Category Archives: Retail

the ever-expanding Black Friday

November 21, 2014 By in Current Market Thoughts, Industry Analysis, Retail Tags: , , , , , Leave a comment

For at least the past couple of weeks the Promotions tab of my email inbox has been stuffed with a gazillion Black Friday promotions.  In the bricks and mortar world, Wal-Mart (WMT) has announced that this year its Black Friday period will last for 10 days (today is day one).  [The term “Black Friday,” by the way, originated in Philadelphia, according to the Visual Thesaurus, as a police description of the extra work they had to do on the Friday and Saturday after Thanksgiving.]

In the years immediately after the Great Recession, retailers, led by Wal-Mart, began to try to push the traditional start to the holiday shopping season forward from Friday to Thanksgiving Day itself.  The theory hat lent urgency to this endeavor was that times were bad and consumers had little desire or ability to do extensive shopping.  Therefore, the first merchant to make a sale would do well; retailers who held back would find consumers’ wallets already empty.

What investment significance–if any–does the move of Black Friday from the week of Thanksgiving to the week before the  holiday have?

My take:

–I don’t think this is a sign of overall economic fragility, as it was several years ago.

–I do think, though, that spending on big-ticket items like housing and autos has left consumers with less cash for other items.  This is a normal pattern worldwide, including the US prior to the crazy bank lending spree that led to the financial crisis.

–WMT’s customer base is skewed toward the less affluent.  The company is facing increasing competition from dollar stores, as well as, I think, a rejuvenated Target.

–I suspect that there’s a Millennials/Baby Boom element to the promotional environment, with physical stores positioned to serve the latter–so that those retailers are competing in a no-growth arena.  One interesting (to me, anyway) aspect of the WMT promotion is that Black Friday prices are available today, but only in the stores, not online.

–My inbox bloat may just reflect my online shopping habits and have no further significance.  Still, any online merchant has the ability to avoid using the blunt instrument of price reduction and use couponing or customer-specific pricing to drive sales instead.  The idea is at least as old as dynamic pricing for airline tickets.  The practice is likely much more widespread than I care to believe.

My conclusions:

Most important, I don’t think signs of an increasingly promotional holiday season are a red flag either for overall US consumer spending or for the stock market.

Personally, I’m looking more for Consumer Discretionary names that are online or Millennials-oriented rather than physical store/Boomer plays.  No surprise there  …in the eternal struggle between Concept (growth) and Valuation (value), I’m normally going to be in the growth camp.  There will be times when valuation trumps potential.  I don’t think now is one of them, although I have noticed that for the first time in years WMT has begun to outperform.  If anything, this suggests to me that the holiday shopping season may be better for everyone than I’ve been thinking.

 

 

online shopping continues to evolve

October 27, 2014 By in economics, Industry Analysis, internet, Retail Tags: , , , , , , 1 Comment

Three studies reported in the press this year about the behavior of online merchants have caught my eye.  They all call into question what I think is the consensus belief that online shopping is not only faster and simpler than going to a bricks-and-mortar store, but that it’s cheaper as well.

–the first concluded that the price Staples showed to an online customer varied with that customer’s location.  More specifically, price depended on how close the physical stores of rival office supplies companies were.

–the second concluded that Amazon has been raising its prices  this year, to the point where for some things AMZN is now 10% more expensive than Wal-Mart and 5% more than Target.

–the third, covering 16 popular online merchants and noted last week in the Wall Street Journal, found that:

—–Travelocity charged users of Apple mobile devices to access its site $15 a night less for hotel rooms than everyone else

—–Home Depot showed cheaper items to shoppers using a desktop than those coming to its site via laptop, tablet or phone.  The difference averaged about $100.

—–Cheaptickets and Orbitz charged on average $12 less to customers who logged into their sites than those who didn’t, without alerting people to the savings.

—–some sites seemingly experimented with pricing by randomly offering customers higher or lower quotes.

my take

Some of this is a little weird–like why an iPhone user should get a discount (I would have thought the pricing would go in the other direction).  A lot parallels the traditional practices of bricks-and-mortar retailing.  Using a phone or tablet is apparently the equivalent of driving up to a sore in a limo and expecting a bargain.

The emergence of the same in online retailing signals a significant maturing of the medium.  We’ve left the early days where to make profits grow it’s enough just to get more traffic.  The game is now all about finding the highest price that will convert browsers to buyers, thereby maximizing the profit per transaction.

We all know some variable pricing happens, both in online and bricks-and-mortar retailing.  But as potential customers become more aware that it occurs a lot more online than they had thought, and as they learn the signals they need to send to get a lower price, the tricks merchants now employ will become less effective.

A so-so economy will accelerate this adjustment process, with negative implications for online-only retailers, I think.

 

internet pricing

August 7, 2014 By in Industry Analysis, internet, Retail Tags: , , , , , , Leave a comment

Just thinking out loud…

Years ago, I was looking at a chain of convenience stores that had free-standing urban outlets as well as suburban/rural ones linked to gasoline stations.  The chain was beginning to implement variable, or dynamic, pricing.  It had installed electronic price signs on its shelves and had a wireless system it could use to change prices from one time to another during the day–either item by item or store by store, or across the entire chain.  The idea was to sell a carton of milk for $2 at noon  $3 at 7 pm and $4 a midnight.

As it turned out, the system never got off the ground.  There were technical legal issues, like whether you could use an electronic sign or whether a price had to be marked on each item.  But the main thing was that customers were outraged by the whole scheme.  They thought it was an incredible ripoff and stopped patronizing the chain.  Chagrined management apologized and shut the whole variable pricing effort down.

My guess is the same thing would happen today.

On the other hand, we all kind of know and accept that airplane seats and hotel rooms have been variable priced for years.  Hotels in college towns may triple room rates on graduation weekend.  Airlines raise their prices around traditional travelling high points.  Both routinely raise prices as the day its space will be used, based on computer analysis of demand and space availability.

No one minds.  In fact, through membership in rewards programs and with affinity credit cards, we flood hotel and airline companies with information about ourselves and our buying habits!

Then there’s e-commerce, ex travel.

For most publicly traded consumer companies this is not a big profit issue yet.  But it will be soon.  And for companies like Staples it already is.

We (sort of) know that websites practice variable intraday pricing.  We know that people in different zip codes get offered different prices, and that the distance to the nearest brick-and-mortar store that likely carries the item counts, too.  We know that if I’m thought to be a potential good customer, I’ll get different prices than if I’m perceived as not worth having.  We know that after browsing and returning to a site, the price we get may depend on whether we’ve closed/reopened our browser or not.  We also know that retailers don’t want to call attention to how much information they have about customers for fear of frightening them away.  (That said, I’ve recently noticed that if I leave an item unbought in a shopping basket, it follows me around in a semi-creepy way in subsequent browsing.)

Two potentially important things we don’t know:

–how much extra profit dynamic pricing brings internet retailers.  I have no idea.  If there were some way to make a small bet with a large payoff, I’d say that for a Wal-Mart or a Staples, it amounts to 5% -10% of internet revenue and 10%  – 20% of internet operating profit.

–when people become more familiar with what’s happening, will they react like the customers of my convenience store chain above, or like frequent fliers/stayers?  My guess is that it will be more the firmer than the latter.

Investment implications?   Two, I think:  for mixed bricks-and-mortar plus internet retailers, the internet business will be surprisingly strong; if I’m correct that consumers will see dynamic pricing as an abuse of trust, the negative reaction could be severs as/when its use is make evident (other than a huge journalistic investigation, I don’t see how).

 

 

 

 

Kindle Unlimited: publishers as collateral damage?

July 25, 2014 By in Amazon, e-readers, Industry Analysis, internet, Publishing, Retail Tags: , , , , , , , 2 Comments

At one time there was only the Kindle.

Then came the Kindle Fire and Amazon Prime.  Now there’s the Fire phone and Kindle Unlimited–all five programs (along with a bunch of smaller ones) launched by Amazon (AMZN) to bind customers ever closer to the shopping service and get them to buy more stuff through it.

For AMZN, it’s not that important that any of these be moneymakers straight out of the box.  That can always be straightened out later, when the customer has been transformed from a buyer of X who happens to use AMZN to an AMZN customer who happens to want to buy X.

Kindle Unlimited, the just introduced subscription service for e-books and audio-books, is a particularly interesting instance.  That’s because it may end up being the tipping point in AMZN’s favor in its long-running battle with the five big publishing houses for control of the English-language book reader.

Another intriguing aspect of Kindle Unlimited is that AMZN has more relevant information, I think, than any other party at the table–but it isn’t talking.  So analysts, both the Wall Street kind and the planners inside the publishing companies, have less than normal to work from as they create their castles in the air.

Here’s how I view the situation:

1.  For $9.99 a month–about $120 a year–Kindle Unlimited lets subscribers read as many e-books as they want, from a collection of over 600,000, as well as to listen to as many Audible audiobooks, from a list of “thousands.”

No titles from the big five publishing houses are included, although, for example, all the Harry Potter books are.

The rollout of KU suggests that the very public spat between AMZN and Hachette, the smallest of the big five, may have been aimed at persuading Hachette to take part.

2.  Most industries exhibit a “heavy half.”   The idea is that, say, 20% of the purchasers buy a huge amount, usually put at 80%, of the stuff.  For e-books, only AMZN knows what the exact proportions are.  My guess is that heavy users easily spend $50 a month ($100+?) on e-books.  For them, signing up for KU is a no-brainer.

3.  It seems to me that KU users will dig deeper into “free” content in the 600,000 titles instead of buying expensive bestsellers launched by the big five.  Presumably, AMZN has surveyed the heavy half, and maybe even run small tests to figure out what will likely happen.  Certainly AMZN must believe that KU will redirect a lot of e-book use away from the big five and toward AMZN self-published content, or content from smaller presses that may sign up.

4.  Until yesterday, I hadn’t looked at AMZN’s financials for years.  From my perusal, I’ve decided, for no particularly good reason, that AMZN makes $60 million in operating profit per quarter from e-books in the US.  The company could easily let that drop to zero, as sales of high-priced best sellers wane. However, AMZN seems to be indicating–who knows whether bluster or not–that it is willing to go deep into the red to get KU off the ground (remember, AMZN is generates about $5 billion in yearly cash flow, so it can afford to lose money on KU for a l-o-o-ng time).  Last night it guided to a possible operating loss of over $800 million for the coming quarter.

5.  The big five could be squeezed in a number of ways.  KU users switch away from them, constricting their cash flow.  Fewer pre-orders from KU users would mean new titles fall off the bestseller lists, hurting sales further.  Authors complain about diminished royalty payments and ponder self-publishing through AMZN themselves, where, for sales in the US, the author receives 70% of the sales price vs. 25% from the big five.

6.  AMZN has lots of customer information; the publishers probably have much less.  Therefore, this negative money cycle may end up being much larger than the big five anticipate.  One or more may break ranks.

It will be interesting to see how this plays out.

 

 

the Apple – IBM partnership

July 16, 2014 By in Luxury goods, software, Technology Tags: , , Leave a comment

Jobs 1.0

Back in the early 1980s, AAPL made a better personal computer than IBM, at a time when the PC was beginning to displace the minicomputer in corporations and when individuals were starting to become a viable market for computing power.

Steve Jobs made two strategic errors, however, that ended up preventing AAPL from exploiting its advantage, which ultimately marginalized his company and put it on the verge of bankruptcy.

–AAPL priced its PC at 2x -3x the level of its MS-DOS alternatives, providing an overwhelming economic incentive to put up with the clunkiness of an IMB or a Compaq.

–Jobs marketed solely to company IT departments, which at that time had no power to make purchasing decisions.  He completely ignored the CEOs and COOs who did.  This may have enhanced his counterculture image, but it effectively closed the door to any corporate sales.

Jobs 2.0, Groundhog Day–except better so far

Arguably, Jobs 2.0 repeated the same game plan as 1.0:  make high-end, high-priced consumer devices and ignore the corporate world.  

In the post-Jobs era, and after a whole lot of waffling, AAPL management has decided to stick with Page One of the Steve playbook and is continuing to define itself as a maker of high-end consumer devices.  On the other hand, it lived (by the skin of its teeth) through Jobs 1.0 and knows how that story ended.

That’s why I think AAPL’s just-announced decision to partner with IBM to sell mobile products to corporations is potentially very significant.  It suggests AAPL is no longer willing to be straitjacketed by the Jobs mystique.  This is a good thing, because growth companies only continue to prosper if they periodically reinvent themselves.  

Also, given the continuing ineptitude of Ballmer-led Microsoft, the corporate market is much more wide open to AAPL smartphones and tablets than AAPL had any right to expect.  

I’m not rushing out to buy AAPL on the strength of a single new venture.  But it’s a start.  It suggests that Tim Cook is doing more than rearranging the deck chairs.  It argues that we should also be on the alert for further signals of favorable change in the company’s strategy.