once the worst has passed–Instacart

It’s probably not too soon to start imagining what changes there will be in daily life once the coronavirus is under control.

home food delivery

Online ordering through Whole Foods or Amazon has been impossible.  The wait for a Costco delivery slot has been two weeks+   …until yesterday, when suddenly (I hadn’t looked for a while) slots for same-day as well as every day for the next week were available.  Everything I ordered was in stock–delivered three hours later  …another change.

To me this suggests that panic buying has subsided.


What really caught my eye is Instacart, which powers many food delivery services.  Not in a way that makes me itching to invest, though.  The markup on the food was 26%, after including a 5% tip.  That’s a lot, I think.  For a family of four that spends $1000 a month on food, Instacart would cost an extra $3000+ a year.  During a pandemic, this is probably not an issue for most people.  But in normal times, this seems pretty steep to me.

I don’t think home delivery will go away.  But it seem to me that potential new competitors have lots of room to undercut Instacart’s markup.  Also, it would seem to me that delivery from centralized warehouses is inherently less costly than hiring someone to shop in a supermarket in your place.

a surprisingly hardy breed

A caveat–two, actually:  I’m not an expert on supermarkets; grocery is, to me, a weird and wacky industry, with greater staying power than I would ever have imagined.  My town, for example, offers only a number of very dated, inefficient food stores.  A national chain has been trying to build a superstore for over twenty years on commercially zoned land it bought from a department store moving to a nearby mall.   Protests by “citizens’ committees” funded by the incumbent grocers have blocked redevelopment, as I understand the situation, despite the deterioration of the neighborhood as small businesses in need of an anchor have left.

The economics of physical grocery stores is also more complex than I would have thought–all mixed up with payments from manufacturers for premium space, the role of house brands, ancillary services like banking or a pharmacy…

Anyway, this is to say that supermarkets may be harder to kill than it seems on the surface (just look at department stores, which have been dying for almost fifty years).


thinking about Walmart (WMT)

On August 16th, WMT reported very strong 2Q18 earnings (Chrome keeps warning me the Walmart investor web pages aren’t safe to access, so I’m not adding details).  Wall Street seems to have taken this result as evidence that the company makeover to become a more effective competitor to Amazon is bearing enough fruit that we should be thinking of a “new,” secular growth WMT.

Maybe that’s right.  But I think there’s a simpler, and likely more correct, interpretation.

WMT’s original aim was to provide affordable one-stop shopping to communities with a population of fewer than 250,000.  It has since expanded into supermarkets, warehouse stores and, most recently, online sales. Its store footprint is very faint in the affluent Northeast and in southern California, however.  And its core audience is not wealthy, standing somewhere below Target and above the dollar stores in terms of customer income.

This demographic has been hurt the worst by the one-two punch of recession and rapid technological change since 2000.   My read of the stellar WMT figures is that they show less WMT’s change in structure than that the company’s customers are just now–nine years after the worst of the financial collapse–feeling secure enough to begin spending less cautiously.


This interpretation has three consequences:  although Walmart is an extraordinary company, WMT may not be the growth vehicle that 2Q18 might suggest.  Other formats, like the dollar stores or even TGT, that cater to a similar demographic may be more interesting.  Finally, the idea that recovery is just now reaching the common man both justifies the Fed’s decade-long loose money policy–and suggests that at this point there’s little reason for it not to continue to raise short-term interest rates.

corporate taxes, consumer spending and the stock market

It looks as if the top Federal corporate tax rate will be declining from the current world-high 35% to a more median-ish 20% or so.  The consensus guess, which I think is as good as any, is that this change will mean about a 15% one-time increase in profits reported by S&P 500 stocks next year.

However, Wall Street has held the strong belief for a long time that this would happen in a Trump administration.  Arguably (and this is my opinion, too), one big reason for the strength in US publicly traded stocks this year has been that the benefits of corporate tax reform are being steadily, and increasingly, factored into stock quotes.  The action of computers reading news reports about passage is likely, I think, to be the last gasp of tax news bolstering stocks.  And even that bump is likely to be relatively mild.

In fact, one effect of the increased economic stimulus that may come from lower domestic corporate taxes is that the Federal Reserve will feel freer to lean against this strength by moving interest rates up from the current emergency-room lows more quickly than the consensus expects.  Although weening the economy from the addiction to very low-cost borrowing is an unambiguous long-term positive, the increasing attractiveness of fixed income will serve as a brake on nearer-term enthusiasm for stocks.


What I do find very bullish for stocks, though, is the surprising strength of consumer spending, both online and in physical stores, this holiday season.  We are now nine years past the worst of the recession, which saw deeply frightening and scarring events–bank failures, massive layoffs, the collapse of world trade.  It seems to me that the consumer spending we are now seeing in the US means that, after almost a decade, people are seeing recession in the rear view mirror for the first time.  I think this has very positive implications for the Consumer discretionary sector–and retail in particular–in 2018.

Cyber Monday

I think the most interesting thing about this year’s Black Friday/Cyber Monday is that, despite the weekend’s decreasing overall relevance for American shoppers, business has been unusually strong.  This is likely in large part because consumers in the aggregate finally–eight years after the bottom of the economy (and 8 1/2 years after the bottom in world stock markets)–feel confident that the recovery is real.  Yes, we still have serious regional, educational and other demographic disparities.  But the typical consumer appears to feel that his/her job is safe and that family finances are enough under control to allow a return to more-or-less normal spending.  This is an important positive economic sign.

If this is correct, then it’s probably also time to begin to sort through the Wall Street wreckage in the retail sector.  I’d be particularly inclined to look at bricks-and-mortar, where more open wallets are likely to make the greatest positive impact.


By the way, I’ve been shopping online for a RAID array.  While I was looking on one site, a price comparison app told me that the item I was thinking about was substantially cheaper at Wal-Mart (WMT).  The WMT site told me that I would get $35 off the purchase if I applied for a credit card and bought today–both of which I did.  Almost immediately I got an email that said my purchase had been cancelled, but gave me a phone number to call for an explanation.  I did.  After about 10 minutes of waiting, when I was next in line for an agent, the line disconnected.  I ended up finding the item for the same price and with much faster delivery from B&H.

WMT may be a more formidable competitor for Amazon than it was a year or two ago.  And the AMZN price for what I wanted was 50% higher than WMT’s!!!  But WMT still has a ways to go, at least handling high-volume online days.  That’s probably more a positive than a negative for the stock, however, since there’s still considerable scope for improvement.




more on Whole Foods (WFM) and Amazon (AMZN)

I was reading an article from Fortune magazine about the AMZN takeover of WFM.  Although it echoed much of what the rest of the press is saying, I was struck by it–mostly because my expectations for Fortune are higher than for financial reporting in general.

Three ideas in the article stuck out in particular:

–that AMZN’s goal with WFM is to compete head-to-head in groceries with Wal-Mart (WMT)

—the implication that because the margins of grocery chains are low they have a poor business model

–that the price cuts made by AMZN on Monday are small, therefore they make no difference.

my take

–ten campers, including yourself, are being chased by a bear.  If the goal is purely personal survival, you don’t need to outrun the bear.  You only need to outrun one of the other nine.

Put a different way, the goal of, say, Zara or Suit Supply is not to compete head-to-head on price with WMT.  that would be suicide.  Instead, those firms intend to provide differentiated clothing to a more focused audience.  Yes, it’s still clothing, but it’s different clothing.  Initially, at least, that’s AMZN’s goal with WFM.  It wants to expand WFM’s appeal to a smaller, younger, more affluent audience, not steal traffic from WMT.

–the key to profitability in a distribution business is to turn inventory over rapidly, taking a small markup on each transaction.  This is surprisingly badly understood by most professional investors, as well as virtually all the financial press–and by WFM, as well.  This is one reason that as an investor I love distribution companies.

Low markups defend against competition and create customer loyalty; continual effort to keep the growth in inventory under the growth in sales creates positive operating leverage.

WFM appears to me to have chosen do pretty much the opposite–to take large markups on each transaction, a “strategy” that has stunted sales growth.  Inventory turns are higher for WFM than for other grocers, although I suspect that this is a function of differences in product mix.  In any event, something else (or, more likely, a bunch of other something elses) in WFM’s organizational structure is all messed up.  The income statement shows that its very fat gross margins are frittered away almost completely by high overhead expenses.

If I were AMZN, I’d figure I’d attack what I think is the abundant low-hanging fruit in operating inefficiency and lower food selling prices as I made gains there

–it’s very easy to lower prices.  It’s extremely hard to raise them again–a key reason that couponing is a favorite supermarket strategy.  So it would be crazy for a merchant to lower prices across the board on day one.  $.49 a pound bananas, displayed prominently by the store entrance, is aimed at setting customer expectations about pricing throughout the store.  It’s a symbol, a promise   …at this point, nothing more.