In The Headlines
Shopping Shift – Retailers Confront a New Consumer Reality
After years of slow to stagnant growth, some experts worry that the entire retail sector is now shifting into a fundamental decline. At a time of year when U.S. retailers should be riding the annual wave of back-to-school spending and gearing up for the bonanza of the ever-expanding holiday season, they are instead gloomily explaining continued lackluster results to Wall Street. Companies from Target to Kohl’s to Coach have reported disappointing sales for several quarters running. Wal-Mart, the world’s largest retailer, with $279 billion in sales in the U.S. alone, has seen a drop in store traffic in each of the past seven quarters. Once-shining brands such as Staples and Abercrombie & Fitch are closing stores—a reversal from the “build it and they will come” mentality that formerly served as a strategy.
What are the reasons for this malaise? Industry analysts and executives describe a perfect storm fueled by an addiction to promotions and discounts, continued economic instability, and the fact that there is simply too much store space for the current population. The result, says Mark Cohen, director of retail studies at Columbia University and former CEO of Sears Canada, will be a “Darwinian struggle for survival,” which may ultimately take down some of the best-known brands. And e-commerce continues to grow rapidly, now accounting for an estimated 6.4% of sales, or $304 billion in 2014. U.S. shoppers have not gone away altogether. But there is a “sea change in how people are shopping,” says Daniel Busch, an analyst with real estate analysis firm Green Street Advisors. Retailers must change dramatically to reach future customers.
Discounting is the oldest strategy in merchandising, offering shoppers an artificial price lower than “retail” to spur our primal desire for landing bargains. But over the past decade, say analysts, things have gotten out of control. Virtually every retailer, at both the high and the low end, has fallen so deeply into the trap that discounting has become an expectation of customers rather than a bonus. “There’s price deflation caused by ever-increasing discounts and price competition, which lowers the average transaction value,” says Columbia University’s Cohen. “That means you have to sell more things just to stay even.” This phenomenon has been spurred in recent years by the ability of shoppers to compare prices on the web.
In an attempt to win back some share, the department stores that the off-price chains have squeezed are getting in on the action. This has spurred growth in the number of outlet stores. While mall traffic overall continues to fall—some 15% of malls are expected to close or convert to other uses in the next decade, according to Green Street—outlet malls are booming. According to the International Council of Shopping Centers, there are now 340 outlet centers in the U.S., up from 311 in 2007.
It should surprise no one that lower-income shoppers continue to be price-sensitive. The U.S. is growing again after the trauma of the Great Recession. But not everyone is feeling it. The bottom 20% of Americans in terms of income saw their real income grow only 19.5% between 1967 and 2012, while the top 5% earned 88% more. What is more, the way people use their disposable income has changed. For instance, think about the “smartphone effect.” With $100 or more per month going to service plans, apps, and music, consumers have less money for a new pair of shoes. Those economic trends help explain the ongoing stagnation at many retailers. In an environment of perpetually yo-yoing consumer confidence, retailers must either win clearly on price and convenience, or wow shoppers with such an innovative product or unique buying experience that they can’t help opening their wallets.
If any single trend in retail is crystal clear, it is this: Online sales will continue to boom. E-commerce sales should leap 61% by 2018, according to eMarketer, reaching $491.5 billion. Brick-and-mortar sales, still a vastly larger number, are expected to grow a decidedly more modest 12.8% to about $5 trillion, from $4.43 trillion, over the same period. Adapting to this brave new world has proved difficult for many in the sector. While virtually every retailer participates in online sales, not all do it well. And a growing portion of overall online sales is going to retailers with no physical stores. The digital experience is changing shopping habits in other ways too. Even when customers do choose to purchase items in a store, they frequently do research online first and then go straight for the item without stopping to browse. That reduces spontaneous purchases and harms retailers without great inventory controls.
Is there hope yet for U.S. retail? Only if retailers themselves understand that the classic assumptions about the way people shop are no longer valid. “People haven’t stopped wanting things, and they won’t stop wanting things,” Cohen says. “The economy will eventually repair itself. But where are they going to transact? That is the question.”
Australia’s Miners Have Seen the Future and it is Beef
As China’s economy slows and the days of double-digit economic growth are over, companies that have been selling minerals to the Chinese are looking for the next big thing. For many Australian miners, the answer is cattle.
China’s demand for iron ore and other rocks dug out of the ground may be fading, but the Chinese appetite for foreign-raised beef is should keep increasing: China’s beef consumption could jump more than 70% by 2030, according to a new report by ANZ Bank.
China’s industry lacks the scale to feed that kind of growth, with almost three-fourths of local supply coming from herds with fewer than 10 head of cattle. “China’s ability to meet its own beef demands will continue to be hampered by the fragmented structure of its beef industry,” Michael Whitehead, ANZ’s director of agribusiness research, said in a statement published Friday. China consumed 5.9 million tons of beef last year, of which 81% came from local suppliers. ANZ says that by 2030, however, the share that comes from Chinese ranches will fall to 62%.
You might think American ranchers would be big winners from that shortfall. After all, the U.S. is the world’s top producer of beef. But China has banned imports of American beef for more than a decade, following a 2003 outbreak of bovine spongiform encephalopathy (mad cow disease). Since Hong Kong still allows imports, however, some beef from the U.S. still makes its way into the mainland. Another mad-cow scare led the Chinese government to ban Brazilian beef in 2012, further solidifying Australia’s position as the top supplier to China.
The increasing Chinese appetite for beef is leading some Australian companies to focus less on rocks and more on cows. For instance, Bloomberg News recently reported that Australian mining companies that had taken advantage of the China-led minerals boom are becoming ranchers now that the mining business is cooling. In the first half of 2014, at least $2.6 billion in deals involved Australian food and agricultural assets, the best six months in at least a dozen years. Rio Tinto and Hancock Prospecting are among the Australian miners moving into the cattle industry.
For companies that have incurred big expenses transporting minerals from remote parts of the outback, raising cattle has an advantage. “The trouble with iron ore is you have to dig it out and move it by truck,” says Agricultural Minister Barnaby Jocye, “but the great thing about cattle is they walk there for you.”
Among the Australian mining titans turning to cattle is Andrew Forrest, the billionaire founder of Fortescue Metals, the world’s fourth-biggest exporter of iron ore. In May, he acquired western Australia’s Harvey Beef, the state’s only licensed exporter to China. Forrest, who has a net worth of $4 billion, is also the founder of the Australia Sino Hundred Year Agricultural & Food Safety Partnership, a group that aims “to make Australia the most reliable and competitive food supplier to China,” according to the Forrest-backed Minderoo Foundation.
Sources:
1. http://bit.ly/1ttI41s – Fortune
2. http://buswk.co/1rSOHdO – BusinessWeek
The Good News Is . . .
• Factory orders surged 10.5% in July. The data included a sharp 1.2% rise for shipments and a 1.4% rise for shipments of nondefense capital goods excluding aircraft. Unfilled orders show an unusually outsized gain of 5.4% while inventories, up only 0.1%, will need to be refilled. Another positive was an upward revision to June orders, now at a very strong 1.5% vs a prior reading of plus 1.1%. Aircraft orders the July surge and could eventually boost factory shipments and employment.
• Lowe’s Companies Inc., a leading U.S. home improvement retailer, reported earnings of $1.04 per share, an increase of 18.2% over year-ago earnings of $0.88. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $16.6 billion, an increase of 5.7%. Management attributed the company’s results to improved outdoor product sales which had lagged earlier in the year due to unfavorable weather conditions.
• One of the biggest providers of flower deliveries, 1-800-Flowers.com, agreed to buy Harry & David, the purveyor of gift baskets, for $142.5 million in cash. Under the terms of the deal, 1-800-Flowers would continue to run Harry & David as a subsidiary, with the current management staying on. Adding Harry & David will push 1-800-Flowers’ annual revenue to more than $1 billion, while also leading to potential cost savings at the two companies.
Sources:
1. http://bloom.bg/1bidM2T – Bloomberg
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/Ze1gna – Lowe’s Companies, Inc.
4. http://nyti.ms/Ze1jiO – NY Times Dealbook
Planning Tips
Planning Tips – Understanding Exchange Traded Funds (ETFs)
Exchange traded funds (ETFs) have become very popular with investors over the last decade. In general, these securities mimic the behavior of a particular stock index. Below are some guidelines to help you understand what ETFs are, how they work, as well as their associated risks and benefits.
What is an ETF? – In the simplest terms, Exchange Traded Funds (ETFs) are funds that track indexes like the NASDAQ-100 Index, S&P 500, Dow Jones, etc. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate its performance. They do not try to beat the market. They try to be the market.
How are ETFs managed? – The purpose of an ETF is to match a particular market index, leading to a fund management style known as passive management. Passive management is the chief distinguishing feature of ETFs, and it brings a number of advantages for investors in index funds. Essentially, passive management means the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. This is quite different from an actively managed fund, like most mutual funds, where the manager continually trades assets in an effort to outperform the market. Because they are tied to a particular index, ETFs tend to cover a discrete number of stocks, as opposed to a mutual fund whose scope of investment is subject to continual change. For these reasons, ETFs mitigate the element of “managerial risk” that can make choosing the right fund difficult.
What are the benefits of ETFs? – ETF shares trade exactly like stocks. Unlike index mutual funds, which are priced only after market closings, ETFs are priced and traded continuously throughout the trading day. Yet because their value is based on an underlying index, ETFs enjoy the additional benefits of broader diversification than shares in single companies. ETFs, or at least the ones based on major indexes, typically trade at much higher volumes than individual stocks. High trading volumes mean high liquidity, enabling investors to get into and out of investment positions with less risk and expense.
How do costs of ETFs compare with mutual funds? – Because an ETF tracks an index without trying to outperform it, it incurs fewer administrative costs than actively managed portfolios. Typical ETF administrative costs are lower than an actively managed fund, coming in less than 0.20% per annum, as opposed to the over 1% yearly cost of some mutual funds. Because they incur low management and sponsor fees, and because they don’t typically carry high sales loads, there are fewer recurring costs to diminish your returns. ETFs are also less likely than actively managed portfolios to experience the trading of securities, which can create potentially high capital gains distributions. Fewer trades into and out of the trust mean fewer taxable distributions, and a more efficient overall return on investment.
What are the risks of ETFs? – ETFs are generally closely tied to one sector or index which means that any crisis affecting that index or sector would immediately impact the value of your ETF investment. Asset allocation strategies used by ETFs spread the risk, but do not eliminate it. Also, some ETFs are based on “exotic” indexes which, by their special design, may make them more volatile. ETFs like other investments come with a certain degree of risk. It is a good idea to consult with your financial advisor before investing to determine if ETFs are appropriate for you and your situation.
Sources:
1. http://bit.ly/1AozS0Y – US News & World Report
2. http://bit.ly/1uFsfBK – NASDAQ
3. http://ti.me/1ogTSNr – Money
4. http://onforb.es/18kNZMS – Forbes
5. http://on.barrons.com/1ogU1AD – Barrons
6. http://bit.ly/1imXSgJ – Investopedia
