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20
Jun-18
Wednesday

Short-term thinking, long-term consequences

63
The NRF has been so vocal in their criticism of tariffs being applied by the US Administration to high-tech Chinese imports that Retail Directions' Pulse needs to comment. NRF CEO Matthew Shay said that "These tariffs won't reduce or eliminate China's abusive trade practices, but they will strain the budgets of working families by raising consumer prices." He is definitely right that tariffs will lead to some price increases, but his assertions that the tariffs will be ineffective seem groundless. If the US didn’t take action, the Made in China 2025 strategic plan would challenge US technological leadership, with severe strategic and economic consequences.
19
Jun-18
Tuesday

Freight capacity crunch in the US

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The Australian reprinted an article from The Wall Street Journal about the freight capacity crunch in the US, resulting in rising prices and causing shipping delays. US trucking and rail spending went up by over 17% since last year.  This is now impacting the profits of retailers such as Costco and Dollar General, as well as manufacturers.  We warned a few weeks ago that the saturation of the delivery system will start acting as a break on the continuing expansion of online sales that need to be delivered.

Amazon launches Prime down under

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Inside Retail reported that Amazon.com launched its Prime membership program in Australia today, offering free two-day delivery to 90% of the country for an annual membership fee of $59. Amazon Prime in the US costs $119 annually. Prime members in Australia will also have access to the four million products on Amazon in the US, which Amazon decided to make available through the Australian site, with free international delivery on orders over $49.  In our view, this still doesn’t compensate for their recent decision to stop shipping orders from its US site to Australian addresses in order to protest against the now more level GST rules in Australia.

Defending the un-defendable

39
The AFR reported Coles’ claim that it intends to expand its private label range because “customers are demanding” this.  It’s easy to see how it works: Coles removes branded stock from the shelf and its sales drop to zero.  The customers then have no choice but to buy the only ‘brand’ available, i.e. Coles, which is then definitely in higher demand.  The real reason behind the rush to cheap home brand stems from Coles’ inability to reduce its operating costs.  So, the only option left to keep the business profitable is to buy cheaper stock and sell it for less, but with a higher margin.  The bad news: even this won’t make Coles competitive when compared to Aldi.  In the meantime, Coles must have started to realise that some of the local suppliers have disappeared because they now intend to look for branded merchandise overseas.
18
Jun-18
Monday

UK retail solid growth

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US retail is not alone in experiencing boom times.  Reuters reported that UK sales in May went up 3.9% year on year.  We were again disappointed by Reuters – we had to dig deep into their article to find this data.  Most of it was focused on the analysis of meaningless month-on-month sales rate change (1.3%, which means literally NOTHING).  The May results could be a sign of recovery in the UK, but it is worth remembering that the UK economy is still suffering from the uncertainty caused by the approaching Brexit and the re-alignments in international trade driven by the US.
15
Jun-18
Friday

Mission impossible at Godfreys?

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In the infancy of a business takeover and restructure by Godfrey’s co-founder John Johnson, the situation has gone from bad to worse with sales slipping by 15% in June compared to the corresponding period last year – triggering a significant profit downgrade. The business had warned earlier this month of a serious cash flow squeeze looming in July and the need for emergency finance. The retailer has failed to adapt to structural shifts in the market and fierce competition from both traditional and pureplay rivals. Saving the business is starting to look a lot like mission impossible.

Coles’ long-term strategic blinkers

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The AFR reported further details about Coles’ plan to increase private label brands to 40% of sales within five years. Outgoing Coles MD John Durkan said the grocer wants to be an “own brand powerhouse” by 2023. This just reinforces our prior comments that Coles is operating with long-term strategic blinkers. The initiative may push revenue up in the short-term, but over time it will punish local suppliers (destroying many), increase the business’s cost of operations, and progressively degrade the brand – all without materially enhancing the customer offer or making the business more competitive on price.

Tech tail wagging the dog

57
Multiple media outlets, including Reuters, reported that Microsoft is working on technology that “would eliminate cashiers and checkout lines from stores”.  This is apparently in a nascent challenge to Amazon's automated grocery shop. Microsoft is working on systems that will track what shoppers add to their carts.  The systems will rely on a combination of customers’ phones, cameras, and sensors.  A claim was made that this will work well for grocers.  Our view has not changed: simply because something is technologically possible (and expensive) doesn’t mean that it makes practical sense.  What about people who don’t have smartphones (still about 10% in Australia), what about shrinkage, or someone throwing an item into somebody else’s cart?  What about the correct handling of fresh meat, produce and other items that are somewhat less precisely defined as SKUs in comparison to a simple can of baked beans?  What about this complex electronic ecosystem experiencing issue? Finally, what about genuine customer service? A good history lesson can be learned from the Great Eastern experience.  Complexity results in clumsy solutions.

Retail sales surge in the US

41
Reuters reported that retail sales in the US went up 5.9% in May compared to the year before.  This reflects US economic revival, a pipe dream for Australian retailers, plodding along in a sluggish economic environment, which no Australian politician has the guts to reform. The level of unemployed in the US is at a 44 year low and the jobless rate is expected to drop to 3.6% by the end of the year.
14
Jun-18
Thursday

Australian retail forecast

36
Inside Retail reported on Access Economics’ forecast for 2018/19, which expects a mild increase in the rate of retail sales growth, from 2.4% this year to 2.6% the next year.  What interested us more was the comment that “pureplay competition is heating up quickly”.  We have predicted earlier that Amazon’s arrival in Australia would have a significant impact, but predominantly in the e-commerce space. This was based on the assessment that the actual sales drift from brick and mortar to online had mostly already happened prior to Amazon’s arrival.  Given Amazon’s fierce competitiveness in e-commerce and its bottomless coffers, we expect them to make an even bigger dent in the pureplay space in the future.

US interest rates

37
Reuters commented that the US economy is as close to ideal as it could have been dreamed of a decade ago. It is growing at a pace topping 4 percent, unemployment is as low as it has been this century, and inflation has safely edged up toward an official target.  On Wednesday, the Fed increased its benchmark overnight lending rate from 1.75 to 2.00%.  The rate hike was the seventh in this cycle and marked a shift to a neutral stance in which the policy rate matches inflation. Fed Chairman said that “the economy is doing very well”.
13
Jun-18
Wednesday

The problem of doing too well

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The Wall Street Journal commented that the US Federal Reserve is concerned with the US unemployment rate being too low.  Only twice in the past half-century has unemployment fallen to its current rate of 3.8% - for a few years in the late 1960s and for one month in 2000. The ’60s episode helped spur years of soaring inflation that took a decade for policymakers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession. The WSJ expects that on Wednesday the Fed will raise short-term interest rates, trying to put some brakes on the economy.