April 9, 2018 Consensus

The Weekly Consensus – April 9, 2018 (Volume 10, Number 15)

The Big Story
Retailers Anxiously Eye A New Challenge: Tariffs

Last week, President Trump proposed tariffs on more than 1,300 Chinese imports centered around consumer electronics and machinery. While the list doesn’t target most apparel, footwear, or accessories categories, it is not final, and concerns abound that this economic brinksmanship is likely to ensnare more industries. The White House has said the tariffs are being assessed to retaliate against China for intellectual property theft from American businesses. Many observers, however, question whether the action will have its desired effect, and representatives in the sporting goods, apparel, footwear and outdoors industries have made clear their concerns that the tariffs would harm primarily American companies and consumers without accomplishing its intended directive.

The Retail Industry Leaders Association warned that tariffs could hit U.S. households the hardest. The RILA urged the reevaluation of the proposed retaliatory tariffs to avoid punishing American consumers for the mistakes of others. “Retailers fully support holding our trading partners accountable when there is a proven case of intellectual property theft, but we remain concerned that many of these proposed tariffs will punish American consumers. Tariffs on everyday consumer products will hit American wallets, not Chinese technology violators.”

The National Retail Federation also weighed in. Matthew Shay, CEO of the NRF commented “As we’ve said all along, tariffs are taxes on consumers and a drag on the nation’s economy. This entire process creates uncertainty and makes it difficult for retail companies that must rely on complicated global supply chains.”

In a press release, the Outdoor Industry Association (OIA) welcomed the news that outdoor products were not among the initial list, but said the group will continue to argue that imposing retaliatory tariffs on products such as apparel, footwear, and travel goods that are already subject to heavy taxes is not the best way to address China’s intellectual property practices. Said Alex Boian, OIA’s vice president of government affairs, “We again call on the administration to pursue a more narrow, targeted approach, one that addresses legitimate concerns about protecting U.S. intellectual property without raising costs for American consumers.”

In any event, the initial announcement of tariffs is only the beginning. Shortly after Trump’s list of 1,300 goods was released, China threatened to introduce its own tariffs on 128 U.S. products, including a 25% tariff on certain meats, and a 15% tariff on certain nuts and fruit products. China’s response sparked fears that a trade war involving the world’s two largest economies could quickly escalate.

President Trump responded with the threat of another round of tariffs. As to where it leads is anyone’s guess. What seems clear, however, is that leaders across the consumer products spectrum are not counting on anything. Nick Sargent, president of Snowsports Industries America, said that after reviewing documents and speaking with colleagues, he is both relieved and cautious. “This trade war situation is going to continue to evolve. We’re just going to have to continue to wait and watch.”

With back-and-forth tariffs being added by both China and the U.S., more fallout is likely to come. And it still doesn’t address how to punish China for stealing intellectual property from American businesses. In any event, while sports and fitness products, apparel, footwear, outdoor gear, or personal accessories may have been spared so far, the industries will be anxiously following where this leads.

 

Headlines of the Week

Amazon may reportedly rival Walmart with bid to buy India’s Flipkart

Amazon may make an offer to buy Indian e-commerce giant Flipkart, an Indian newspaper reported last week. Flipkart is already in advanced talks with Walmart to sell a majority stake to the U.S. retailer but Amazon has held its own exploratory discussions to buy the company, India’s Mint newspaper said.

Smucker to Buy Rachael Ray Dog Food Brand in $1.9 Billion Deal

J.M. Smucker Co. agreed to buy Ainsworth Pet Nutrition in a deal valued at $1.9 billion, betting that pet food can help reinvigorate sales in a sluggish consumer-product industry. The transaction, which gives Smucker a brand of premium dog and cat food backed by celebrity chef Rachael Ray, will amount to about $1.7 billion when excluding a $200 million tax benefit. The company also confirmed that it’s exploring the sale of its U.S. baking unit, which generates roughly $370 million in annual sales.

 

 

Apparel & Footwear

Blue Jeans Are Mounting a Comeback

From Ralph Lauren to Calvin Klein, America’s biggest fashion labels are pinning their hopes on a blue jean revival. Across the industry, fashion brands are renewing their focus on denim, betting the wardrobe staple can be a major sales driver as jeans battle stretchy pants for supremacy from the waist down. Last year, imports of elastic knit pants surpassed those of jeans for the first time ever, according to the U.S. Census Bureau. Yet while Levi Strauss & Co. struggled for years to stave off pressure from stretchy pants, there are signs of a rebound. The jeans maker posted an 8 percent increase in revenue in 2017, thanks to a significant revamp of its women’s jeans.

Polyvore is shutting down after being acquired by fashion retailer Ssense

Montreal-based fashion site Ssense is acquiring Polyvore from Verizon’s Oath, but the site will not live on. Ssense has already shut down the Polyvore site, taking its user data and redirecting traffic from the site’s main URL. Terms of the deal were not disclosed. Polyvore was previously owned by Oath, a Verizon subsidiary which also owns TechCrunch. Yahoo acquired the Pinterest-like social commerce site back in 2015 in the midst of Marissa Mayer’s tenure. According to Recode, Yahoo paid as much as $200 million for the fashion site.

Secondhand Apparel Is Set to Outpace Off-Price and Fast Fashion

Thrifting used to mean sifting through piles of cast-off clothing at Goodwill, but newer upstarts are attempting to take used goods into the digital age. ThredUp, an online marketplace for used clothing and shoes, published a new study about the $20 billion resale market. Disrupters like Poshmark, Tradesy, The RealReal and ThredUp itself are estimated to grow 49% between 2017 and 2018, a much greater increase than traditional retail (9%), off-price retail (7%) and the apparel category overall (2%).

According to the report, used items accounted for 11% of clothing owned by secondhand buyers in 2012. That figure rose to 24% in 2017 and is estimated to jump to 40% by 2022. Moreover, the study found that one in three women shopped for secondhand apparel last year, with penetration highest among those 18 to 24, at 40%.

 

Athletic & Sporting Goods

Adidas has gotten a Boost

Adidas has cause to celebrate. Since Mark King took over the North American business in 2014, the company has more than doubled its market share on the continent, and its stock has nearly quadrupled globally. Even a pay-to-play college basketball scandal, which could send one of the company’s former executives to prison, has done little to slow Adidas’ momentum. Adidas released its 2017 annual report showing that North American revenue grew 27 percent. That’s compared with 3 percent growth for Nike in 2017 and Adidas’ 2013 increase of just 2 percent. Industry experts said the company’s sudden growth spurt is a story of technology, celebrity and a healthy dose of luck.

 

Fear-Based Gun Buying Is Back

Gun sales soared last month: 2,767,699 federal background checks for firearms purchases were run, the highest March number since the FBI began releasing data in 1998.   While there is no exact data on firearms purchases in the U.S., the FBI’s National Instant Criminal Background Check System is used as a barometer for gun sales. Adjusted for permit checks, such as concealed-carry applications, March checks were up 10.8 percent from the previous year, totaling 1,503,967. Handgun checks increased 3.9 percent, while long-gun checks increased 17.3 percent.  The strong background check data suggests that the industry is picking up after slipping into a deep slump following the 2016 presidential election.

Cosmetics & Pharmacy

Japanese Brand Shiseido Confirms Investment in Violet Grey

High-end skincare brand Shiseido recently has announced more moves into retail. The company just made an investment into Violet Grey in order to pursue more business in e-commerce. The label has chosen this investment carefully as part of the company’s three-year corporate strategy, as reported by WWD. “We decided to take a minority stake in this e-commerce company Violet Grey so we would be able to gain these e-commerce capabilities on our own,” president and chief officer of Shiseido Masahiko Uotani told the publication. T​he Japanese brand is most known for its luxury skincare and beauty products. Currently, Violet Grey sells various brands including Tom Ford, Anine Bing, Yves Saint Laurent. Terms of the deal were not disclosed publicly.

Sally Beauty Cutting Staff; To Focus Stores on Hair Color/Care

Sally Beauty Holdings is reducing headcount, primarily at its headquarters, as the first part of a cost-reduction plan. In addition to job cuts, the plan includes cost savings initiatives focused on “organizational efficiencies, sourcing of product and brands for resale, indirect procurement, store operating expenses, and inventory management.” Sally expects annual savings to be in the range of $14 million to $15 million. The company expects to reinvest the savings in technology to improve customers’ in-store experience and accelerate online growth, and store employee wages. In addition, Sally Beauty plans to reinvest in strategic initiatives to accelerate growth in its core hair color and hair care categories, which, which, combined, represent more than half of Sally’s revenue in the U.S. and Canada.

GNC Eyes More Global Expansion

General Nutrition Corporation is expanding into the land down under. Just a month after it announced plans to ramp up its business in India, the retailer said it will establish and develop a presence in the Australian market. Under a master franchise agreement, GNC will partner with Rapid Nutrition to market, sell and distribute GNC products through retail store expansion, e-commerce, and other potential distribution channels throughout Australia. In addition, Rapid Nutrition will be able to distribute its owned brands through the GNC global network. According to Euromonitor, Australia’s consumer health market was approximately $3.1 billion in 2017.

Discounters & Department Stores

Mall owners Namdar, Washington Prime in bid to buy Bon-Ton: sources

U.S. mall owners Namdar Realty Group and Washington Prime Group Inc. are in talks to acquire U.S. department store operator Bon-Ton Stores Inc. out of bankruptcy, people familiar with the matter said on Tuesday. Namdar’s and Washington Prime’s bid for Bon-Ton offers a path for the retailer to survive, three sources said. Firms specializing in liquidation plan to submit a $740 million offer for Bon-Ton in partnership with its bondholders. If that bid were to prevail, the company would be dismantled. Bon-Ton, which filed for bankruptcy in February with about 250 stores, is a significant tenant of both Namdar and Washington Prime malls.

 

‘Small-format’ Target to open at former site of Logan Square Discount Mega Mall

Target plans to open another of its smaller stores in the Logan Square neighborhood, just a little more than a mile and a half from an existing store in Avondale. The new 27,400-square-foot store, expected to open in 2020 at the former site of the Discount Mega Mall on the southwest corner of Sacramento and Milwaukee avenues, will be Target’s 10th “small-format” store in the Chicago area, the retailer said in a news release. Two others, both in Lakeview, are even closer neighbors at 1.2 miles apart.

 

Grocery & Restaurants

Instacart raises $150 million more in funding

Online grocery delivery operator Instacart Inc. is adding more money to a previous round of venture financing from February, bringing the total to $350 million to fund a battle with Amazon.com. The San Francisco-based company said on Thursday that it raised $150 million in the round led by Coatue Management, on top of the $200 million investment that came primarily from Coatue and Glade Brook Capital Partners in February. With the additional funding, Instacart’s valuation rises to $4.35 billion, a spokesman said.

TriSpan buys NYC-based Rosa Mexicano

Private-equity group TriSpan Rising Stars L.P. has bought the New York-based Rosa Mexicano from Goode Partners LLC, the companies announced Wednesday. Trispan, which in October made a “significant” investment in the Miami-based Yardbird Southern Table & Bar, did not release details of the deal. Casual-dining Rosa Mexicano has 12 units nationally.

Bain affiliate leads investment in By Chloe

By Chloe, the 10-unit vegan fast-casual concept, has closed on an investment with a group led by Bain Capital Double Impact, the companies said Thursday. New York City-based By Chloe, which was begun as a division of ESquared Hospitality, said it would use the investment to double its number of units. Terms of the deal were not disclosed. The lead investor is Bain Capital Double Impact, an affiliate of Boston-based Bain Capital, and included New York-based early stage investor Kitchen Fund, the Collaborative Fund, TGP International/Qoot International and other unnamed investors.

Home & Road

More Martha Stewart coming to Michaels

Move over Party City….Michaels Companies is making a big commitment to party goods via the Martha Stewart brand. The arts-and-crafts retailer and Sequential Brands Group announce the expansion of the Martha Stewart brand at Michaels. The exclusive new Martha Stewart Celebrations collection adds more than 300 party essentials to the brand’s existing offering of paints, tools, stencils, and paper crafts at Michaels stores. In addition, Michaels will also exclusively offer a new Martha Stewart Cricut machine, billed as a “go-to customization tool for every DIY fan.”

Need for Speed in Furniture

The need for speed while containing costs will drive changes in North America’s upholstered furniture manufacturing industry, according to a survey from Lectra, a provider of integrated solutions to the upholstered furniture industry, and the Centre for Industrial Studies, Milan. Unlike their Eastern European and Chinese counterparts, who cited a shortage of skilled labor at the top of their list of challenges, North American upholstered furniture manufacturers said the downward pressure on prices and the demand for quicker deliveries were their most pressing challenges as they look to weather the changes in the industry.

Jewelry & Luxury

Citizen Marks 100 with a Major Partnership

Citizen is celebrating its 100th anniversary by inking a partnership with one of the world’s most well-known companies: Disney. Under its just-announced partnership with The Walt Disney Company, Citizen becomes the official timepiece of the Walt Disney World Resort in Lake Buena Vista (Orlando), Florida and of Disneyland in Anaheim, California. What this means is that the Citizen logo will be on all the clocks on Main Street U.S.A.—the stretch of street leading up to Cinderella’s castle—in the Magic Kingdom, on the Main Street U.S.A. clock at Disneyland, and on certain analog ride clocks.

 

Football Player’s Suit Takes Aim at Jeweler’s Diamond Markup

New Orleans Saints quarterback Drew Brees has sued a San Diego retailer, claiming the jeweler misled by selling him “investment grade” diamonds with too high a markup. In a suit filed April 2 in San Diego Superior Court by Brees and wife Brittany, the football star claimed that, over the course of a decade, he had purchased $15 million in colored diamonds from local retailer CJ Charles Jewelers. However, in early 2017, Brees’ financial advisor recommended he get the diamonds appraised, the suit said.

 

Office & Leisure

For Toronto toymaker Spin Master, innovation is key to success in post-Toys ‘R’ Us world

The closure of Toys “R” Us in the U.S. only seems like the end of the toy world. Toymakers have seen this kind of failure before — in 2009, mall-based KB Toys, which at its height operated 1,300 stores in malls across the U.S., shut down. “I think what we’re seeing is a changing landscape, and I would say it’s similar to what we saw in the late 1990s, with the advent of Walmart and the big-box retailers,” said Ronnen Harary, who co-founded Spin Master Corp. in 1994 and currently serves as co-chief executive officer. The fortunes of the Toronto-based toymaker have been soaring even as Toys “R” Us foundered because Spin Master was able to do what Toys “R” Us, hobbled by debt, could not: Innovate.

Technology & Internet

Honey has held talks to raise around $100 million in a new investment

Honey, a startup whose internet tool tells online shoppers whether there is an eligible coupon for their purchase, has held talks to raise somewhere around $100 million in new investment money, according to multiple sources. Honey, based in Los Angeles, was founded in 2012 and makes technology that scours the web for available digital coupons and sales. Its website browser extension then displays those coupons or sale codes to shoppers right when they reach the checkout page on thousands of partnering retail sites.

 

Finance & Economy

US jobless claims rise, as continuing claims drop to the lowest level since 1973

New applications for U.S. unemployment benefits increased more than expected last week, but the number of Americans on jobless rolls fell to its lowest level since 1973, pointing to tightening labor market conditions.  The labor market is considered to be near or at full employment. The jobless rate is at a 17-year low of 4.1 percent, not too far from the Federal Reserve’s forecast of 3.8 percent by the end of this year.

 

Rising Rates Sounding Alarm Bells for Debt-Laden U.S. Consumers

Americans have a history of loading up on debt in good times, then paying dearly when the bills come due. Adding to the pain: A booming economy is often accompanied by rising interest rates, which make mortgages, credit cards and other debt much more expensive.  As the U.S. Federal Reserve raises rates, there are signs that consumers could be putting themselves in peril.  Spending on U.S. general purpose credit cards surged 9.4 percent last year, to $3.5 trillion, according to industry newsletter Nilson Report. Card delinquencies are also rising. U.S. household debt climbed in the fourth quarter at the fastest pace since 2007, according to the Federal Reserve.