Retail’s Greatest Challenge In A Half-Century

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Retail’s Greatest Challenge In A Half-Century

by David Reavill

For those who have spent their career in sales, what’s happening in retail, has a very familiar ring.

Imagine the following: the Sales Manager walks into the Boss’s Office and proudly declares: Sales are up, Sir. So are profits. Things couldn’t look better. The Boss looks at the numbers, and sure enough, sales are up, profits too. So, he decides to give the entire sales department a raise.

But later, the Boss looks around and suddenly realizes things aren’t so hunky dory. The bills keep mounting, there is a lot more leftover inventory than there should be, and the company is suddenly in trouble financially.

How could this happen? Especially when the sales department just had such a boffo year?

The answer to this puzzle lies in our history. But a history that goes back nearly 50 years to the last time we had inflation of this magnitude: the 1970s. And what’s happening to our fictional Boss and to many real-life retail companies is that they are caught in the maelstrom of runaway prices. A storm that they did not create but that they now have to learn to survive.

This week we have 13 major retail stores scheduled to announce earnings. Nine have already been reported, with the balance on the calendar for later today. So far, five of the companies have beat Wall Street Estimates, while four have reported lower earnings.

And most of the reports have been a variation of our story of the Sales Manager and the Boss. Almost all of these companies are reporting higher sales. That’s a good thing.

Usually, I would say that yes. But not this year. Unless sales increase by more than 8 1/2%, it’s pure delusion. 8 1/2% was the inflation rate over the past year. And to see improving sales, you need to have sales that exceed inflation. Otherwise, you’re just spinning your wheels.

Inflation leads directly to the Boss’ second problem: leftover inventory. Inflation drove up the price of all the goods in the warehouse. So sales could sell fewer items at a higher price and still meet their goals. And leave the Boss with the leftover inventory.

And in fact, this is just what is massively occurring at Walmart. Walmart reported that inventories are up 26% over last year. And they are busy canceling billions of dollars of new orders to bring stocks back to normal.

Put it all together, this first year of runaway inflation wasn’t too bad for most retailers. Unfortunately, the worst may be yet to come.

Over the next few years, we’ll likely hear much about “pricing power.” As inflation relentlessly drives costs higher, the retailer must be able to increase their sales prices to meet those escalating costs. Pricing Power will be the key to any retailer’s survival.

That’s the sinister part of inflation for the retailer. It does give a nice inventory bump that first year. But after that, it is a continuing struggle to keep raising prices to meet costs.

And pricing brings me to the current American Retail Model. The most dominant retail franchisers use a discount price model. Now they each may have their unique wrinkle. But at their heart, they are all discounters.

Walmart is the nation’s largest discounter, and if you listen to their ads, they all lead with low prices. Amazon is the nation’s largest online discounter. Again, for Amazon, the price is the all-important driver. BJ’s Wholesale is the best performing retailer this reporting season, as shoppers gravitate more and more to low prices.

The whole point of a discounter is that they operate on paper-thin margins. And this will be highly problematic if, as I believe, inflation will be with us for a while.

I remind you of the many retailers who have gone out of business over the past few decades. The list is lengthy. Thin margins give little room for a mistake.

For the modern retailer, this current economy will be the most difficult they have faced in almost half a century.

Economic News

Inflation remains the big topic of the day, with Japan registering an annual inflation rate of just 2.6%. The lowest of any of the G20 nations.

While here in the US, the Federal Reserve looks committed to bringing our inflation rate down to that level. And we have quite a way to go, as inflation in the United States stands at a stratospheric 8.5%. This week, three of the most dovish Fed Governors, Neel Kashkari, James Bullard, and Mary Daly, all emphasized that they want to see inflation back at the 2% level. And they will keep conditions tight until they achieve their goal. Markets are not reacting well to this news, which is why we see stock futures in the red this morning.

A couple more retailers report earnings today, and both have positive receptions. Apparel maker Buckle is trading higher on their results. And Foot Locker is up big on the announcement of a new CEO. Mary Dillon, the recent CEO of Ulta Beauty, will be taking over the reins at Foor Locker. Wall Street is very pleased with this announcement.

However, the Street is not so happy about the results from John Deere & Company; the big farm and industrial equipment maker is trading lower in the pre-market on their earnings. These earnings make the second quarter in a row that John Deere disappoints.


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GuvGeek
GuvGeek
1 month ago

Back in 1997, when the Baht crashed in Thailand, a motorcycle dealer was selling their motorcycles at half price. The Thai Bought went from 25 Baht to the US Dollar to 59 Baht to the US Dollar. The Dealer did not change the prices and maintained the same prices in Baht. Savvy Foreigners brought out their whole stock over a weekend. When the Dealer put in an order to replace the stock they found that replacements now cost more than twice as much in Thai Baht, Twice what they sold the Motorcycle for. Imagine what the Boss thought when they sold their whole inventory in a weekend, but then realized that he had an Inflation driven going out of business sale. That is what is happening all over America. Business can’t raise prices, but can’t afford new inventory.

We will need to go though a stiff bout of Depression and a major shrinking of Government before we can recover. Almost every market in America has inflated into a bubble and the Bubbles will pop in a chain reaction. The result will be shortages in everything; including food. If the Government doesn’t contract drastically, and stop trying to regulate the economy, the Dollar will Crash and it will be all over as we know it. There will be Biblical Proportion Famine in the United States. The Food Wars in Big Blue Cities will not be pretty.

Thank you Traitor Joe!

Last edited 1 month ago by GuvGeek
Peter B. Prange
Peter B. Prange
1 month ago

Doggonit David! Why did you have to use common sense to burst our bubble after the White House and its allies in Congress assured us there was no inflation problem. I am sure my university professors in the 60’s could have straightened you out. Logic and common sense, they said, had no place in economics.
True story: I foolishly took econ as an elective. I failed the mid-term writing answers like your commentary. I wrote all their stupid garbage on the final and must have got a hundred because I still got a B in the course.
Of course never learned why deficit spending and adding all those interest payment to the cost of government could improve the economy, or why their system instead of helping the Joe Average family as promised raised inflation and taxes left us with lower spendable income. Never did learn why the huge deficit in trade with China and others was so wonderful either, but I never heard the Chinees complain.
One last little thing. History shows that cheap available energy is an important part of what drives a growing economy, but the economic experts today say we need intermittent wind and 12 hour solar to lead the way.
Well enough I guess. David, why don’t you go back to university and see if you can learn the wisdom that in 78 years on this planet I have never been able to grasp. I guess I am just so stupid shouldn’t be allowed to vote, or at least the elites need to add some ballots to balance off and replace my ignorance.