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24
Mar-18
Saturday

Amazon’s strange moves

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Bloomberg reported that less than a year after closing its acquisition of Whole Foods, Amazon is searching for bigger Whole Foods locations in cities that can serve as both grocery stores and urban distribution centers for delivering goods to online shoppers.  This kind of makes sense, but questions must be asked: if Whole Foods was a good business, why mess with it?  If it wasn’t, why did Amazon buy it?  The confusion at Amazon’s end seems to be confirmed by the news that they are also working on a project to convert parking areas at existing Whole Foods stores into stalls for Amazon delivery contractors to load up their orders. A word of advice to Amazon: if you reduce parking space at a supermarket, your sales will drop.  Just a basic law of nature as far as supermarkets are concerned.

Taxing online sales

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Australia is not the only country with a messed up sales tax system. The Wall Street Journal recently questioned US Congress’s consideration of the proposed federal law authorising states to impose their respective sales tax on remote sellers, criticising South Dakota for trying to tax internet sales.  NRF pointed out that unfair competition from remote sellers exempt from the combined state and local sales-tax (charged at the rate of 6.5% in South Dakota) causes many local retailers to fail. Yet, Canberra politicians keep claiming that a 10% price difference is immaterial, therefore, there is no rush to tax overseas internet purchases - a view that is on the verge of commercial insanity.  In retail, a 10% price difference is a matter of life or death.
23
Mar-18
Friday

New Look to shut down 60 stores

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According to The Telegraph, UK-based retailer, New Look will close 10% of its 600 stores as part of a reorganisation that will cut about 1,000 of its 15,300 staff positions. The company has launched a voluntary arrangement with its creditors to avoid insolvency.  When an otherwise good retailer gets into this kind of trouble, it just confirms how hard fast fashion retailing can be.

Trying to fix the US balance of trade

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According to Bloomberg, the US Government announced the introduction of tariffs aimed at reducing the US / China trade imbalance and to curtail the current Chinese practice of forced technology transfers.  The US trade deficit, which is close to $600 billion annually, has become unsustainable, so something had to happen.  Interestingly, 20 years ago the books were balanced. Deutsche Welle reported that the affected sectors will include robotics, aerospace, maritime and modern rail equipment as well as electric vehicles, and biopharma products.
22
Mar-18
Thursday

US interest rate hike signals bullish outlook

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The US Federal Reserve raised its key short-term interest rate yesterday, the first of a total of three increases expected in 2018. Interest rate hikes can often be viewed in a negative light, with benefits isolated to investors. Contrary to this prevailing perception, an increase in interest rates signals higher levels of confidence in future economic prospects.

Nordstrom not going anywhere

13
NRF reported that the Nordstrom board has ended buyout talks with members of the Nordstrom family after failing to come to terms on a price.  Probably a good thing - we usually see takeovers and ownership changes undermining the ethos of the business, with performance and financial consequences a materialising few years down the track.

Myer on thin ice

18
Following the announcement of more loses and the suspension of dividends, the question arises: how will Myer’s lenders react?  While Solomon Lew has been vocal trying to influence the Board, Myer’s bankers will have more direct power - what options will they pursue?  A mere replacement of the Board won’t solve much as, in our assessment, the problems rest much deeper within the business.
21
Mar-18
Wednesday

Reinventing the internet

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AFR published commentary about the need to reinvent the web and it included an interesting idea: governments need to reclassify social platforms as publishers, making them responsible for the content they host such as newspapers and broadcasters.  Given the level of disinformation, unbalanced opinions and vulgarity published by these networks, this would be a smart move.  Long overdue.

Social networks are reaching a plateau

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We just became aware that a few days ago, Campaign US reported that 34% of Generation Z in the US are quitting social media for good, 64% are putting their use on hold, and 41% report that social platforms make them feel depressed, anxious or sad.  This aligns with our doubts about the validity of Citi Research predictions about the expected growth in online sales – the social network space is becoming saturated.

Amazon coming down to earth

18
Bloomberg reported that Amazon has considered acquiring some soon-to-be-empty Toys R Us stores, to expand its own brick-and-mortar retail concepts, sources said. The company's physical retail operations include bookstores, a convenience store concept and the 450 Whole Foods Market locations it acquired last year. Good to see Amazon getting into the real world of retail.  It will be interesting to see how far they need to go before the stock market starts seeing them as yet another large retailer, rather than something truly special.  A more sober market valuation will no doubt follow.

IGA shrinking, as expected

22
We keep repeating our prediction of the gradual demise of IGA supermarkets as a consequence of Aldi and Costco expanding their network. According to Citi Research, in 2012 Aldi’s size was around 30% of Metcash’s IGA.  Five years later, Aldi has grown to 60% of IGA, in line with our expectations.  At this rate their market share will be roughly the same around 2020.  The question arises at what point does IGA’s supermarket business model begins to break.  Note that in the process Coles and Woolworth will also suffer.

Retail space growth still too fast

14
In their quarterly update, Citi Research observed that over the next three years the expansion of Australian retail space will exceed population growth. According to Citi, online sales are expected to grow at 10%, although we question this prediction.  Statistics about smartphones and social media penetration as well as the usage of social media indicate that we are entering a plateau phase.  Therefore, we expect online sales growth to slow down.  Citi commented that retailers have become reluctant to open new stores, but successful retailers don’t seem to have such concerns.