Headed into Black Friday...

With Black Friday upon us, I thought it would be worthwhile to provide a bit of context on what I believe we are seeing in retail with the latest quarterly earnings:

In general, retailers are posting strong results on a sales basis versus what we have seen in previous years. Low unemployment, generally positive consumer sentiment and wage growth are likely the major contributors. Specific niches of retail are seeing a shift of sales from bankruptcies and store closures which has also been accretive. With all of that said, I still believe most retailers still require further store grooming through closures and will face more difficult margins in the years ahead due to the growth of ecommerce.

Target - Strong year over year comp of 5.1% which was down from 6.5% in Q2 (best in 13 years). Of all the retailers, the year over year improvements is most evident in Target. Last year’s comps in Q2 and Q3 were 1.3% and 0.9% respectively. Looking ahead, Target guided a sales comp for Q4 of 5.0%

Walmart - The juggernaut reported a strong Q3 comp of 3.4% with ecommerce growing 43%. With Walmart coming off a 4.5% comp in Q2 (best in 10 years) and muted forward guidance of at least a 3% comp in Q4, investors weren’t that pleased. Walmart’s stake in JD.com also hasn’t helped with the CEO stepping down and some weaker than expected profitability and cloudy outlook. Lastly, the warehouse club arm, Sam’s Club posted a 3.2% comp which was down from 5.0% in Q2. I don’t see anything particularly alarming just believe the stock price got ahead of itself and Walmart’s ability to grow ecommerce share in the US is still a concern especially as the profitability remains difficult.

JC Penney - Disastrous quarter for this retailer who had posted four consecutive positive quarters prior to the -5.4% Q3 comp. I still see plenty of pain ahead marking this chain as the next “on watch” retailer.

Kohls - Another strong year over year comp but deceleration has set in with a Q3 comp of 2.5% versus >3% in previous quarters and 6.3% in Q4. I still find this to be the best mid-tier department store when you compare Kohls to the likes of Dillards, JC Penney and Macys.

Macy’s - 2nd best comp over past several years with a 3.3%. Management was especially rosy on the call about Q4 but only provided slight increases to the low end comp guidance of 2.3%. Ecommerce is firing with additional product added to site and extensive use of buy online, pick-up in store. Macy's is definitely benefiting from a strong consumer but also seeing margin pressure from ecommerce.

Nordstrom - Full line continues to struggle despite last quarter’s pop of 4.1%, their upper end offering posted a measly 0.4%. Their off price offering Rack on the other hand continues to perform well with a 5.8% comp. Nordstrom’s total online business now accounts for 30% of their sales, highest of all the retailers compared here.

TJ Maxx - Both the home offering and main line offering continue to outperform the overall off price sector with a 7.0% comp in Q3.

Ross - A respectable 3.0% comp but TJ Maxx continues to shine and take market share as inventories at Ross have struggled.

Costco - This warehouse chain is on fire, posting nothing lower than a 7.0% comp this year. Q3 was 7.2% and Costco is just starting to tee up their ecommerce offering. With the moat of memberships, this retailer looks poised to continue their assault on retail market share.

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Resurgent Retail?

Recent headlines in retail have shifted the narrative from retail is dead to retail is strong and alive. Some headlines over the last few weeks included:

• Walmart posts the best store comp in 10 years
• Target posts the best comp in 13 years
• Macy's return to a positive store comp and increases annual guidance

While this is all great news for retail, be reminded that high tides lift all boats. Wages are growing at the fastest rate in 9 years and unemployment remains below 4%. The stock market continues to rally in the longest recorded bull market in history. Restaurants continue to see strong sales year over year and even amusement parks are posting their best months. Consumers are spending everywhere and providing much needed relief.

Bottom line: This is shaping up to be a rosy holiday period for retail. With that said, positive sales hide a lot of sins. Enjoy the party now, but the long term trends of shifting to online in an "overstored" environment will still be here when the champagne runs out.

Amazon: "Pay to Play" Search

In 2017, one of the key lines you would read, hear or see related to Amazon was how Amazon product searches outnumbered those of Google. Although this has become well known, Jumpshot recently revealed that 90% of pageviews come from the search box:

And within the search results, the first row on the first page of search drives 20% of page views:

The marketplace is becoming increasingly a "pay to play" marketplace where the page views are increasingly being driven from keyword buys:

Bottom Line: Amazon has the lion share of ecommerce growth captive, now it's all about extracting more services revenue from that base. Amazon's shift to "pay to play" is far from over. 

Amazon Earnings In Pictures

Another blockbuster quarter for Amazon with a few key takeaways:

Services revenue continues to grow at astounding rates and now account for 40% of overall revenue (up from 34% in last year's quarter)

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AWS continues to grow at rates of 40%+ and international slowed a bit from previous quarter growth rates

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Whole Foods is impacting store revenues. Online accounted for 51% versus 63% in the previous year's quarter

The Story of How Google Maps Came To Be

Recently finished Never Lost Again: The Google Mapping Revolution That Sparked New Industries and Augmented Our Reality via Audible. Remember what it was like before Google Maps? Do you remember using a map? I certainly don't yet we take our location and turn based directions for granted. We are the first civilization that truly isn't ever lost geographically.

The story starts with the tiny startup Keyhole that developed the early version of Google Earth, a downloadable program that allowed users to punch in their address and magically be transported from space overlooking earth down to your actual neighborhood block in dramatic fashion. I remember using this program for the first time and being speechless.

The story evolves into the Google acquisition, Larry Page doubling down with no drive to monetize. Search in 2000 was rarely driven by the context of where someone was and where someone was looking to go. Over time, mashups with the data are made and Google decides to lessen their reliance on the archaic and poorly updated road databases of Tele Atlas and Navteq to build their own. GPS evolves the offering via mobile phones to provide turn based navigation and the eventual acquisition of Waze brings traffic patterns. The story helps to illustrate the number of service offerings spawned. The other services we now take for granted include home searches via Zillow, transportation via Uber and ratings via Yelp. Truly a remarkable story that has cemented Google as our data hub for all things search using geography.

Pick it up and read it, amazing story. Truly one of the most influential acquisitions Google has ever made. 

PS The founder of Keyhole eventually moved on to launch Niantic Labs, developer of Pokemon Go, the fastest growing app of all time and first true augmented reality app.

Amazon Doesn't Care About Private Label

Amazon has and always will make more money providing services to 3rd party sellers and not buying and selling their own inventory of goods. While building Amazon brands is a focus, the much larger focus is increasing the size of the product offering through 3rd party sellers using Amazon for logisitics and selling. eMarketer is projecting Amazon 3rd Party or Marketplace Ecommerce sales to account for $229 billion in the year 2019. 

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That total will equate for 70% of the overall US annual 2019 Ecommerce sales. That is up from 64% in 2017. Amazon continues to shift to the eBay/Alibaba services marketplace model despite the media focus on private label/Amazon brand offerings. There is a lot more money in being the platform rather than the owner of inventory.

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New Age Retail: Three-Legged Stool

We have spoken at length here regarding the evolution of brands and how new age retail requires the 3 legs of a stool (in no particular order): 1) wholesale; 2) etail or DTC; 3) retail. I was reminded of this need as I reviewed Merkle's latest Digital Marketing Report outlining a cost per click on Google up 10-12% year over year and CPM on Facebook up 70%. Buying eyeballs and clicks sure ain't cheap. 

Brands that start in wholesale eventually crave the high margins of etail. Once the brand acquires the captive loyal brand aware customers, they start to desire the allure of a store and justify the new expense as a new channel and marketing awareness vehicle. Key example is Canada Goose.

Brands that start in etail or DTC aggressively purchase ads via Google, Facebook (Instagram) and justify any acquisition through lifetime value as a customer. Once the growth slows, the brand will focus on wholesale opportunities that provide large orders they can typically buy and sell "hand to mouth." Key example is Casper or Harry's.

Unless you are a private company with investors not requiring growth, you must have 2 of the 3. This need will only compound as the cost of acquiring customers becomes more expensive with duopolies controlling the largest ecommerce markets. 

The MoviePass Bet

I have always been a movie buff and loved the experience of a theater versus the convenience of watching at home. The crushing sound, obnoxiously large screen and popcorn easily outweigh all the negatives for me.

A few years back, I came across MoviePass via angel investment site Microventures. At the time, the subscriptions were $49.95 per month for unlimited movies at a handful of theaters. At that time, the service just wasn't compelling enough for me to sign up or invest. 

Fast forward to today. The service is as low as $7.95 per month, there are 5 theaters within a 20 minute walk of my apartment in NYC and stock is trading at <$0.20 a share. Surely compelling enough for a trial and maybe even a bet.

Last weekend, my wife and I used MoviePass to view Three Identical Strangers. As we were walking, we opened the app, reserved seats and made our way to the theater. At the theater, we input our confirmation code into the kiosk and tickets came right out. Cost was $7.95 for the monthly rate versus $18.50 each. The theater was a Landmark theater, clean, cool and comfortable. No complaints.

I like to experience a brand, product or service before ever investing. Based on my experience, MoviePass is onto something. Yes, they have been in the news for surge pricing, modifying the subscription service and limiting the movies. Remember how many times Uber changed their service? Or how about when Netflix pushed out a price increase that included physical discs and streaming and had to pull back on the changes? Subscription models and service models require a test and learn approach. 

So how about all that debt and need for cash? Yes, MoviePass is losing money with every subscription today. On average, customers are watching 1.7 movies per month, more than the cost of the $7.95 to $9.95 per month. However, I believe there are opportunities to promote movies for studios and eventually use their customer base for other sales tactics. Let's also not forget that movie theater attendance hit a 25 year low last year...they need MoviePass and their 2-3 million customers more than ever. What's the best chance at pulling customers off their couches and into movie theaters? Low prices with a drive to make money on concessions. MoviePass is the equivalent of Spirit Airlines with fares offset by carry-on bag fees and marketing within planes.

Is MoviePass a good investment at this point? Absolutely not. Could MoviePass go bankrupt in less than 6 months? Absolutely. Do I mind placing a bet on a subscription service delivering an experience I enjoy in an industry demanding attention? Not one bit.

Enjoy the movies and go watch Three Identical Strangers.

Global Ecommerce Duopolies

Ecommerce is growing at a scale we have never seen. That growth is only coming in a few buckets. The graphic below shows how in 3 of the top 5 global ecommerce markets, Alibaba, JD, Amazon and eBay own close to 60% of the ecommerce market share in their respective markets. Alibaba and JD in China with Amazon and eBay in the US and Germany.

This is staggering. Retail has never witnessed this level of concentration and it will likely increase with Alibaba and Amazon growing the fastest. One can only hope others will come along to improve the competitiveness of these markets in the rapidly evolving digital shopping space.

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World Cup Madness →

There is nothing like the World Cup. A coming together of 32 countries every 4 years. To get into the spirit, I recently finished Red Card: How the U.S. Blew the Whistle on the World's Biggest Sports Scandal. 

Over the last decade, hundreds of millions of dollars determined host cities of various Cups and qualifying teams through an elaborate system of bribes and kickbacks. Many believe that this World Cup would suffer due what was exposed. While ratings are down, I believe very few care or even recall what the guilty parties were convicted of. 

A number of the majors have been eliminated. Germany, Spain and Argentina are all already out. Italy and the US didn't even make the qualified teams. Even with some of the favorites out of contention and the fraud overhang, I can't help but be excited for each of the knockout stage games.

Online Sales Taxes: Winners, Losers & Does It Matter?

As we have all heard, the US Supreme Court ruled on Thursday that all states can collect sales tax for any online purchases. While this will take years to play out as states decide the amount to tax, what to tax (inbound transactions, outbound distribution) and who to tax (in-state, out of state), there are some clear winners and losers. 

Winners

• States: Most state and local budgets desperately need the money.
• 139 of Top 500 internet Retailers: Not all collect but this levels the field in the pricing game (where consumers care or seem to notice)
• Tax Service Providers: Avalara (nice IPO timing), Taxjar, H&R Block and other service providers. This will complicate tax collection and remittance for businesses of all sizes. The sheer number of jurisdictions is in the thousands. 
• Amazon: The behemoth already collects where required for 48% of their business and this will force their 52% of their 3rd party sellers to start collecting. Amazon charges a fee to sellers they collect on behalf of.

Losers

• Amazon Small and Medium Size Sellers: Most Amazon 3rd party sellers don't collect. Once they start, Amazon will charge a fee and the sellers will add the cost and labor burden of collecting and remitting. 
• Wayfair, Ebay, Etsy and Other Smaller Marketplaces: Most sellers on these platforms and the marketplaces themselves do not collect unless they are larger businesses.
• Consumers: Eventually the cost purchasing goods will be higher on almost all purchases.

So does this ruling really matter and will this slow the shift to online? I don't believe so for a number of reasons:

1. Time - This change won't happen overnight as states grapple with the best way of implementing, communicating and policing the new requirements.
2. Sales Taxes are Hidden - Collection and recognition of taxes happens at the checkout and isn't stated upfront in the cost of the product, most customers are already captive or convinced of the purchase.
3. Convenience - What drove most customers to online isn't changing. Online purchasing will still remain incredibly convenient and convenience is the number one attraction to ecommerce.

Yes! Amazon Has Not Cracked Private Label

“Much is made of Amazon’s private label prowess, but Jumpshot presents a mixed picture. AmazonBasics accounts for 88% of its private label conversions, and it leads only in electronics (which are nearly half of those purchases). Take out AmazonBasics, and the e-commerce giant owns just 7% of conversions market share. “Amazon doesn’t have private labels cracked,” the report notes.”

— Jumpshot via Retail Dive

I agree. For a number of reasons. But before going there, we need to address the stigmas of private label. 

Private label brands have been on the retail scene for decades. There will always be a customer willing to purchase a lower cost brand and not fall victim to marketing. 

All multi-brand retailers give private labels a shot. Depending upon the category, private label sales can account for up to 40% of the overall category sales.

So why is Amazon any different for releasing private label product? Some may argue because they can take the first search result spot. Is that any different than Target providing an end cap in the most important aisle in their stores? Brands pay for that spot. Just like they do on Amazon. 

I'd even argue that setting up a private label on Amazon is harder than in-store. Why? Imagine the long tail of brands and products on a marketplace like Amazon versus a store shelf that may have several brands. Gaining scale is much more difficult. 

Another argument I hear about Amazon is they will steal your sales data to release their own private label. Is that true? Yes. But is that any different from selling a brand to Macy's, Kohls, Target or Walmart? Nope.

Focus on private label or branded merchandise often depends on the type, size or financial state of a retailer. Retailers short on top brands looking for margin improvement might emphasize private label whereas retailers with a strong portfolio of brands may push private label aside.

So has Amazon completely cracked private label? No. The process takes time and refining. We will see this play out for as long as Amazon keeps selling product. Private label is here to stay and always will be. 

The Baddest of Blood

Recently finished Bad Blood, the story of Theranos. I had seen the 60 Minutes on Theranos, followed along in the Wall Street Journal and felt as though I understood the level of fraud. 

I was incredibly wrong. This impeccably researched story has a level of deception that is shocking. What began as a vision and then turned into an over promised device eventually led to fraudulent and misleading results that impacted lives.

The book is a quick read or listen as I just couldn’t put it down. All the villains, duped investors and whistleblowing heroes are covered in extreme yet convincing detail. Retailers ranging from Safeway to Walgreens believed Theranos would drive their next decade of growth and separation from the likes of Kroger and CVS. Investors ranging from Rupert Murdoch and Carlos Slim lost millions on the fear of missing out on the next Steve Jobs.

The current state of private company valuations and Facebook, Amazon, Netflix, Google excitement reminds me to look past the smoke and mirrors of any pitch, marketing campaign or investor book. Sometimes things truly aren’t as good as they may seem.

I highly encourage anyone to have a read...or at least a listen to Bad Blood. 

Retail Comp Store Update

Each quarter I update a chart detailing their comp sales increases/decreases to better understand where the pockets of growth are coming from and who is gaining share.

The latest quarter saw some increases from the struggling Department Stores sector. Note that the optimism for several retailers including Kohl's and Macy's comes as a result of pulling marketing events into the first quarter. The gains would have been marginally higher otherwise.

Off Price retailers like Ross, Burlington and TJ Maxx continue to shine and have yet to reach the saturation point everyone fears and seem to be fending off Amazon for now. With the shrink in department stores, that spend has to go somewhere. I would expect this trend to continue. 

The Warehouse Club retailers like Costco and Sam's Club continue to do well as well. Costco has been especially strong in sales along with a strong membership base. I would also expect this trend to continue.

See the breakout below.

Moody's: Death of Retail Is Greatly Exaggerated

Although Moody's contends Retail isn't having a decline comparable to that of Manufacturing, the numbers show Retail becoming less impactful on the overall economy and all strength is due to ecommerce.

Mortgage Rates Jump to 7 Year Highs

“Mortgage rates spiked in a big way today, bringing some lenders to the highest levels in nearly 7 years (you’d need to go back to July 2011 to see worse). That heavy-hitting headline is largely due to the fact that rates were already fairly close to 7-year highs, although today did cover quite a bit more distance than other recent “bad days.” ”

— http://www.mortgagenewsdaily.com/consumer_rates/852600.aspx

Mortgage rates spiked in a big way today, bringing some lenders to the highest levels in nearly 7 years (you'd need to go back to July 2011 to see worse).  That heavy-hitting headline is largely due to the fact that rates were already fairly close to 7-year highs, although today did cover quite a bit more distance than other recent "bad days." 

"Hey Google, your Shopping ads are too expensive!" Sincerely, Amazon

I am surprised to see the limited coverage of Amazon's recent shutdown of Google Shopping/PLA (picture ads) that show at the top of Google results related to products has been.

“Marketing firm Merkle noticed Amazon’s sudden retreat on April 28 by analyzing Google shopping ad data it tracks for clients. “The widespread vanishing act observed over the last week point to Amazon itself pausing its Shopping campaigns,” Andy Taylor, a Merkle research director, wrote in a recent blog.”

Most brands and retailers have become accustomed to Amazon typically outbidding them for position #1 in PLAs or at least being in the top 5. Alongside Amazon you will see other retailers battling it out along with the brand for placement. All of this competition leads to higher prices for better placement which ultimately helps Google. 

I'd be surprised if Amazon wasn't the largest bidder on the PLA/Shopping platform and with Amazon dropping out, I'd expect bid prices to come down. Could they have dropped out because they know most customers (60%+) will start their search at Amazon anyways? Could they have dropped out because the cost of PLA (imaged ads) has become too high yet continued to pay for AdWords (text ads)? Sign of the war intensifying? Likely a mix but this is definitely a good thing for those with PLA budgets and not a good thing for Google.

Sears Concedes

“Competing against Amazon.com “is like racing against Secretariat or playing Michael Jordan,” he said. “A lot of things we were trying to do, they have done better.””

— Eddie Lampert, Sears CEO

You don't typically see CEO's concede on their ability to compete with other industry players yet the outspoken Eddie Lampert of Sears has done just that. Lampert is not your conventional CEO. Lampert comes from a hedge fund & finance background and has carried out one of the largest real estate wind downs by selling off the low and medium tier Sears/K-Mart stores and spinning the higher tier into a REIT via Seritage Properties. No retailer has been able to compete thus far. Just think about the recent headlines. Walmart sold their Asda stake to pay for their battle with Amazon in India. Bonton is now bankrupt. 

Some retailers realize the impact of Amazon and its reach within retail and outside of retail. Kohl's accepts Amazon returns that have led to positive traffic gains to those specific stores and a completely new customer profile. Chicos understands that 60%+ of the ecommerce growth is via Amazon and decides to list their product. Best Buy understands the importance of their private label and thus uses Alexa as their platform.

Regardless of Lampert's end goal with Sears/K-Mart, his brashness is spot on. No retailer can take Amazon head on and every retailer needs to carve their niche exploiting Amazon.

Content vs Distribution: Netflix & Disney

L2 recently interviewed author Derek Thompon on the debate of whether the distribution network and scale of Netflix is more valuable than treasure trove of content (Pixar, Star Wars, Marvel) that Disney owns. Fascinating listen on who will win over time and whether new entrants like Spotify have a chance. But is there only room for one? 

I find it funny how we all talk about cord cutting because of our desire to stop paying for too many channels or content we don’t need yet switch to buying “channels” like Netflix, Hulu, HBO Go, Showtime Anytime, ESPN+ with an abundance of content we don’t watch. Bundles of these apps and services have begin with Hulu and Spotify being offered together and Google TV is now the equivalent of a Verizon FiOS or Time Warner cable bundle..

Because we are just recreating the same ecosystem we are fleeing, there won’t just be one. There will be many. And companies like Disney realize this. Hence they are “confusing” customers by splitting Hulu and Disney core content into two “channels.” Why?

Because adults will pay for both. They will purchase Disney streaming for the family and Hulu streaming for when the kids go to bed. Don’t count Bob Eiger and Disney out just yet, there are many more channels to come as traditional media brings their content back online.   Have a listen, fascinating.