US retail inventories

Going into the end of year holiday shopping season, inventories of US merchants–especially of apparel–seem to be unusually (i.e., too) high.  I don;t think this is the case across the board.  It appears to be especially true of department stores, however.

I think this oversupply is partly caused by a reaction to last year’s troubles at the West Coast ports, meaning that merchants made their buying decisions early, to avoid running out of stock if labor problems resurfaced.

But I also think a couple of mindset issues are at work, as well.

–the recent strategic shift Wal-Mart announced to emphasize the internet suggests to me that throughout established retail, high level, long time executives who made their careers controlling the logistics of servicing physical stores have been in denial about online.

–in a housing upswing, the typical pattern around the world is that people who are establishing new households, either by renting or by buying, find the money to pay the rent/mortgage, paint, decorate, furnish…by shifting spending away from other, less immediately pressing, items.  Like apparel, for example.

The only time I can recall this reallocation not occurring is in the US, during the period from the mid-1990s to the crash in 2008.  That’s when homeowners were financing consumption by borrowing against the equity in their houses.

That’s no longer the case.  We’re back in a more normal environment, where a dollar spent on furniture or hoe improvements means a dollar less to be spent on clothes or toys (except for Star Wars, of course).

My thoughts:

It’s easier to adjust from having made the second mindset mistake than the first.  Revenues may not show who has made either; profits (or a lack of them) will.

The idea that as investors in retail we have to play the housing cycle as a key determinant of profit growth is another aspect of the Millennials vs. Boomers phenomenon in the economy.

segmenting the Millennial market

This is a continuation of my post from Wednesday.

How important is understanding this evolving segmentation between older and younger Millennials?

Overall, I think it’s more important to think about shifting our consumer stock exposure away from Baby Boomers and toward Millennials.  On the other hand, this potential change in portfolio structure is probably already much better understood than the finer point of distinguishing between older and younger Millennials.  So the latter may have equal outperformance-creating power.

In what follows, I’m relying on a recent NPD study that you can send for on the NPD website.

1. Overall spending

Both older and younger Millennials do a larger amount of their spending online than the rest of the population.

Older Millennials tend to belong to loyalty clubs and often use retailer apps on their phones.  Younger Millennials, not so much.

Older Millennials buy more kids’ stuff and have more home-related expenses.  This makes sense, since they are in the household formation stage of their lives .  Younger Millennials are attracted to experiences rather than things–they do more and buy less.

2.  Eating

Older Millennials like to cook;  younger ones don’t.  Both groups want healthy, filling food, but younger Millennials like the convenience of eating out.

Both groups use wholesale clubs more than supermarkets.

3.  Department stores vs. specialty retail

Overall, Millennials spend more of their income in department stores than the rest of the population.

Among specialty apparel retailers, younger Millennials like Hollister and Charlotte Russe the best.  Older Millennials prefer Zara and Old Navy.

4.  Beauty products

Millennials spend more on this category than the overall population.  Both older and younger do about half their spending in this category in a combination of Wal-Mart, Target and Costco–a larger percentage than the population in general.

5.  Younger Millennials are very interested in health in fitness.  Not so their older counterparts.  YMs like REI and Nike.

 

 

segmenting Millennials

I got an e-“book” from NPD, the retail data and analysis people, the other day that argues we as investors shouldn’t look at Millennials as a coherent group, but rather segment them by age ( I wrote “book” because it’s ten pages long).  Here’s what it says:

general

Millennials are an important demographic group in one sense because they’re the largest segment in the US by age, having recently passed the Baby Boom in size.  More important, they’re in the ascendant economically, while Boomers are gradually fading into retirement, with attendant lower incomes and weakening propensity to spend.  In addition, 13.8% of those 18 -29 are either unemployed or out of the workforce.  This suggests that this group will show better than average income–and spending–growth as Boomer retirement and economic expansion make more jobs available.

Millennials are projected to account for a third of total US retail spending within the next five years.

segmenting

NPD divides Millennials into younger (18 – 24) and older (25 -34).

Older Millennials:

74% white

40% married (44% have been married at least once)

40% have children

have more money

are less optimistic

favor Donald Trump.

 

Younger Millennials:

68% white

10% married (20% have been at least once)

10% have children

have less money (many are still in school)

are more optimistic

favor Bernie Sanders

 

Differing retail habits on Friday.

 

 

Japan as a possible future for the US

Japan, in my subjective view

As I wrote yesterday, the Japanese economy continues to limp along at about stall speed, hugging closely to the 0% line between growth and contraction.  There are several reasons for this, in my :

–an aging population

–strong social prejudice against accepting women as working professionals (meaning Japan wastes potentially half its workforce)

–strong aversion to foreigners that manifests itself as an unwillingness to allow immigration

–therefore, a shrinking workforce

–money-based politics that fiercely defends the status quo

–veneration of age as the source of wisdom, meaning that older managers can’t/won’t solicit/accept suggestions from younger, more technically competent, subordinates

–a docile electorate

the US is the same, in…

–an aging population

–lingering discrimination against women

–growing political (shoot-yourself-in-the-foot) pressure to limit immigration overall, and especially by high skilled professionals from Asia

–money-based politics that defends the status quo, seen, among other places, in failure to reform the federal tax code (Japan and the US have the highest rates in the OECD)

the US differs, in…

–having a younger population than Japan, meaning we have time to make changes–and the example of the fate of Japan to motivate us to do so

–a better record on hiring women (not a high bar, though)

–political and cultural embracing of youthful entrepreneurs and disruptive ideas

summing up

The US has younger population tan Japan and a more vigorous economy, but is carrying similar dead-weight in the forces of the status quo, typified by politics in Washington.

In the past 25 years, Japanese voters have voted on two occasions to toss the dominant Liberal Democratic  Party out of office and replace it with the Democrats (formerly the Social Democrats, and the Socialists before that).  Both occasions triggered bitter intra-party warfare about who should receive credit for the victory.  Nothing got done, so voters quickly reselected the LDP, as the lesser of two evils.

Hopefully, we can do better than that.