January 29, 2018 Consensus

The Weekly Consensus – January 29, 2018 (Volume 10, Number 5)

The Big Story
Things Are Getting Grosser for Grocers
Maeghan Thompson

Only days after Amazon made headlines last week by opening its cutting-edge Amazon Go convenience store to the public, it was reported that Kroger, the largest supermarket chain in the U.S., is considering teaming up with China’s ecommerce giant Alibaba.  Amazon Go stores are cashier-less, and use cameras and sensors to eliminate checkout lines, allowing customers to grab and go.  Coincidentally, Alibaba also operates supermarkets in China that use Amazon Go-like technology.

While the events of last week may have been less connected than they seemed, the sequence certainly has the appearance of being the latest chapter in what has become a supermarket/tech arms race.  Beginning with Amazon’s acquisition of Whole Foods last year, large U.S. grocery retailers, including Walmart, Target, Kroger, and Costco, have all reacted to Amazon’s expansion into the industry.  Walmart has continued to develop item-scanning apps that enable customers to skip the cashier line, and Target acquired the food delivery startup Shipt for $550 million in December to bolster its same-day delivery capabilities.  Kroger’s flirtation with Alibaba is likely related to Alibaba’s Alipay, which is a mobile and online payment platform that could potentially be used as an app for shoppers to skip lines, just like Amazon Go.

While Amazon’s long-term plans for Whole Foods remain unclear, the first industry dynamic that the acquisition impacted wasn’t high tech at all – it was pricing pressure. Shortly after finalizing the deal, Amazon cut prices at Whole Foods, increasing foot traffic by undercutting other grocers’ value advantage versus the historically premium-positioned brand.  Adding to traditional grocers’ pricing-related woes, Aldi and Lidl, two German discounters, are expanding quickly in the U.S., competing for value-seeking customers.

The competitive frenzy in the brick and mortar grocery industry is compounded by growth in online grocery. According to the Food Marketing Institute and Nielsen, online grocery spending is projected to grow to 20 percent of the market, or $100 billion, by 2025.  Startups such as Blue Apron, HelloFresh, Plated, and Kettlebell Kitchen are delivering meal kits and heat-and-eat meals that help consumers spend less time in stores.  While still a small part of the grocery market, meal delivery companies are likely to be a larger threat in the future, and in the meantime, are elevating consumers’ expectations for convenience.

The winner in all of this is clearly the consumer. While disruptive technology and competitive challenges are making grocers eye the future nervously, food shoppers can expect both more convenience and lower prices. New technologies and industry-shaping acquisitions may make grocers feel threatened, but consumers are feeling wooed.

 

Headlines of the Week

Kroger said to discuss Alibaba partnership

Kroger Co. has held preliminary talks about a possible partnership with Chinese e-commerce giant Alibaba, according to reports. Executives from the two companies met last month in China, the New York Post reported. The newspaper, citing a Chinese government press release, said the two companies have already “teamed up” in an agreement “to speed up the integration of online and offline sales.”

Richemont bids for control of Yoox Net-A-Porter as luxury expands online

Cartier owner Richemont last week offered up to 2.8 billion euros ($3.4 billion) for full control of Yoox Net-a-Porter to compete better in an expanding online market for luxury goods. Richemont, which like many rivals in the watch industry and high fashion world has been slow to move into selling online, offered 38 euros per share for YNAP, an almost 26 percent premium to the e-commerce portal’s closing price on Friday. The terms of the deal value YNAP as a whole at 5.3 billion euros, YNAP CEO Federico Marchetti said.

 

 

Apparel & Footwear

Foot Locker Just Spent $15 Million to Get Closer to Female Consumers

Pumping $15 million in Series A funding into Carbon38 — founded by former ballet dancers and Harvard University classmates Katie Warner Johnson and Caroline Gogolak —  New York-based Foot Locker now holds a minority stake in the company. That strategic investment brings the total funding raised by Carbon38 since 2013 to $26 million.  In a bid to boost its women’s business, Foot Locker in 2012 introduced the Six:02 banner as an elevated retail concept featuring premium fitness apparel and athletic brands.

Esprit warns of US$125m loss as China business takes a hit

Hong Kong-listed fashion house Esprit Holdings has pledged to continue to grow its China operations despite warning of a net loss of up to HK$980 million (US$125.36 million) due largely to a “significant decline” in its mainland business. The company said it expected to report a net loss of between HK$950 million and HK$980 million for the six months ended December 31, 2017, compared with a net profit of HK$61 million for the same period last year.  The Hong Kong-based company, which was founded in 1968 in the US, generates around four-fifths of its revenue from European countries including Germany. But it has in the past five years turned its focus to the China apparel market, which is valued at around US$300 billion.

Kering, Stella McCartney in Talks to End Partnership

French luxury group Kering is in discussions to sell its 50 percent share of Stella McCartney back to the namesake designer, according to a source familiar with the discussions. The announcement, originally slated for early January, has been pushed back indefinitely, the source says. “Ms Stella McCartney and Kering have been operating and growing the Stella McCartney brand since 2001 as a 50/50 joint venture. As often between stakeholders there are regular discussions about the future of the partnership,” a spokesperson for Kering said in a statement.

 

 

Athletic & Sporting Goods

US sales of outdoor equipment slump as consumer habits shift

The outdoor gear industry brought its biggest winter marketplace to Denver this week as it faces slipping sales and shifting U.S. consumer habits.  Industry retail sales totaled $18.9 billion from December 2016 through November 2017, down 6 percent from the previous 12 months, according to NPD Group, a market research company that tracks trends in two dozen industries.  One factor in the decline is changing consumer preferences, driven by millennials, said Matt Powell, NPD’s senior adviser for the sports industry. Millennials — sometimes defined as people born between 1982 and 2004 — are less likely than the previous generation to demand outdoor gear that stands up to extreme conditions, Powell said. He used boots as an example.  “I describe it as good-enough products. A product that will get me through most of what I want to do, and a product that is versatile,” he said.

 

Acushnet Holdings Corp. Acquires Links & Kings, Maker of Handcrafted Leather Golf Products

Acushnet Holdings Corp., the global leader in performance-driven golf products and steward of the Titleist and FootJoy brands, announced the acquisition of Links & Kings, a Utah-based company dedicated to the design and crafted production of luxury leather golf and lifestyle products.  From head covers and belts to travel bags and scorecard holders, each Links & Kings design is cut from hand-selected leather hides sourced from around the world and meticulously handcrafted to deliver the performance, quality and feel that dedicated golfers demand.

Cosmetics & Pharmacy

Huggies’ Owner Kimberly-Clark to Slash 5,000 jobs, Close 10 Factories

Kimberly-Clark, the maker of Huggies diapers and Kleenex tissues, announced it will cut about 13 percent of its workforce globally, or at least 5,000 jobs, in a bid to reduce costs as sales wane.  The company plans to shutter or sell 10 of its 91 production factories worldwide. In all, it is anticipating more than $2 billion in cost cuts by 2021. About $1.5 billion will come from reducing costs within its business. An added $500 million to $550 million will come from the efforts to streamline its manufacturing supply chain and overhead. For years, consumer companies have enjoyed what has been widely considered to be overly optimistic stock prices. Now, the names are grappling with the reality of a new landscape.

 

P&G second quarter beats, but margins worry investors

The world’s largest consumer goods maker Procter & Gamble Co reported better-than-expected sales and profit for its second quarter, but investors focused on a drop in gross margins, sending its shares down 2 percent. Margins fell by nearly 1 percent in the quarter, hit by higher commodity costs, investment outlays and cuts in prices in the grooming business that includes Gillette razorblades. The company has just quelled activist investor Nelson Peltz’s attacks on its strategy by offering him a board seat but is struggling to boost Gillette sales against cheaper competitors like Unilever’s Dollar Shave Club.

Colgate’s Sales Disappoint Despite Price Cuts, Higher Ad Spending

Colgate-Palmolive Co’s shares sank after the company reported lower-than-expected quarterly sales despite spending more on advertising and cutting prices to spur enough demand. The world’s largest toothpaste maker said gross margins fell to 59.8 percent in the fourth quarter from 60.4 percent a year earlier, hit by higher costs for raw materials and packaging.  Colgate said it expects sales growth in 2018 but the forecast did nothing to shake the impression of stagnation that has dogged Colgate and other consumer goods producers in the past year. Its shares slumped 6 percent to $72.82, setting them up for their worst day in more than seven years.

 

Discounters & Department Stores

Wal-Mart Job Cuts Rise to 1,000 in Company’s Latest Shake-Up 

Wal-Mart Stores Inc. is cutting as many as 1,000 jobs at its headquarters this year and next, the latest effort to streamline a retail empire under threat from Amazon.com.  The first wave of layoffs totaled between 400 and 500 jobs and hit the company’s marketing, human resources, merchandising, real estate and other divisions this week, the Bentonville, Arkansas-based chain said. Those affected will have 60 days to find a new role. A second phase of cutbacks will come in 2019, when some buildings are consolidated to make way for the company’s new corporate headquarters.

Sam’s Club Further Shakes Up Operations After Closing Stores

Sam’s Club is restructuring its product-purchasing team, marking the second big shake-up for the Wal-Mart Stores Inc. unit this month. A spokeswoman said the warehouse club retailer will consolidate what had been six buying roles into three: merchant, senior merchant and divisional merchandise manager. The reshuffle, effective Feb. 3, will not result in a loss of jobs. The idea is to give experienced employees a chance to select the most successful products, said spokeswoman Carrie McKnight.

Walmart Sets Three Women As Directors Of Ads Airing During Oscar Broadcast

Continuing the film-centric ad campaign it introduced on last year’s Oscar broadcast, Walmart has lined up three directors who will turn out a trio of 60-second branded shorts: Nancy Meyers, Dee Rees and Melissa McCarthy. This year’s spots all revolve around the retail giant’s signature blue shipping box, adding their own interpretations and styles to tell their stories. In a related move, Walmart will offer funding for Women in Film’s Catalyze program, which supports up-and-coming female filmmakers by teaching them skills and helping to advance their careers. As part of the sponsorship, four emerging female film teams will receive funding to create, produce and distribute short films.

 

Grocery & Restaurants

Bacardi Buys Patron, Valuing Tequila Maker at $5.1 Billion

Bacardi Ltd. is tapping into the fast-growing market for tequila by acquiring Patron Spirits International AG in a deal valuing the company at $5.1 billion. The purchase will combine two of the world’s largest closely held distillers, putting Grey Goose vodka, Dewar’s scotch and Bacardi rum under the same banner as Patron’s famous tequilas.

 

Cara Operations acquires The Keg steakhouse chain for $161.4M

Cara Operations Ltd. has agreed to buy 106-unit Keg Restaurants Ltd. in a deal worth about CA$200 million ($161.4 million), the companies said. Vaughn, Ontario-based Cara, which has 1,259 restaurants, mostly in Canada, said it agreed to pay CA$105 million ($85.2 million) in cash and 3.8 million Cara voting shares for the Vancouver-based casual-dining steakhouse chain. The Keg has 96 restaurants in Canada and 10 units in Arizona, Colorado, Texas and Washington.

Home & Road

Increased Wholesale Offsets Lower Retail Sales at Ethan Allen

Vertically integrated retailer and manufacturer Ethan Allen Interiors reported net sales of $198.5 million for its 2018 second fiscal quarter, a 2% increase over the prior-year period.  Net income was for the three months ended Dec. 31 stood at $14.9 million or $0.54 per diluted share, compared with $10.7 million or $0.38 per diluted share in fiscal 2017’s second quarter. In the wholesale segment, second-quarter 2018 net sales rose 3.8% over the prior-year period due to sales to international and domestic independent retailers and the Department of State.

Sherwin Williams Consolidated Sales up 43% in Q4

Sherwin-Williams reported double-digit sales increases in its fourth quarter and full year 2017 results.  The company said that consolidated net sales rose 43% in the fourth quarter to a record $3.98 billion from $2.8 billion in the fourth quarter of 2016 and rose 26.4% to a record $14.98 billion, from $11.85 billion in 2016 for the full year.  Net income during the fourth quarter rose to $897.4 million from $203 million in 2016. For the full year, it rose to $1.77 billion from $1.32 billion in 2016.

Jewelry & Luxury

LVMH CEO still doesn’t trust that online retail won’t damage luxury brands

LVMH CEO Bernard Arnault is still concerned that a heavy presence online will damage the reputations of the luxury brands in the group’s portfolio, and that’s shaping how the conglomerate’s digital strategy plays out globally. “We plan to continue investing in digital technology in 2018, but we need to be prudent there, so as not to sell at all costs,” said Arnault during a presentation with investors for the company’s 2017 year-end results. “We need to be strong on the digital front, but we must not trivialize our products.”

Michael Hill Jeweler to Close Its U.S. Stores, Exit Market

Michael Hill Jeweler, the Brisbane, Australia–based chain that entered the U.S. market with considerable fanfare in the summer of 2008, now plans to close its nine stores here and exit the market entirely. It’s the end of nearly 10 years of struggle for the company, which has up until now seen success in every market it’s entered and once envisioned an 800-store chain of its distinctive purple-hued stores in America. In its latest half-year results, it said that its U.S. sales had fallen 10 percent, even as its sales in Canada and New Zealand rose, and sales in Australia were flat.

 

DPA Annual Budget Rises to $70M

Funds available for the Diamond Producers Association (DPA) to spend on generic marketing will jump to $70 million this year following an increase in contributions from its members. The extra cash will enable the organization to grow its US marketing and expand campaigns around the world, Jean-Marc Lieberherr, its CEO, said in an exclusive interview with Rapaport News, during the forthcoming edition of In the Loupe — The Rapaport Diamond Podcast. “Last year, we invested about $50 million in our first real year of investment, which was significant,” Lieberherr said.

Jewelry Rental Site Flont Still Building Out Its Bench of Brands

Flont, the venture-backed online jewelry startup that lets members rent fine jewelry from major brands, is building out its stable of top-flight brands. The company announced to its mailing list that it’s added a selection of pieces from London-based fine jewelry designer Noor Fares. And earlier this month it trumpeted the addition of rings from cult-favorite Los Angeles–based fine jewelry brand Spinelli Kilcollin, also in an email to members.

 

Office & Leisure

Toys R Us, Hobbled by Competition, Will Shutter 180 Stores

Toys R Us, squeezed by Amazon.com and huge chains like Walmart, will close 180 stores, or about 20 percent of its U.S. locations, within months. Hobbled by $5 billion in debt, the company that once dominated toy sales in the U.S. filed for bankruptcy protection in September. Chairman and CEO Dave Brandon said in a letter Wednesday that tough decisions are required to save Toys R Us. Toys R Us operates about 900 stores in the U.S. The store closings will begin in February and the majority of the targeted locations will go dark by mid-April. At some other locations, the retailer is combining its Toys R Us and Babies R Us stores.

Sphero lays off dozens as it shifts focus to education

Sphero was ready to conquer the world last year. The company quintupled its product release schedule, flying high with the help of a Disney licensing deal that gave the world several Star Wars droids and talking Spider-Man and Lightning McQueen robots. But following a holiday season that failed to live up to expectations, the company recently laid off 45 staff members globally. The majority of the layoffs were centered in the company’s Colorado headquarters, but staff cuts also affected its global offices in the U.K. and Hong Kong. This restructuring finds Sphero investing much more of its existing resources into the education side of its business. The company has been operating in the category for some time, leveraging its hardware creations in an offering designed to target schools, but that side has largely taken a backseat to Sphero’s more commercial offerings until now.

Staples CEO out; replacement named

Less than five months after an ownership change, Staples has announced a change in leadership. In a brief statement, Staples said that Shira Goodman is stepping down as president and CEO of the company, to be replaced by J. Alexander (Sandy) Douglas as CEO, effective April 2, 2018. The Wall Street Journal reported that Goodman’s last day was Friday, January 26. Douglas is a 30-year veteran of The Coca-Cola Company, serving most recently as president of Coca-Cola North America. He also served as global chief customer officer, and held a variety of positions across sales and marketing. John Lederer, executive chairman of Staples and its separate United States and Canadian retail businesses, will lead the company on a day-to-day basis during the transition.

Technology & Internet

Ring raises $109M to help build safer neighbourhoods, sights still set on IPO

Video doorbell and connected security device startup Ring has raised $109 million in a Series D round, following its $61.2 million raise last year, when it also launched its Ring Pro smart doorbell. This time around, the new funding follows quickly on the heels of its launch of its connected video motion floodlight, which debuted at CES. The round is led by DFJ Growth, Goldman Sachs Investment Partners and Qualcomm Ventures, with participation from Sir Richard Branson, American Family Insurance, Shea and True Ventures, as well as others; it also includes “a small amount” of debt funding from Silicon Valley Bank.

 

Trump Slaps Tariffs On Imported Solar Panels And Washing Machines

Pledging to defend American businesses and workers, President Trump imposed tariffs on imported solar panel components and large residential washing machines last Monday. In a statement, U.S. Trade Representative Robert Lighthizer said that, after consulting with the interagency Trade Policy Committee and the bipartisan U.S. International Trade Commission, the president decided that “increased foreign imports of washers and solar cells and modules are a substantial cause of serious injury to domestic manufacturers.”

Finance & Economy

U.S. GDP Grows Below-Forecast 2.6% on Trade, Inventory Drags

The U.S. economy expanded at a slower-than-projected pace in the fourth quarter on drags from trade and inventories, offsetting strength in consumer spending and business investment that signals solid momentum entering 2018.  While the report dashed expectations for the longest streak of 3 percent-or-better growth since 2005, a key measure of underlying demand delivered the strongest performance since 2014 and inflation picked up, which will help keep the Federal Reserve on track to raise interest rates in coming months.

 

Exports, consumers drive China’s 6.9% growth in 2017

China’s economy gained steam in 2017, expanding at a 6.9% pace in 2017 in its first annual increase in seven years, according to data that exceeded economists’ forecasts and the government’s target.  Buoyant consumer spending and robust exports helped drive the faster expansion, as the economy defied expectations of weaker growth in the latter half of the year due to curbs on bank lending.  The data show China’s communist leaders have some extra wiggle room as they strive to wean the economy away from reliance on wasteful and polluting industries and exports in favor of slower but more sustainable consumer spending.