April 16, 2018 Consensus

The Weekly Consensus – April 16, 2018 (Volume 10, Number 16)

The Big Story
Retailers Don’t “Like” or Want to “Share” Facebook’s Problems
Maeghan Thompson

Perhaps nothing else captured the country’s attention last week more than the questioning of Facebook founder and CEO Mark Zuckerberg on Capitol Hill. The hearings were spurred by recent revelations that political consulting firm Cambridge Analytica accessed the personal information of 87 million Facebook users over a period of years. For nearly ten hours across two days, House and Senate legislators grilled Zuckerberg on his company’s privacy policies and the security of its users’ private data. Underpinning the hearings was the question of whether Congress needs to regulate social media specifically, or internet companies generally, in order to protect consumers’ privacy. Regulation could provide comfort for social media users, but it could create issues for internet marketers and groups that employ them, including retailers.

Both marketers and sketchier actors such as Cambridge Analytica use data about people collected on the internet to achieve their goals. “Likes,” friends, demographics, geographical locations, purchase histories, browsing histories, and more can be cataloged and attributed to individuals associated with unique IP addresses. Those individuals can then be targeted with great precision with various ads and messages online, ranging from the innocuous (picture a promotional offer for baby shampoo), to the devious (such as fake news stories designed to influence an election).

New privacy regulations could constrain nefarious parties’ ability to collect and abuse people’s personal information online, but it could also impair retailers’ efforts to optimize their marketing spend. Limiting the use of online data to pinpoint consumers would likely decrease the effectiveness of online marketing. For instance, a company selling tennis rackets can spend money today to make sure that its internet ads only appear before consumers whose previous online activity suggests an interest in tennis. If the same retailer can’t use data to pinpoint specific consumers, a large portion of its ads are likely to appear before consumers who have no interest in tennis.

Even if new regulations are not enacted, the current Cambridge/Facebook controversy could impact retailers by influencing consumers’ online behavior. Users could reduce the amount of personal information they share, or they could become more suspicious of targeted ads. Either response would likely negatively impact the effectiveness of targeted online marketing. Certain consumers are already signaling that they will change their behavior. According to GBH Insights, a poll of Facebook users found that 15 percent said they will decrease their use of the platform, and a small number of users even expect to delete their accounts.

New regulations or changes in consumer behavior could negatively impact marketers’ precision, but voluntary changes on the part of Facebook and other social media platforms could allay the public’s fear and quiet calls for new rules. For instance, Facebook could take a step toward regaining the public’s trust if it makes it easier for consumers to “opt-out” of personal data collection and/or targeted marketing. Additionally, if other changes in privacy settings or company policies result in fewer future controversies, consumers’ fears are likely to fade, which could prompt people to return to their pre-Facebook/Cambridge online behaviors.

Ultimately, new broad and sweeping consumer privacy regulations could threaten an entire genre of precise and efficient advertising that many marketers and retailers rely on. The powers the be may decide that it is in the public’s best interest to enact such new rules, and this would certainly create certain positives for consumer protection. But many marketers and retailers are probably watching Capitol Hill hoping that both legislators and the public view recent events as only a Facebook-specific problem, that deserves a Facebook-specific solution.


Headlines of the Week

Bon-Ton bankruptcy court ruling makes liquidation more likely

Bankrupt department store chain operator The Bon-Ton Stores Inc.’s quest for survival was dealt a significant setback Wednesday when a bankruptcy judge denied a request by Bon-Ton to pay a work fee to an investor group interested in buying the company in a going-concern transaction. The $500,000 work fee would have been used by the investor group interested in purchasing Bon-Ton to conduct due diligence ahead of the company’s April 16 auction. The group — led by mall owners Washington Prime Group, Namdar Realty Group and asset manager DW Partners LP — on April 6 signed a letter of intent to acquire the Milwaukee and York, Pa.-based retailer in a transaction that would save the company from liquidation and keep it operating.



Apparel & Footwear

The RealReal — the fashion site that sells secondhand Gucci and Louis Vuitton — wants to raise a new $100 million investment

Is this the real, real pre-IPO round? For several years, The RealReal’s CEO Julie Wainwright has proclaimed that her company’s next round of private financing would be its last before an eventual IPO — only to then go ahead and secure a new investment. Perhaps this time will be the charm. Wainwright, the founder of the luxury fashion site that specializes in the sale of secondhand clothing from brands like Gucci and Louis Vuitton, is currently pitching investors about raising a fresh $100 million in new funding, multiple sources have told Recode. The company has already raised more than $170 million since it launched seven years ago. The RealReal works under a consignment model, where sellers ship goods to the company and the company then sells an item and shares the proceeds — usually around 50 to 60 percent — with the individual.

Another Retail Shoe Drops: Nine West Declares Bankruptcy

Retail bankruptcies in 2018 are starting off similarly to the way 2017 finished up with wave after wave of prominent retailers filing for bankruptcy. The latest casualty of Retailmageddon is Nine West, the iconic seller of shoes who will no longer be selling footwear as their saga unfolds. Nine West joins Toys R Us, The Walking Company, Bon Ton and Claire’s this year, and it is only in April. The Nine West story follows a similar path of many retail bankruptcy stories: declining traffic to the stores, excessive debt accumulated through private equity ownership and retail headwinds in the category (shoes in this instance). Nine West had an extra layer of misery added to their struggles, as it was also a prominent wholesaler to department store chains, many of whom are dealing with the same conditions. And let’s blame Amazon.com as well: certainly their push into fashion and apparel, as well as ownership of Zappos, couldn’t have helped.

Gap Follows J. Crew in Giving Up on the Bridal-Wear Industry

Another major apparel retailer is giving up on a potentially lucrative but challenging clothing category: bridal wear. Gap Inc.’s Weddington Way brand, which has operated shops within Banana Republic stores, announced plans to close down within the next few months. Though the company hopes to continue serving customers online, it will only guarantee orders through June 11. The demise of the brand, which focused on bridesmaid dresses, follows J. Crew Group Inc.’s decision to shutter its wedding-dress business in 2016. David’s Bridal Inc., a chain that sells gowns and accessories, also has struggled — another sign of how perilous the market has become.


Athletic & Sporting Goods

Nike’s Coolness Is Slipping with Teens as Streetwear Gains

According to some 6,000 teens in geographically diverse high schools around the US, Nike’s status as the top brand among young Americans is under pressure.  Adidas, for one, continues to thrive on Nike’s home turf. It saw gains across every segment of teens across gender and income level.  But one of the bigger surprises was the momentum of streetwear and affiliated labels, notably Vans and Supreme.  Streetwear has emerged as a powerful forces in fashion over the last few years. Its ties to hip-hop, skating, and its focus on casual clothes and graphics have made it particularly popular among younger generations of shoppers.


Nike Strengthens Digital Platforms by Acquiring Computer Vision Company Invertex

Nike has purchased Invertex, a computer vision company based in Tel Aviv, Israel. The move is part of the Portland-based company’s drive to improve its digital platforms, with the Invertex team set to work on “building groundbreaking innovations” for Nike. Invertex has created so-called “scan-to-fit” shopping experiences which combine 3D-digitization and deep-learning technologies to create new retail solutions. This technology is significant, as it lowers the number of returns from customers and allows retailers to tailor existing products to the customers’ specific needs.

Cosmetics & Pharmacy

Rite Aid Revenues Drop 6% in FY2018

Rite Aid posted revenues of $21.5 billion for its fiscal year ended March 3, marking a decline of 6.1%. Retail pharmacy segment revenues totaled $15.8 billion for the year, which was a decrease of 5.6%. The company primarily attributed the decline to the extra week in the prior-year period and a decline in same-store sales. Revenues in the Camp Hill, Pa.-based company’s pharmacy services segment were $5.9 billion, a decrease of 7.8% compared to the prior year, which was due to a decline in commercial business and to the change in the composition of Medicare Part D membership, Rite Aid said. Same-store sales from continuing operations for the year decreased 2.9%, consisting of a 3.9% decrease in pharmacy sales and a 0.8% decrease in front-end sales.

Bryce Harper Signs Hair, Beard Product Endorsement Deal with Blind Barber

Washington Nationals superstar Bryce Harper has signed an endorsement deal with Blind Barber, “a network of six barbershops where customers can get a cut, have a drink and buy one of the brand’s variety of hair care products for retail,” according to Darren Rovell of ESPN.com. As a part of the deal, Harper will receive an equity stake in the company and will “help create and sell” the company’s hair styling clay, beard balm and dry shampoo. Harper’s hair went viral after his brother Bryan shared a video of the Nationals star’s supposed grooming routine Wednesday.

Discounters & Department Stores

Walmart plans to spend the most this year in its biggest state, Texas

Walmart plans to spend $277 million in Texas this year remodeling 45 stores and adding several in-store and online tools, including its big orange Pickup Towers. In Dallas-Fort Worth, Walmart plans to remodel 18 stores, among them the Neighborhood Market in Uptown on N. Central Expressway, two stores in Plano and one each in Richardson and Forney. (See complete list below.) The Texas spending budget is the largest of any state this year, said Walmart spokeswoman Anne Hatfield. The next-biggest budget is $200 million to upgrade stores in Florida, she said. Texas is Walmart’s largest state, with 508 Walmart stores, 85 Sam’s Clubs and 19 distribution centers. It employs 171,796 people here.


Grocery & Restaurants

Bain fund invests in Bamboo Sushi parent

Bain Capital Double Impact, a mission-oriented private-equity fund, has led a new strategic investment in Portland, Ore.-based Sustainable Restaurant Group to grow its Bamboo Sushi and QuickFish brands, the companies said Tuesday. The Boston-based Bain affiliate joined the New York City-based early-stage Kitchen Fund in the investment in Sustainable Restaurant Group, which has four full-service Bamboo Sushi units in Portland and one in Denver, as well as one limited-service QuickFish location in Portland.

Home & Road

Bed, Bath & Beyond Dips in 4th Quarter

Bed Bath & Beyond issued its fourth-quarter sales and earnings, which beat the Street but also reported gloomy guidance for its current year. Bed Bath & Beyond said it earned $194 million, or $1.41 a share, in the quarter ended March 3, compared with $269 million, or $1.84 a share, in the year-ago period. Excluding items, the retailer reported adjusted earnings of $204.59 million or $1.48 per share, better than analysts had expected. Sales rose 5.2% to $3.7 billion in the quarter. Same-store sales fell by about 0.6%. The company said it expects fiscal 2018 per-share net earnings to be in the low-to-mid $2 range. Analysts had expectations of $3.07 a share for the year.

Furniture Retailer Taps Former Barnes & Noble Head as CEO

Art Van Furniture has appointed a veteran retailer as its next chief executive. The Midwest furniture and mattress retailer said that Ronald Boire will join the company as its new president and CEO, effective April 30, 2018. He will succeed Kim Yost, who recently announced his retirement after nine years with the chain. Boire comes to Art Van having previously served in senior executive positions, including president and CEO roles, at a wide variety of retail and consumer electronic companies, including Barnes & Noble (where he served as CEO from September 2015 to August 2016), Sony Electronics, Best Buy, Toys “R” Us, Brookstone, and Sears Canada.

Jewelry & Luxury

De Beers Lifts Diamond Prices for Second Straight Sale

Top diamond miner De Beers increased prices for a second consecutive sale, according to people familiar with the matter, even as an alleged $2 billion fraud continues to send shockwaves through the industry. De Beers lifted prices between 1 percent and 2 percent, according to the people, who asked not to be identified as the information isn’t public. The company raised prices a similar amount in its previous sale at the end of February. While the sale is ongoing, the total amount sold is likely to be around $525 million, the people said.

LVMH’s Watch, Jewelry Sales Rise 20 Percent in First Quarter

LVMH’s stable of watch and jewelry brands enjoyed an astounding 20 percent organic revenue growth during the first quarter of 2018, the luxury conglomerate announced recently. That’s better than all of the luxury conglomerate’s other business groups, and it also tops the 13 percent organic growth the overall company registered for the first quarter of the year.

US-China Trade War Shouldn’t Hurt Diamonds

The global diamond and jewelry industry may have felt nervous about the US proposal earlier this month to place $50 billion-worth of tariffs on Chinese goods. The response from the People’s Republic last week — threatening its own duty hike on imports from the US — raised the stakes higher still. However, diamond traders need not worry yet, senior figures in the sector have predicted. Precious stones and jewelry are not included in either country’s list of targeted products and are unlikely to be the subject of tariffs in the near future.


Office & Leisure

Toy mogul Isaac Larian offers $890 million to buy Toys R Us stores in U.S., Canada

Isaac Larian, the entrepreneur who made his fortune marketing bestselling toys like the Bratz dolls, said Friday he has submitted a formal bid to buy Toys R Us stores in the United States and Canada in an effort to keep the iconic retail brand alive. Larian has offered $675 million for 274 top performing U.S. stores and $215 million for the Canadian operations of Toys R Us. The U.S. bid includes the Wayne headquarters of Toys R Us, but Larian said in a phone interview Friday that he has not yet decided if the headquarters will remain in Wayne. Larian said he and the other investors joining him in the offer believe that the bids represent “a very fair valuation for the properties.” “We have put our best foot forward and let’s see if they accept it or not,” he said. Larian and his group have given Toys R Us a six-day deadline to accept or reject the offer. Larian, chief executive of California-based MGA Entertainment Inc., a privately held toy and entertainment company, launched a crowd-funding campaign on March 22 to raise money to keep Toys R Us alive.

Technology & Internet

Walmart is in advanced talks to acquire Amazon’s India rival Flipkart — but it may have to strike a deal with eBay first

Walmart is in late-stage discussions to buy a majority stake in India’s online shopping site Flipkart, in what would be the company’s most ambitious move yet to take on Amazon outside of the U.S., according to multiple people familiar with the talks. But Walmart will likely have to first work out a deal with eBay, a Flipkart investor and partner, if it wants to do much business with its new Indian subsidiary over the next few years. eBay last year invested around $500 million in Flipkart, taking a 5 percent stake in the business and handing over its eBay India operation in the process. Alongside the investment, eBay also signed what was then a four-year exclusive commercial arrangement to partner with Flipkart, a move that eBay CEO Devin Wenig at the time said was the part of the deal he was “most enthusiastic about.” The potential obstacle for Walmart is that the eBay deal still has three years to go and is believed to cover all types of merchandise except grocery items.


Finance & Economy

Consumer prices post first drop in 10 months on weak gasoline

U.S. consumer prices fell for the first time in 10 months in March, weighed down by a decline in the cost of gasoline, but underlying inflation continued to firm amid rising prices for healthcare and rental accommodation.  Previous headline compared CPI to the core estimate increase of 0.2 percent.  Economists had forecast the CPI unchanged in March and the core CPI rising 0.2 percent.


Global debt mountain climbs to record $237 trillion in 2017

The global debt mountain continues to grow.  The Institute of International Finance underlined how not just the U.S. but also Europe and other emerging economies have increased borrowing to take advantage of the low interest rate environment, with strong global growth whetting the appetite for debt among consumers.  Although the growth of debt is evenly split among developed markets and emerging markets, the latter has shown a sharper increase in the ratio of their total debt to their annual economic output as their debt loads are growing from a smaller base. This could suggest a swifter deterioration of their ability to pay their creditors.