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The Weekly Consensus

Ideas, observations, and news on the consumer products and retail industries
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The Weekly Consensus – April 2, 2018 (Volume 10, Number 14)

The Big Story
Advantage, Walmart
Betsy White

Last week, while the current resident of the White House was tweeting negative comments about the retail behemoth Amazon, the Wall Street Journal reported that Walmart, the Amazon of the 80s and 90s, is in discussions to buy health insurer Humana.  A transaction involving Humana, with a market cap of $38 billion, would be the largest in Walmart’s history, but still smaller than other recently announced transactions in the space, including the proposed acquisitions of Aetna by CVS for $69 billion and of Express Scripts by Cigna for $67 billion.

As big as Walmart is with $500 billion in total sales, according to a 2016 report, it is only the fourth largest retail pharmacy, with CVS, Walgreens and Express Scripts each generating more than twice the pharmacy revenue as Walmart.  Combining forces with health insurer Humana, which has over 14 million policyholders, could help drive traffic and additional pharmacy (and other) business to the 4,700 Walmart stores with pharmacies and to Walmart’s online business.  Further, aligning with a health insurer would have the added benefit of helping to control healthcare costs and benefits for Walmart’s 1.5 million U.S. employees.

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The Weekly Consensus – March 26, 2018 (Volume 10, Number 13)

The Big Story
Apocryphal Apocalypse
Billy Busko

“How the words are dark and dire: It is later than you think.” – Robert Service

 

“The reports of my death are greatly exaggerated.” – Mark Twain

Headlines:

Claire’s Stores Files for Bankruptcy

Duluth Trading to Increase Store Base 50% This Year

Toys ‘R’ Us Going-Out-Of-Business Sale Begins Friday

Land’s End to Open Dozens of Stores in 2018

Starbucks Opening 750 Locations this Year

These are headlines just from this past week.

In the past year, reports under the heading “Retail Apocalypse” have been made by many media outlets, including the BBC, Bloomberg, the Financial Times, Forbes, Fox, the Los Angeles Times, MSN, the New York Times, the New Republic, Newsweek, USA Today, Vogue, the Wall Street Journal and the Washington Post.  But as our sample size of one week shows, is there really more going on than just doom and gloom for retail stores?

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The Weekly Consensus – March 19, 2018 (Volume 10, Number 12)

The Big Story
RetailWire Discussion: Walmart Goes Big, Goes Nationwide with Online Grocery Delivery
George Anderson, RetailWire

Walmart currently offers online grocery delivery in only six markets, but by the end of the year, it will expand the service to more than 40 percent of all U.S. households.

“Ninety percent of Americans live within 10 miles of a Walmart store, and we serve more than 150 million customers a week, which gives us a unique opportunity to make every day a little easier for busy families,” said Tom Ward, vice president, Digital Operations, Walmart U.S., in a statement. “Today, we’re expanding this promise by helping even more customers save time and money without leaving their homes.”

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The Weekly Consensus – March 12, 2018 (Volume 10, Number 11)

The Big Story
Amazon the Great Inches Closer to Tears
Paul Alexander, CFA

“When Alexander saw the breadth of his domain, he wept for there were no more worlds to conquer.” The Greek biographer Plutarch is widely credited as the author of this famous (though misquoted) line regarding the exploits of Alexander the Great. If Plutarch were alive today, and penning a slightly melodramatic biography of modern retail, he might argue that the industry’s modern conqueror, Amazon, is getting closer to its own weeping session.

While Amazon isn’t out of worlds to conquer just yet, it took a step closer last week, when it announced that it will offer Prime membership at a discounted rate ($5.99 per month, versus the normal rate of $12.99) to people enrolled in Medicaid. This comes after a similar move last year to offer discounted membership to people who receive government food assistance. Amazon has received praise for extending these discounts to less economically-advantaged consumers. But these steps can also be interpreted not as altruism, but as an effort to conquer a new target customer for Amazon Prime: lower-income households.

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

The Big Story
For Retailers, Is Being Political Ever Correct? – Part II
Mark Lenz

A couple of months ago, I wrote The Big Story about how Patagonia and REI responded to President Trump’s decision to downsize several National Monuments, and the risks and rewards of the positions they took.  Recent events have created another unavoidably public moment for retailers, as they grapple with politically-charged gun policies in the aftermath of the school shooting in Florida.

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The Weekly Consensus – February 26, 2018 (Volume 10, Number 9)

The Big Story
Amazon, and Everyone Else
Doug Stebbins, CFA

The rise of ecommerce and its fundamental reshaping of the retail world is well documented.  A Google search of virtually any consumer product will produce dozens of options that can be purchased online.  Ecommerce has exploded and the increase in the number and power of web-based retailers is undeniable.  Or is it?

eMarketer reports that Amazon at $197 billion in sales last year accounted for 4% of all retail sales in the US.  But of ecommerce sales, Amazon accounted for a whopping 44% of all web sales in the US.  So, while US ecommerce sales grew by $60 billion from 2016 to 2017, over $40 billion of that growth (or 70%) was attributable to Amazon.  And while the US ecommerce market grew 16% from 2016 to 2017, the growth rate for all eRetailers other than Amazon was a more pedestrian 8%.  In the ecommerce world there is Amazon and there is everyone else.

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The Weekly Consensus – February 19, 2018 (Volume 10, Number 8)

The Big Story
The Risk of Giving a Brand’s Heritage the Boot
Marshall Schleifman

Since its founding in 1912, L.L. Bean has attracted a loyal customer base built at least partially upon its 100% satisfaction guarantee policy. The gold standard in retail. In practice, this guarantee meant that L.L. Bean was willing to replace any item purchased at any time – no matter how many years ago – in any condition if the customer was no longer happy with it, no receipt required.

L.L. Bean used to take great pride in that guarantee, its website stating: “L.L. himself always said that he ‘didn’t consider a sale complete until goods are worn out and the customer still satisfied.’ Our guarantee is a handshake – a promise that we’ll be fair to each other. So if something’s not working or fitting or standing up to its task or lasting as long as you think it should, we’ll take it back. We want to make sure we keep our guarantee the way it’s always been for over a century.” For L.L. Bean, this guarantee was a key differentiator, setting it apart from its competitors.

All of that changed this month when L.L. Bean ended its legendary policy. In a letter to customers, L.L. Bean’s executive chairman and the great-grandson of the company’s founder, Shawn O. Gorman, announced that customers now have one year to make returns and proof of purchase is required. Mr. Gorman explained that “a small, but growing number of customers has been interpreting our guarantee well beyond its original intent. Some view it as a lifetime product replacement program, expecting refunds for heavily worn products used over many years. Others seek refunds for products that have been purchased through third parties, such as at yard sales.”

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The Weekly Consensus – February 12, 2018 (Volume 10, Number 7)

The Big Story
A Super Bowl for the Millennials
Michael A. O’Hara

Last Sunday’s Super Bowl LII featured a gutsy head coach making his debut in the big game and an anonymous back-up quarterback becoming a legend to rival Rocky Balboa in the City of Brotherly Love.  But the nation’s most broadly celebrated non-holiday holiday also contained some discernable non-football cultural trends worthy of note:

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The Weekly Consensus – February 5, 2018 (Volume 10, Number 6)

The Big Story
Does Amazon Still Not Care About Making Money?
Paul Alexander, CFA

For many years the narrative surrounding Amazon and its attitude toward making money has been that the company doesn’t seek to be profitable. That it values growth opportunity and market share over income. That it has been tirelessly conditioning the investment community to prioritize vision over the bottom line. NYU professor and notable tech pundit Scott Galloway even mused in a speaking engagement last year that every time Amazon reports a profitable quarter, CEO Jeff Bezos probably berates his deputies that they screwed up.

And yet, last week, Amazon reported that it generated $3 billion of net income in 2017. $1.9 billion of that came just in the fourth quarter. According to Galloway’s joke, there must have been a bloodbath in a certain conference room in Seattle.

Or was there? Maybe Amazon is finally warming up to the concept of making money. 2017’s $3 billion profit is up from $2.4 billion in 2016 and $0.6 billion in 2015. In contrast, over the prior three-year period, from 2012 through 2014, Amazon was roughly breakeven. To borrow a famous line by James Bond creator Ian Fleming, one year of profit growth is happenstance, two years is a coincidence, three is a trend. Amazon must have meant to do this, no? Is the company finally allowing itself to reap the rewards of its growth and dominance?

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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.

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