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).

Doing Business in Brazil

brazilBrazil is more than just football!

Interesting fashion can be found in every corner of the globe and Brazil is no exception. Compared with China, Brazil has had far less attention from global brands. But that’s changing.

As I’m typing away on my flight from Rio de Janeiro to Sao Paulo and reflect on my trip so far, it becomes more and more apparent that the fashion industry here is set to explode in more ways than one. It is primed to be both impacted by global forces as well as make an impact on the world stage with more than just flip-flops and bikinis.

“B” as in BRIC

Brazil is the fifth largest country in the world with 200 million people, half of whom are under the age of 30. It is becomingmore urbanized as millions of people have transitioned from poverty to the middle class. Brazil has a $54 billion apparel market that’s expected to keep growing, and by 2020, almost half of apparel spending will come from its smaller cities. [Read more…]

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…]

Walmart Collateral Damage

iStock_000043854262LargeWhat if Walmart opened a big fleet of new-format stores and no one came?

We might find out really soon. After years of tinkering with its small-format, food driven Neighborhood Market model, Walmart has started to roll them out in earnest. There are now about 350 Neighborhood Markets and Walmart expects to open them at the rate of about 200 per year, ultimately achieving about 2,000 stores.

At about 40,000 square feet each, Neighborhood Markets are integral to Walmart’s strategy for future growth. Its main store model, the huge food and nonfood supercenter, needs a boost since it has just about reached market saturation and is facing dwindling consumer engagement.

And in an unexpected twist, Neighborhood Markets in many areas are pulling dollars from the pockets of the same supercenters shoppers, so net sales increases aren’t growing at the anticipated rate. In fact, Walmart’s net sales are actually dropping in some areas. And guess what? Local supermarket operators are starting to relax about the competitive threat Neighborhood Markets pose. [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…]

Are You Trapped in the Past?

shutterstock_176490206Think you are a Retail Guru? Student of the Industry? Current or former Master or Mistress of the Universe? Or have you just been around the business for at least 25 years? Well, wherever you were in 1989, were you capable of foreseeing what retail would be like in 2014? Some of you who were part of the industry in 1964 may in fact still be alive and kicking. If you are a member of that rarified group, did you envision then any of the changes that have occurred in our industry over these past 50 years?

Change is a concept that most of us say we understand and readily embrace. Yet, in reality, we have little or no capacity to conceive of, plan in support of, or manage change.

Past as Prelude

In 1964, retail was principally focused on downtown business districts in either overlarge emporium like local department stores and/or mega-catalog houses. Downtown specialty retail was invariably local. Few, if any, shopping malls existed; there were no strip or power centers, and no big box players or discounters of any consequence. Local city-based Woolworth’s and Woolworth-like stores that blanketed downtowns were more the norm throughout the country. Technology then was embodied by mechanical cash registers in the front of the house and manual comptometers and handwritten ledgers in the back room. [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…]

Widening the Gap

shutterstock_192812690Having followed Gap and Gap Inc. for 25 some years, I’m intrigued with the many growth opportunities the $16+ billion company still provides. As an analyst, I’ve long applied a portfolio approach to Gap Inc.; when one brand is humming another is flubbing— and basically that’s been the case. Gap Inc. is accessible: luxury (albeit boring) at Banana; value at Old Navy; and just-plainclothes- with-a-hint-of-attitude (mostly from good marketing, not so much design) at Gap. Recent acquisitions, along with new global opportunities and a changing industry, begged another look at this behemoth. And I like what I see! [Read more…]