary to Western stealth wealth, the souks exhibit a certain sensuality; part dress-up, part princess-complex; and an explosion of both insatiability and satisfaction. The whole experience is wrapped up in life’s emotional punctuation marks. Acquisitions from the bazaars celebrate milestones, even those as simple as adding another gold bangle to the collection for no reason at all other than the ability to do so. [Read more…]

Goldman Sachs 21st Annual Global Retail Conference Key Takeaways

The traditional September back-to-work event for investors, marking the end of the summer lull (after a hectic wrap up to Q2 earnings in August and prognosticating about the back-to-school selling season) is the Goldman Sachs annual conference. This two-day affair is chock full of investor presentations and Q&As with 50+ public companies, private equity investors and the GS team. There was no real breakthrough news at the event, and our stalwart retail leaders seem to be soldiering on working hard to create compelling customer experiences as a point of differentiation. But it’s tough out there on the retail battleground front, and omnichannel is settling in as the strategy of choice for survival.

I believe the overriding takeaway of the conference was put forth in Robin Lewis’s recent blog, The Forecast: Share Wars For Rest of 2014, that ran a week ago, which quoted Macy’s CEO, Terry Lundgren, who kicked off the conference on the first day. The blog forecasted zero growth based on Mr. Lundgren’s quote: “The rebound that we were all expecting in this year hasn’t happened. The consumer has not bounced back with the confidence that we were all looking for. And so the performance I think we had in the second quarter, and we expect to have in the second half, is going to be a continuation of what we’ve been able to do over the last several years — and that is to capture market share and get the most out of the consumers that are in our stores.” [Read more…]