The Forecast: Share Wars For Rest of 2014

RL_Blog_9-10-14Forget about all of the holiday projections soon to be bandied about by the legions of economists, analysts, pundits, experts and faux experts. This is the one you can take to the bank, and it comes from none other than Macy’s CEO Terry Lundgren. Crisply, clearly and without hesitation, he nailed it at his presentation at the Goldman Sachs Annual Retail Conference.

“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.”

In other words, folks, there will be no overall market growth this holiday season; only share wars in which the great retailers will steal share from the not-so-great, resulting in a zero-sum game. So, here you have it, The Robin Report official holiday projection: Zero Percent Growth. [Read more...]

Dispatches

Robin Lewis“What Your Intern Is Really Thinking, “ written by our staff Millennial, Grace Ehlers addresses the seemingly cavalier and misguided view among most companies about her generation, particularly those with college degrees. The article was justifiably critical, in my opinion, of companies assuming that these “best and brightest” of the Millennials should be available for hire as non-compensated “interns.” She has a follow-up article in which she challenges the misconceptions among many companies about the work ethics and career expectations of her generation.

So, as I set forth my argument regarding the deflation and devaluation of our economy and everything in it, due to our shift from value creation to value consumption, exacerbated by our new, “less-free- market” form of capitalism, it struck me how this shift is, and will continue to have perhaps its greatest negative impact on Grace’s generation. Conversely, it also struck me how this shift is wasting this generation as the greatest asset we have, and if given the chance, they might provide the very solution we need to reverse our economic decline.

Here’s the scenario for these Millennials. On totally reverse trajectories we have an economy that is shifting from higher-paying manufacturing jobs, including those in charge of running those companies, who also happen to require higher intelligence and professional skills, to lower-paying service jobs (feeding a consumption economy), and which require a lower set of skills and level of education. So not only fewer jobs, but lower paying jobs that are well beneath the skills of college graduates.

Furthermore, the theory that once we lost our manufacturing base we would simply move up the “food chain,” creating wealth and higher levels of value through innovation, technology and science has been debunked by many economists. In short, engineering, science and technology degrees are being sought less by students instead favoring MBA’s and liberal arts. And, while thousands of foreign students do seek those degrees from our best universities, they are finding it almost impossible (for many reasons) to obtain visas to stay and work in the US. Thus we not only lose their intelligence for these higher “food chain” industries, we are in fact, exporting these industries to China, India and other countries around the world. And, while all of this is happening, more and more young people than ever before have been graduating with college degrees.

However, most of them are heavily in debt for educational loans, (in the aggregate, about $1 trillion, and the percentage of borrowers who are more than 90 days delinquent has risen to 17%, from 10% in 2004). And the number of young Americans without a job has exploded to 53.4% —a post-World War II high, according to the Labor Department.

So, fewer and fewer jobs and more and more educated young people in dire need of jobs, spells tragedy. It is a tragedy because as I said, we are wasting our most valuable asset, the one cohort of our population who, if given a chance, might figure out how to reverse the economic decline.

Drexler Hits the Nail on the Head Again

The Robin Report - Mickey DrexlerHey folks, I hate to suck up to Mickey Drexler, and I assure you I am not, because he has once again nailed a major and very dangerous value shift taking place in this industry. He’s said it before in different ways, as have I. And, I’m going to follow him this time, essentially “doubling down” on his points.

I’ve called what’s going on with discounting, which is now on the steroids of the e-commerce “deal machine,” the “lowering of all ships,” “the race to the bottom,” and, I’ve even speculated, and actually built a pretty good case, for predicting our economy drifting into a deflationary cycle. [Read more...]

Diluting Cotton Content Compromises Quality and Brand Perception

Consumer Facts from Cotton Incorporated Lifestyle Monitor

The Robin Report

Click to See Chart Full-Sized

A year ago the rising costs of materials, labor and fuel put pressure on apparel brands and manufacturers to maintain margins and pass minimal costs onto the consumer. In re-thinking sourcing strategies, many brands sought to cut corners by substituting cotton with synthetic fibers. Cotton, a mainstay of apparel, had historically high prices last year. One year later, the landscape is different and so is the consumer perception of quality; begging the question, is there a higher cost for diluting the touch and feel of cotton?

The run-up in cotton fiber prices a year ago was mistaken by some as the sole reason for increased apparel costs at retail. Indeed, the jump to $2.43 a pound on the A Index was unprecedented. However, other factors, such as: increased labor costs in textile manufacturing regions; increased fuel costs; the increased price of fibers competitive to cotton; and a 15-year cycle of deflationary apparel pricing in the U.S. all played a part in the slightly elevated prices consumers are seeing at retail. At the retail level, apparel prices increased year-over-year 4.2% in February, the most recent data available. Interestingly, although apparel prices have increased over the last few months, consumer demand for apparel has shown signs of resiliency. In January, when prices were higher than in February, the U.S. Department of Commerce reported consumer apparel spending was stable on a priceadjusted basis relative to a year prior. [Read more...]

Dear Reader

Robin LewisThere are incredible transformative events going on in retailing today. Most of them are due to the necessity for gaining competitive advantage in our over-stored, “share wars” marketplace, increasingly exacerbated by the relentless and rapid growth of e-commerce.

U.S. population resided in rural areas, with scant access to towns and cities, people ordered everything they needed or wanted through their “Internet” at the time (the Sears catalogue). The department stores, located in the major cities, created enough compelling experiences that those rural families would travel long distances and spend the entire day at Macy’s or Marshall Field’s and others. Indeed, these stores were described as “palaces of consumption.” And, even post-WWII and well into the 1970s, department stores continued to be all day outing destinations for families. Then they were not.

The huge irony today is that, just as compelling experiences lured customers away from the Sears “Internet” in the earliest years, and other competitors later, until they didn’t, the department stores are finding they must once again create great shopping experiences to drag consumers away from the real Internet. This time around, however, it’s even more imperative, due to our over-competed marketplace. And, I dare say, given the knowledge and access of today’s consumer, the experiences are going to have to be overwhelming just to get their attention.

The other irony, as an offshoot to this, and not yet broadly articulated, is that as these brick and mortar retailers build their “omnichannels,” they will have competitive advantage over the Internet “pure e-commerce” players like Amazon, Ebay and others. Simply put, they provide the consumer with dual access (online and offline, with the lure of an experience to boot).

So, guess what? Understanding this, and witnessing the Apple experience, Amazon is opening a store in Seattle. And, Google, eBay, Living Social, Gilt Groupe and others are in various stages of considering and opening brick and mortar stores. The game-changing ironies keep coming. “Big Box” retailing is breaking down into “small box” neighborhood retailing to gain quicker and easier access to consumers, and to provide quicker and easier access for consumers. Again, much of this strategy is driven by “share wars,” in addition to the fact that online sales are beginning to lessen the amount of physical inventory needed.

What else happens in an over-stored and – stuffed world, added to by the proliferation of e-commerce, each new site offering a better “deal?” I’ll tell you what happens: It “lowers all ships.” Deep discounting accelerates, eventually driving price deflation. More outlet stores open than full-price stores. Quality and value ultimately decline.

With the consumer driving all of these ironies and more, it is forcing all retailers and brands to pursue greater control over all aspects of their business so that they can respond more rapidly to the ever-increasing expectations from today’s consumers. This translates to a seamless, simultaneous, fast, flexible, transparent, collaborative, efficient and effective value chain from creation all the way through consumption.

A final irony here is that this value chain model was pioneered by Zara in the 1980’s and mis-labeled by industry veterans as “fast fashion,” when its model should have been revered and adapted by all retailers, not for “fast fashion,” but to be as consumer-responsive as required to compete in the 21st Century marketplace.

As always, have a good read.

When Drexler Spoke Everybody Listened, But No One Heard (The Real Point)

Following the panel discussion of the now iconic Financo annual seminar and cocktail party held this week, Gilbert Harrison, host and owner of Financo, called on Mickey Drexler to make a comment on what had been discussed by the participants (Chris Burch, founder and CEO of C. Wonder, Susan Lyne, Chairman Gilt Groupe, Kevin Plank, founder and CEO Under Armour, and Walter Robb, co-CEO Whole Foods).

Of course, Mickey does not pull any punches.  Indeed, when he speaks, everybody does listen.  However, no one really heard his enormously important and scary point, including the press.  But, I was there and I did.  His opening comment, “I don’t know what the optimism is about,” (responding to the panel’s rosy view going forward), citing “enormous apparel deflation” due to “…too many units in apparel,” (too many stores and too much stuff), and “more cheap players entering the marketplace than ever before,” led to one of the most discounted Christmases ever.  Essentially, he sees everything on sale 24/7.

And, while all were listening to this point, it was suddenly lost when Mickey simply used an example of one of deflation’s symptoms.  Yes, I said “symptoms,” not the ultimate result.  He referred to the margin squeeze on everybody, and used malls as an example of not only maintaining their rent levels, but also rolling out kiosks (degrading the shopping experience), and not innovating enough to build more traffic.

Well, with Robert Taubman, Chairman of Taubman Centers, and David Simon, Chairman and CEO of Simon Property in the audience, the point Drexler was driving toward was immediately lost to a noisy, but good-humored volley between Mickey and the developers: Taubman at one point saying: “Mickey, God bless you. It’s not like you haven’t made a living off shopping malls, maybe two livings compared to a lot of us.”

So, his game-changing point, in my opinion was lost, as it was a couple months earlier at a smaller gathering of CEOs, who at least paid it “lip service” but who failed to truly grasp the depth of what he was getting at.

The point, and one I’ve been beating on for some time (with people listening but not getting: read From Inflation to Stagflation to Deflation), is that deflationary pricing, at best, is “lowering all ships,” potentially sinking a lot of them.

At its worst, if it moves from a financial problem to a psychological one among consumers, wherein they see a 70% discount today and hold back buying, anticipating an even greater discount tomorrow, it then moves to an economic problem — the dreaded deflationary cycle that Japan fell into and still has not fully recovered from.  The root cause of this is simply too many stores and too much stuff – i.e., unprecedented overcapacity, and now exacerbated by an unknown number of new website stores launched every day, onto a distribution platform that has virtually no barriers to entry.  And, each of those new sites has a discount “deal” bigger and better than the one before it.

So, as opposed to trying to juice the demand side for consumption growth (i.e., the Fed’s stimulus programs and ridiculous deflationary pricing), we should be addressing the supply side conundrum. Simply, a new retail paradigm now exists, with a perpetual disequilibrium of too much supply driving an unrelenting downward pricing spiral.

As I’ve stated many times, everything is on sale all the time and shipped for free.  Retailers have shifted their pricing structures (good, better, best) down.  Outlet stores are growing faster than full price stores, even in the luxury sector.  ‘Flash sales’ and ‘Groupon’ and all other kinds of on-sale online models are proliferating at the speed of light.  What’s more, if you wait for two seconds, your smart phone will beep with an ad or a friend telling you where you can get whatever it is you’re thinking of buying, cheaper.

And, of course, the biggest undertow of them all is housing. Across the entire marketplace, value is being recalibrated – down.

Can lower interest rates or extra dollars in the pocketbook stimulate consumer purchases in such an environment?  I think not, at least not enough to absorb the relentlessly growing and excessive amounts of stuff being tossed into the marketplace, which has many markdowns built into it before it even hits the shelves, and tomorrow, and the next day, and the next, even lower.

I’ve been listening Mickey, and I’m hearing and I’m understanding. What’s to be done?  Do we hire pricing police?  Oh no, that would not be right in a free market capitalistic economy.  But, I ask you, do we have a true free market economy?  The answer is no, because if we did, we might have more businesses fail, getting rid of the excess capacity so a supply/demand equilibrium would provide a level and robust competitive playing field for those who create real value vs. lower prices.

Dear Reader

Here we are, on the edge of a maelstrom of global events, geographically, politically, economically, environmentally, socially and culturally, all with potentially far-reaching outcomes. And, while those outcomes may differ by continent, country, and even locality, they will not be isolated, or “ring-fenced,” to use a popular term. The entire world and all of its inhabitants will be touched in one way or another. Such is the “flatness,” the oneness, the absolute inter-connectedness – yes, the globalization, of our world.

While this is very unsettling (given the types of negative events that are taking place), this may be the trigger point, the time when the collective backs of all humanity are against the proverbial wall, and a time when we should collectively declare that we are not going to “waste a looming apocalypse.”

As the outcomes play out in ways both hugely negative and hugely positive, despite the attempted meddling of our current leaders trying to shape them, this will be one of mankind’s most disruptive periods. Therefore, it will drive fundamental transformation, either proactively by design or reactively by default. [Read more...]

Is This: A Recovery? Or As Good As it Gets?

Interviews with Robin Report CEO Robin Lewis, Goldman Sachs Economist Andrew Tilton Warnaco CEO Joe Gromek, Iconis CEO Neil Cole and Gilt Groupe Founder Alexis Maybank at The Inaugural Robin Report-Fashion Group International C-Level Seminar Series at The New York Hilton on September 22. Hear from industry leaders on how best to weather the economic headwinds as we enter the Holiday Selling Season.

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You Talked Back!

Issue Seven’s “From Inflation to Stagflation to Deflation” prompted the following reader responses:

Excellent article, Robin – frightening to read,but so important for all to recognize…To me it seems like the middle class (world-wide) will continue to be the punching bag in this never ending cycle. The banks (I think it is a cabal of 6 now?) wil continue to perpetuate their feast or famine lending and banking practices – currently famine to SMBs and homeowners. What to do?? To start, lift the veil of mystery off the derivative markets – hopefully that will help institute some basic checks/balances on commodity speculators, etc…

Enact “real” banking oversight and regulations – bring back the Glass-Steegal act or something like it! Sorry Jamie Dimon!

You are absolutely correct that the social/consumer marketing tech bubble will not be able to catapult entire economies around the world. China just built a 26 mile bridge connecting a major port and growing city – I have twitter/facebook/Pandora/linkedin on my android phone – what is more important to job growth and trade!! Granted I can know instantly what Kim Kardashian is up to…

Where did the 50% of the QE money end up?? In my opinion debt and lending is the key to unlock the demand side of this awful equation. But that would mean the banks would have to make one or two points less on their margins in the coming quarters – like that would happen! But Dollar General is willing to, hmmmmm…..Thanks for keeping us thinking!

Ray Hewins – Director of Sales – Doneger Creative Services

 

Robin -

I was wondering if you had ever considered a cross-promotion with either Gillette or Schick? After reading your latest piece, I believe that offering a free pack of razor blades with each subscription would show that you’re really anticipating the needs of your readers. It can be a little messy, but properly securing a rubber hose to your tailpipe is just so damned time-consuming.

Seriously, though – after the continual pummeling from the market and the resulting fluctuations in business, as you point, out there’s a real risk that we — on a national, business, and personal level – become punch drunk and unsure which way to turn.

Although painful, it’s worth being reminded that accepting this as the “new normal” only ensures that it will be.

Bennett S. Gross – President  – Callydus Group

Want to weigh in with your opinion? Email us at Robin@TheRobinReport.

Dear Reader

As I write this, the “Dog Days” of summer are indeed upon us. Originally coined by the early Romans, the term refers to the period from early July to mid-August when the constellation Canis Major, or big dog, is bright and visible in the night sky. “Dog Days” were popularly believed to be an evil time “when the seas boiled, wine turned sour, Quinto raged in anger, dogs grew mad, and all creatures became languid, causing to man burning fevers, hysterics, and phrensies.” (Clavis Calendarium)

When you ponder the world economic situation, including right here in the good old US of A, does this definition work for you? Operative words like evil time, anger, and hysterics could pretty well be attached to the human condition around the global economic mess. Certainly, as you watch on TV the blathering, posturing and largely impotent politicians around the world, any or all of those words would apply, and come up with more if you’d like to. And these economic “Dog Days” are likely to carry into the fall, and potentially right through the holiday season.

My blog on TheRobinReport.com, “Batten Down The Hatches,” pretty well sums up my assessment of our economic condition due to political sclerosis and the inability to address a “double-dip” that may very well be bearing down on us (also see last issue’s article: “From Inflation To Stagflation To Deflation.”)

[Read more...]

From Inflation to Stagflation to Deflation

The Robin Report EconomicoasterNow you see it.  Now you don’t.  This time I’m talking about the US economy falling into what may seem to be, and may feel like, inflation, but only for a nanosecond.

Then, like sleight of hand, we will seem to be entering into stagflation (high inflation coupled with high unemployment and stagnant demand).

But that too, will be for just a nanosecond.

Then, abracadabra, the final unveiling toward the end of 2011 and early 2012 will reveal what the economy has really slipped into.  And, that would be deflation, or a decrease in the general price level of goods and services, occurring when the annual inflation rate falls below 0%, driven by high unemployment, stagnant demand and overcapacity.

This can turn into a spiraling cycle of price declines ultimately resulting in the feared “double dip” recession, if not worse.

Following is a scenario of how this journey unfolds.

The Illusion of Inflation

The Producer Price Index (PPI) has been increasing at accelerating rates for the past several months, rising 7.3% in May, excluding services and falling home prices.  Intermediate goods prices rose an annualized 10.3% in the most recent month. Further, the broad retail sector, including most consumer goods wholesalers, have been railing for months about the rising cost of manufacturing, ingredient products, oil, food, international labor, transportation and distribution.  All combined, cost increase estimates range anywhere from 10-20% across the board.

[Read more...]

Dear Reader

The Robin Report - Dear ReaderI’m back onto economic issues, and how can I not be? What a mess we are in. I honestly do believe we have reached the highest point in our so-called recovery. Read “From Inflation to Stagflation to Deflation,” and “Tech Bubble II,” and you will find a lot of not so tasty food for thought, including the following points: 1) “Free money” donated by the Fed that will neither get businesses to hire nor consumers to borrow and spend; 2) Inflating costs that cannot be passed along to consumers through increasing prices; 3) A further decline in the value of housing; 4) Another technology “bubble” due to the trillions in capital with nowhere else to invest, which simply adds to the never-ending stream of “more stuff than demand warrants” (overcapacity), including the thousands of new commercial websites launching every day; 5) The continuing “sclerosis” in Washington and inability to get our country’s financial house in order; and 6) The continuing debt crises in Europe.

I believe this combination of events will push us into another recession, and worse, a deflationary spiral. While I’m not basking alone in such “darkness,” most economists are somewhat less pessimistic. However, there is one whose theory (depending on how one interprets it), is darker and more permanent then mine. Globally respected Tyler Cowen, with a Ph. D in economics from Harvard University and currently the Holbert C. Harris Chair of Economics at George Mason University, has just published a new book, The Great Stagnation.

[Read more...]