The Stockout show highlights CPG and retail industry trends
On Monday, Grace Sharkey and I went through the year’s biggest trends in the CPG and retail industries, as we saw them. The full show can be seen here and back episodes can be seen here.
Retailers focus on convenience, speed and value
For retailers, the largest trends are related to removing barriers to purchases and making transactions “frictionless.” Examples include Walmart’s phone-based Scan and Go checkouts and Target’s ability to accept curbside returns while also delivering your merchandise and even your Starbucks order at the same time. Removing transaction barriers becomes increasingly important amid growth in social media-driven impulse purchases.
The concept of transaction barriers was also one of the issues at the heart of the Federal Trade Commission’s lawsuit against Amazon and the debate about whether the e-commerce giant was abusing a monopoly position. The FTC alleges that Amazon is selectively using barriers to exploit its monopoly. Not playing by Amazon’s rules results in marketplace sellers not winning the “buy box,” which is typically too big of a barrier to overcome. The same goes for sellers’ inclusion in Prime, which generally requires using Amazon’s fulfillment services.
This year, retailers also continued to up their game on fast and consistent service levels, which prompted Amazon’s shift from a national to a regional fulfillment model and Walmart’s push for the “perfect” online order — with no substitutions or delayed items. Those initiatives have increased demand for automated warehousing and fulfillment in urban locations close to consumption centers and may require retailers to maintain higher inventory levels and invest more heavily in technology and logistics.
(Chart: Barchart.com Inc.)
Yet, despite the focus on convenience and speed, other retailers also won by delivering superior value. I would argue that Costco is one of the least convenient places to shop. Customers trade speed and selection for lower prices on SKUs that are rarely exactly what they want. All the while, customers are assumed to be thieves until their receipt is checked (which now seems prescient). But, it’s the perfect business model amid the cost-of-living crisis, and Costco shares hit an all-time high in recent days. Similarly, private-label discounter Aldi is the fastest-growing grocery chain in the United States.
CPGs clung to elevated retail prices
After rallying last year, the shares of many CPG companies have been pressured this year. Those include General Mills (black line) and J.M. Smucker Co. (blue line), which have posted one-year total returns of negative 23% and negative 20.1%, respectively. That can be attributed to several factors, including investors’ greater appetite for riskier sectors and higher interest rates on corporate bonds, which provide an alternative to consumer staples shares known for strong dividend yields. Other bearish viewpoints on CPG cite rising consumer sensitivity to elevated prices and the impact that Ozempic and similar drugs may have on food and snack sales.
(Chart: Barchart.com Inc.)
There is also the potential for margin contraction. As commodity prices have retreated this year, national CPG brands have clung to elevated prices even as prices of fresh foods and, to a lesser extent, private-label packaged brands have eased. National CPG companies justified the still-high prices by citing rising input costs other than ingredients, such as labor and packaging costs. Now it seems like CPG prices can no longer defy gravity — on both the latest Walmart and Costco analyst calls, the retailers’ management teams suggested they are on paths toward easing CPG prices.
Railroad analyst says service levels will be the most critical railroad issue next year
Last week on People Speaking Rail (PSR), I interviewed independent railroad analyst Tony Hatch. Hatch has followed the industry closely for a long time and hosted a major railroad conference last month (as he does every November) that included Class I railroad CEOs, Surface Transportation Board members, shippers, consultants and union representatives. This year, it even featured a fiery exchange between the STB chairman and Union Pacific leadership. Tuesday’s show discussed whether the railroads’ “no-furlough pledge” is realistic, the “cult of the OR,” the outlook for railroad regulations and what the railroads need to do to regain share from the highway, among other topics. The full show can be seen here, and catch up on past episodes of PSR here. This week on PSR, Joanna Marsh and I discussed our reaction to the points expressed on John Oliver’s comedic critique of the railroad industry. On my scorecard, I have three criticisms that seemed fair and five that were either unfair or lacked needed context.
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