Recovery? We Have Tripled The Number Of Store Closings From Last Year...

Authored by Michael Snyder via The Economic Collapse blog,

Did you know that the number of retail store closings in 2017 has already tripled the number from all of 2016?

Last year, a total of 2,056 store locations were closed down, but this year more than 6,700 stores have been shut down so far. 

That absolutely shatters the all-time record for store closings in a single year, and yet nobody seems that concerned about it.  In 2008, an all-time record 6,163 retail stores were shuttered, and we have already surpassed that mark by a very wide margin.  We are facing an unprecedented retail apocalypse, and as you will see below, the number of retail store closings is actually supposed to be much higher next year.

Whenever the mainstream media reports on the retail apocalypse, they always try to put a positive spin on the story by blaming the growth of Amazon and other online retailers.  And without a doubt that has had an impact, but at this point online shopping still accounts for less than 10 percent of total U.S. retail sales.

Look, Amazon didn’t just show up to the party.  They have been around for many, many years and while it is true that they are growing, they still only account for a very small sliver of the overall retail pie.

So those that would like to explain away this retail apocalypse need to come up with a better explanation.

As I noted in the headline, there are 20 different major retail chains that have closed at least 50 stores so far this year.  The following numbers originally come from Fox Business…

1. Abercrombie & Fitch: 60 stores
2. Aerosoles: 88 stores
3. American Apparel: 110 stores
4. BCBG: 118 stores
5. Bebe: 168 stores
6. The Children’s Place: hundreds of stores to be closed by 2020
7. CVS: 70 stores
8. Guess: 60 stores
9. Gymboree: 350 stores
10. HHgregg: 220 stores
11. J.Crew: 50 stores
12. JC Penney: 138 stores
13. The Limited: 250 stores
14. Macy’s: 68 stores
15. Michael Kors: 125 stores
16. Payless: 800 stores
17. RadioShack: more than 1,000 stores
18. Rue21: up to 400 stores
19. Sears/Kmart: more than 300 stores
20. Wet Seal: 171 stores

If the U.S. economy was really doing well, then why are all of these major retailers closing down locations?

Of course the truth is that the economy is not doing well.  The U.S. economy has not grown by at least 3 percent in a single year since the middle of the Bush administration, and it isn’t going to happen this year either.  Overall, the U.S. economy has grown by an average of just 1.33 percent over the last 10 years, and meanwhile U.S. stock prices are up about 250 percent since the end of the last recession.  The stock market has become completely and utterly disconnected from economic reality, and yet many Americans still believe that it is an accurate barometer for the health of the economy.

I used to do a Black Friday article every year, but I have ended that tradition.  Yes, there were still a few scuffles this year, but at this point the much bigger story is how poorly the retailers are doing.

So far this year, more than 300 retailers have filed for bankruptcy, and we are currently on pace to lose over 147 million square feet of retail space by the end of 2017.

Those are absolutely catastrophic numbers.

And some analysts are already predicting that as many as 9,000 stores could be shut down in the United States in 2018.

Are we just going to keep blaming Amazon every time another retail chain goes belly up?

What we should really be focusing on is the fact that the “retail bubble” is starting to burst.  In the aftermath of the last financial crisis, retailers went on an unprecedented debt binge, and now a lot of that debt is starting to go bad.

In fact, in a previous article I discussed the fact that “the amount of high-yield retail debt that will mature next year is approximately 19 times larger than the amount that matured this year”.  This is going to have very serious implications on Wall Street, but very few people are really talking about this.

Most stores try to stay open through Christmas, but once the holiday season is over we will see another huge wave of store closings.

And as individual stores close down, this will put a lot of financial pressure on malls and shopping centers.  Not too long ago, one report projected that up to 25 percent of all shopping malls in the entire nation could close down by 2022, but I tend to think that number is too optimistic.

The retail industry in the United States is dying, and the biggest reason for that is not Amazon.

Rather, the real reason why the retail industry is in so much trouble is because of the steady decline of the middle class.  The gap between the ultra-wealthy and the rest of us is greater than ever, and we can clearly see the impact of this in the retail world.

Retailers that serve the very wealthy are generally doing well, and those that serve the other end of the food chain (such as dollar stores and Wal-Mart) are also doing okay.

But virtually all of the retailers that depend on middle class shoppers are really struggling, and this is going to continue for the foreseeable future.

Most American families are either living paycheck to paycheck or are close to that level, and these days U.S. consumers simply do not have much discretionary income to play around with.  More hard working Americans are going to fall out of the middle class with each passing month, and that is extremely bad news for a retail industry that is literally falling apart right in front of our eyes.

*  *  *

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

UK High Street Sales Suffer "Most Horrific" October On Record

The writing was on the wall two weeks ago when retail employment tumbled along with CBI-reported retail sales, but tonight"s BDO High Street Sales Tracker should be the icing on the cake for any looming rate hike as like-for-like sales crashed 5.2% - describe by BDO as "the most horrific" October on record.

It was the worst month since right before Brexit in April 2016.

Consumers resisted spending in October following the rise of the Consumer Price Index (CPI) to 3% in September. Recent confidence barometers have also suggested a creeping decline in economic and spending confidence amongst consumers.

As wage increases continue to be outstripped by higher inflation, and with the (now real) anticipation of higher mortgage payments, then it comes as little surprise that people are tightening their belts prior to the anticipated Christmas expenditure.

Fashion sales plunged 7.9% YoY and were the wost segment, but retailers aren’t alone; restaurant, pub and bar groups “also feeling the pinch” in recent weeks.

Rain Newton-Smith, CBI Chief Economist, blamed the weakness on higher inflation.

“It’s clear retailers are beginning to really feel the pinch from higher inflation. While retail sales can be volatile from month to month, the steep drop in sales in October echoes other recent data pointing to a marked softening in consumer demand.”

This collapse fits with what we noted previously, as the British Retail Consortium reported that retail employment dropped at the fastest rate since 2008.

From The Independent, UK retailers cut jobs over the past three months at the fastest rate since comparable records began in 2008, due to technological change and rising employment costs, the British Retail Consortium said on Thursday.

The BRC, which represents major retailers, said its members employed 3.0 per cent fewer staff in the third quarter of this year than during the same time in 2016, and total hours worked fell by 4.2 per cent year-on-year.

Both were the steepest falls since the BRC started collecting records in 2008, when Britain was in the middle of its sharpest recession in decades. This contrasts with the picture in the broader economy, where the unemployment rate is its lowest since 1975 and job creation has been strong, albeit partly at the expense of wages. Still, the BRC report chimed with a European Commission survey last month that showed British retailers’ expectations for employment sank to their lowest since late 2011.

“The pace of job reductions in the retail industry is gathering steam,” BRC chief executive Helen Dickinson said.

 

“Behind this shrinking of the workforce is both a technological revolution in retail, which is reducing demand for labour, and government policy, which is driving up the cost of employment,” she added.

Retail, which accounts for just under 10 per cent of jobs in Britain, has a lot of low-paid jobs that have been affected by rapid rises in the minimum wage in recent years, as well as a new government training levies and pension requirements.

Retail Bloodbath After Target Announces Price Cuts On "Thousands Of Items"

Amazon may have the most razor thin margins in the entire retail world, but that doesn"t mean that its peers can"t catch up as the global race to the deflationary bottom enters its final stage.

Moments ago, that"s precisely what Target did when it announced on its blog that it has taken a "close look" at products most important to its customers to ensure they’re priced right daily, and has cut prices on "thousands of items." The company also unveiled that it has "eliminated more than two-thirds of our price and offer call-outs so you can more easily spot the savings" and that it is not "ditching promotions."

In short, Target just pre-pre-announced that it will shortly be guiding both margins and earnings much lower. The only question is whether Amazon will allow it to expand revenues by enough to offset the bottom line drop. Judging by the market REACTION, the answer is no...

... and not only at Target, but the entire retail sector has been similarly crushed as Amazon takes another multi-billion chunk in market cap from of its comeptition.

Below is the full Target blog post that inspired today"s retail bloodbath:

Pssst… Here’s How to Save Big During Your Target Run (And There’s No Math Required!)    

If you love Target for incredible exclusive brands, super-chic collaborations and one-stop shopping for pretty much everything on your list, you’re going to really love this: We’ve lowered our prices on thousands of items, from cereal and paper towels to baby formula, razors, bath tissue and more.

Sure, there’s nothing like that victorious rush of nabbing a spectacular deal, but having to figure out what “As Advertised!” and “Temporary Price Cut” mean or waiting for just the right sale to roll around can be, well … super frustrating.

So, we’ve put our prices and promotions under the microscope. Our mission? To cut through the clutter and provide guests with great everyday value, while continuing to offer additional savings on the right products at the right times.

“We want our guests to feel a sense of satisfaction every time they shop at Target,” says Mark Tritton, Target executive vice president and chief merchandising officer. “Part of that is removing the guesswork to ensure they feel confident they’re getting a great, low price every day. We’ve spent months looking at our entire assortment, with a focus on offering the right price every day and simplifying our marketing to make great, low prices easy to spot, all while maintaining sales we know are meaningful to guests. And guests are taking note, appreciating much easier, more clear—and more consistent savings—at Target.”

Ready for a few tips for saving big every day at Target?

• Fill your cart with confidence. Go ahead, choose from thousands of items, from milk and eggs to crayons, markers and more … and simply drop them in your cart. We’ve taken a close look at the products that are most important to our guests, making sure they’re priced right daily.


• Watch for simple, easy messages. Say goodbye to all those little signs and ads letting you know about the “Weekly Wow!” or “Bonus Offer.” We’ve eliminated more than two-thirds of our price and offer call-outs so you can more easily spot the savings.


• Delight in the right sales. Don’t worry—we’re not ditching promotions! We’re just making sure to offer only our best, most compelling sales—when it makes the most sense for our guests.

Here’s to even happier Target runs—and a break for your budget!

One Analyst Throws Up On Today's Retail Sales Data: Here's Why

Two weeks ago we reported that July auto sales were a disaster: recall sales for bloated with inventory GM were down 15% YoY, Ford off 7% and Chrysler down 11% - despite record incentive spending - as overall auto sales declined and disappointed for yet another month. And yet, according to this morning"s retail sales report from the Census Bureau, sales for "motor vehicle & parts stores" rose much more robustly than anyone had anticipated, rising 1.2%, the fastest pace since December.

This number was so bizarre, and so out of context with recent sales data, that SouthBay Research threw up all over it in its morning note today. Here"s why:

• Retail Sales m/m: 0.6%


• Retail Sales ex Autos m/m: 0.45%


• Retail Sales ex Autos & Amazon m/m: 0.3%

Consumer Retail Spending was Actually Mild, As Expected

• Auto Sales growth unbelievable


• Amazon Prime Day juiced the results

Don"t believe the auto sales data.  Per the BEA, unit sales were flat m/m (+90K).  Meanwhile, per JD Power, July average retail prices were $950 lower than June"s as auto dealers struggled to make sales and incentives averaged $3.9K, the highest on record and $100 higher than June.

• Hmmm, no rise in auto sales per the real world and the BEA.  Coupled with a fall in net prices. But in fantasy land, the Census Bureau announces a $1.2B m/m jump in sales and a 7%+ y/y rise.

Amazon Prime Day Was Huge...and will Cut August Sales

• Nonstore Retail Sales jumped $700M m/m.  That"s the Amazon Prime Day effect. I modeled it lower and that"s the source of my miss this month

Reasons for Caution: Government Data is Overstating Reality

• The Retail strength does reinforce my view that macro data favors the US in 2H and that the dollar is oversold. But the Retail headline figure is wrong and analysts were correct: consumer spending as captured by Retail is sluggish.  The fact that reality is badly captured by the Retail figures is concerning insofar as it affects the Fed"s decision making. 

The opportunity is to recognize that consumer spending in the real world will pull back and it will also be missed by the official data.  With Consensus unprepared for the pull back, it will deliver a greater shock.

Meanwhile, here"s a quick look at SouthBay"s proprietary "Vice Index."

For those who are unfamiliar, the vice index tracks US consumer spending on alcohol, marijuana, prostitution and gambling, Vices are a special form of discretionary spending that is highly sensitive to near-term
economic conditions: i) Cash based: depends on free cash flow; ii) Luxury spending: wants not needs; iii) Significant dollar amount: not pricey but not cheap. Vice spending is broadly representative of the US consumer: i) Broad-based: Every socioeconomic and demographic group participates; ii) High-volume transactions: Over 100M discrete events per year.

The reason why this index is of particular interest, is because vices predict retail spending with a 4-month lead. Luxury spending is the 1st thing to be affected by changes in household finances.

This is what the index shows:

Chain-Store Stock Carnage Continues (Despite Biggest Jump In Retail Sales Since 2016)

Oh the irony - as bulls celebrate the best jump in retail sales since 2016, the scene for retailer stocks is an utter bloodbath...

Earlier today, US Retail Sales in July rebounded dramatically to a 0.6% MoM gain - the most since Dec 2016 - driven a surge in motor vehicles (record incentives) and department stores (more inventives?). Year-over-year saw upward revisions and a rebound to a 4.2% rise in July.

The last two month"s declines in Retail Sales have been revised away magically and we have now gone 5 months without a decline...

But one glimpse at the carnage in chain-store stocks tells a very different story... Following a week of disappointing earnings from J.C. Penney Co. and Macy’s Inc., the drumbeat resumed Tuesday as results from Advance Auto Parts Inc., Coach Inc. and Dick’s Sporting Goods Inc. sent their shares crashing...

As Bloomberg notes, at this rate, the group is poised for the worst annual decline in share prices since the financial crisis.

“Everybody is being burned in retail and people are just questioning, ‘Is there any place that’s Amazon-free?’” Gary Bradshaw, a Dallas-based fund manager for Hodges Capital Management Inc., said by phone.

“There will be some winners in retail but boy, it’s just a land mine."

However, Vitaliy Katsenelson more accurately states It’s not just Amazon’s fault. Changing consumer habits are killing old retail biz...

Retail stocks have been annihilated recently, despite the economy eking out growth. The fundamentals of the retail business look horrible: Sales are stagnating and profitability is getting worse with every passing quarter.

Jeff Bezos and Amazon get most of the credit, but this credit is misplaced. Today, online sales represent only 8.5 percent of total retail sales. Amazon, at $80 billion in sales, accounts only for 1.5 percent of total U.S. retail sales, which at the end of 2016 were around $5.5 trillion. Though it is human nature to look for the simplest explanation, in truth, the confluence of a half-dozen unrelated developments is responsible for weak retail sales.

Our consumption needs and preferences have changed significantly. Ten years ago we spent a pittance on cellphones. Today Apple sells roughly $100 billion worth of i-goods in the U.S., and about two-thirds of those sales are iPhones.

Consumer income has not changed much since 2006, thus over the last 10 years $190 billion in consumer spending was diverted toward mobile phones. Between phones and their services, this is $340 billion that will not be spent on T-shirts and shoes.

But we are not done. The combination of mid-single-digit health-care inflation and the proliferation of high-deductible plans has increased consumer direct health-care costs and further chipped away at our discretionary dollars. Health-care spending in the U.S. is $3.3 trillion, and just 3 percent of that figure is almost $100 billion.

Then there are soft, hard-to-quantify factors. Millennials and millennial-want-to-be generations (speaking for myself here) don’t really care about clothes as much as we may have 10 years ago.

All this brings us to a hard and sad reality: The U.S. is over-retailed. We simply have too many stores. Americans have four or five times more square footage per capita than other developed countries. This bloated square footage was created for a different consumer, the one who in in the ’90s and ’00s was borrowing money against her house and spending it at her local shopping mall.

But the bottom line, as we noted previously, is that America"s malls, retail stores, and fast-food restaurants are hugely overbuilt.

How Can America Afford A Universal Basic Income? Simple: "Tax The Robots"

By replacing low-wage cashiers and other retail workers with robots, the retail sector’s struggling companies can engineer a potentially life-saving boost in profits. But as advances in artificial intelligence continue to accelerate, according to the World Economic Forum, large swaths of laborers are going to lose their jobs, leading to unprecedented levels of unemployment.

How to distribute the profits that will accrue to corporations thanks to this paradigmatic shift in labor-market conditions has been the subject of intense debate, as it has the capacity to create a sharp drop in living standards across developed economies.

So how can governments ameliorate this diminution of the American workforce? The WEF has an idea: Tax the robots and use the proceeds to fund a universal basic income for all Americans. As the paper notes, the once-controversial UBI has never been more poplar, thanks to tech luminaries like Mark Zuckerberg, Elon Musk and Bill Gates – all of whom have spoken in glowing tones about the policy’s potential to save America from dystopia. Yet, for all this talk, Zuckerberg & Co. have glossed over a crucial question: How, exactly, will taxpayers afford this?

The WEF says it looked to the private sector for answers, and came up with this simple conclusion: Tax the robots.

“Companies will profit significantly from workforce automation,” WEF writes. “So the private sector will be able to afford shouldering this burden, while at the same time still making greater profits.”

The WEF cites a small, yet successful, experiment that was conducted in the UK, and Ontario, as justification for its plan, which it fleshes out in greater detail below:

“As the robots take over, people will begin to lose their jobs, but companies will be fine. More likely than that - they’ll thrive. The profits generated from automation could be used to pay a basic wage to those displaced by robots. To use the welder example from before, a company could slash the cost of their production by at least a third in a short period of time, and would continue to see greater profits as efficiencies increase and the price for parts drops. If that company eventually arrives at the $2 an hour mark that BCG predicts, the company’s bottom line would have been improved by 1250%.

Given all of the savings and massive profits companies are going to reap from these new technologies, they should be responsible for using part of this monetary kick-back to help the workers they’ve displaced. Legislators might consider a sliding-scale automation tax, where a company qualifying itself as using an automated workforce would be taxed depending on how many human workers they have performing tasks compared to how many tasks are performed by automated workers that a human could rightly do. This money could then be put into a UBI fund that is then distributed by the government to citizens affected by automation—or to the entire population.”

While startup costs associated with building a robotic workforce might appear daunting, the WEF notes that they’ve fallen sharply in recent years, and will likely continue to decline as advances in AI technology sharpen robots’ ability to work side-by side with humans.

Some of the largest some of the largest food-service and retail companies have announced initiatives centered around providing customers with a more seamless shopping experience. Cowen"s Andrew Charles, the analyst calculates the jump in sales at McDonald’s as a result of the company"s new Experience of the Future strategy which anticipates that digital ordering kiosks (shown above) will replace cashiers in at least 2,500 restaurants by the end of 2017 and another 3,000 over 2018.

This trend will only continue to accelerate. McDonald’s, an early pioneer of automation, is already replacing human workers with automated kiosks. They expect a 5% to 9% return on investment in just the first year; in 2019 they expect this return to balloon to double digits. And this is only one sector: PricewaterhouseCoopers estimates that 38% of US jobs will be in danger of being replaced by automation by 2030.

To this, WEF adds that Micky D’s expects a 5% to 9% return on investment in just the first year; in 2019 they expect this return to balloon to double digits.

Amazon.com’s nearly $14 billion acquisition of Whole Foods Market has spurred (long overdue) calls from a handful of Congressional Democrats for an investigation into Amazon’s business practices on anti-trust grounds. Over the past few years, the company’s push for speedier delivery times (it offers same day delivery in certain markets through its Amazon Prime service) and an increasingly expansive away of products is devastating smaller retails and brands.

Some smaller retailers, having ascertained the existential threat Bezo’s blatantly monopolistic business practices pose, have started to push back, setting the stage for a full-scale battle between Amazon and its smaller rivals. In an email sent to authorized retailers, the CEO of Birkenstock USA threatened to cut off any retailers who violate the company’s strict policies surrounding reselling by turning over their stock to Amazon. The e-commerce giant has allegedly been reaching out to individual Birkenstock retailers, offering to buy out their entire stock at full price. Amazon has denied these claims. Already, retail bankruptcies have surged 110% in the first half of this year, according to a report by Fitch as retail surpasses battered energy as the most distressed industry in the US.

Unfortunately, US officials aren’t treating the problem of creeping automation with the deference that the WEF says it deserves. Case in point:

“At the exponential rate of robotization, there isn’t a lot of time for legislators to figure out the intricacies of a solution - but they don’t seem to be in too much of a rush. Steven Mnuchin, the US’s treasury secretary, is already completely ignoring this issue, for example.”

Fed Chairwoman Janet Yellen acknowledged the severity of the problem during her Congressional testimony following questions from two Republican senators. To be sure, the Fed doesn’t have the authority to raise taxes (though it could easily choose to monetize these handouts by agreeing to buy more government bonds). Stagnant wages, worsening labor-force participation and expanding deflationary prices have been linked by economists to increasing automation. In a recent study, PricewaterhouseCoopers estimates that 38% of US jobs will be in danger of being replaced by automation by 2030.
 

The Difference Between "Old" And "New" Retail? A Record 50x PE Turns

In the battle between "old" (bricks and mortar) and "new" (online) retail, few will survive although according to the market, the winner couldn"t be more clear.

As BofA"s Savita Subramanian writes in her latest relative value cheat sheet report, "retailers compete for share of the total consumer wallet, and it is old news that online retailers have continued to take share from traditional brick and mortar retailers." Nowhere is this more obvious than in the near-50x multiple point forward P/E spread between "New" (65x) and "Old" (17x) Retail, which is close to a record high (Chart 1). New Retail"s multiple expansion has pushed the P/E of the overall retail group to another near record high of 26x.

In the context of the broader market, this puts retailers at a 46% premium to the S&P - more than double the historical average premium of 17%.

Why the gaping disconnect?

There are two possible explanation: i) the market may be ascribing too much growth to the online group, or ii) is double-counting future profits by giving full credit to New Retail for market share gains without taking it away from Old Retail. However, in a surprising twist, BofA calculates that assuming a reversion to the historical 17% market premium for the total retail group, "one-fourth of the total group"s future earnings (or one-third of Old Retail"s future earnings) may be being double-counted."

Looking at it another way, if the market is fairly discounting the combined group"s future earnings potential, based on the overall retail group"s current P/E of 26x, then given that New Retail makes up nearly half of the combined market cap today, it should also make up half of the total group"s future earnings potential vs. just 18% of current earnings that it represents today. That implies that 35% of Old Retail"s current earnings would eventually need to shift to New Retail.

Taking this one step further, since "new" retail is mostly Amazon, what BofA is suggesting, is that just based on current valuation, the market is either flat out wrong, which would hurt "online" retailer earnings, or it is already pricing in one company (AMZN) generating half the earnings of the entire sector, which may not be the definition of a monopoly, but is getting perilously close, if only for Jeff Bezos.

Will Whole Foods Be Amazon's Waterloo?

Authored by Mark St.Cyr,

Although the Battle of Waterloo means different things to different people, one of the more widely held meanings it’s come to represent is something along the lines of a battle that one side held certain of victory, only to not only be beaten, but then lose everything they had fought for to begin with. This is what ended Napoleon, but it wasn’t for that he had no plan. On the contrary, he just believed his plan wouldn’t fail. That plan was: isolate, and annihilate, each army separately. (e.g., the Allied and Prussian armies.)

If you interchange “armies” for “business sectors”, Amazon’s strategy over the last few years seems much aligned. i.e., War against big-box retail, then all retail, media, spacecraft, and now – retail food shopping. I am of the opinion Amazon™, much like Napoleon, are going to find this battlefield has far more challenges that may end up costing them far more dearly, than they ever bargained for. Here’s why…

Unbeknownst to most, when it comes to the perishable food segment, the regulations and more (i.e., meat, dairy, et cetera) that allow what we American’s take for granted when it comes not only to variety, but for the safety and assured wholesomeness that our food supply is – it’s unlike anything most retailers outside of the industry have ever encountered. Let alone understand.

The ones whom find it the most difficult to acclimate to; are those who are all ready in the retail business (think: department store mentality) and believe it’s all just a case of applying what they know, or what they perceive as “what they know”; and switch it out using a shelf full of, let’s say toys, for a shelf full of steaks, as an example.

Many believe the only difference (an assumed difference) is that one shelf is refrigerated, yet, all the rest is the same. i.e., You have a product, a price, a label, a way to accept money for it, and a place to store back-stock. Sounds easy-peasy right? And that’s the problem, it sounds like it. But it’s anything but in the real world.

The reasons why I know this to be true is because this was the industry I made my marks in. i.e., The meat industry. And when it comes to what Amazon is going to have to contend with going forward I can speak directly to that because (using a hypothetical) when Amazon will be looking to make “deals” or “set up a supplier”, I would be the one on the other-side of the table they would need to negotiate through. And yes, I’ve actually done it, at that level. So I know intimately what I’m talking about, which is why I’m making this case.

This isn’t going to be the first time some retail behemoth decided they were going to get into the “food” market and show the industry a thing or two on how “they” believed the complex should run. It’s been done before, only to have their management sent packing arse-in-hand, shell-shocked, and mumbling for days, “WTF just happened there? Don’t they understand who we are?!” I’m referring to Walmart™ and their initial foray into groceries.

At about the turn of Y2K Walmart entered into the “supermarket” business with gusto. At the time they were gaining quite the reputation for negotiating (more like strong arming or bullying) food suppliers. (think “prepared” like: canned, or boxed product, sodas, etc., etc.) And when they were through – they set their crosshairs on the fresh meat suppliers. (think: steak, chicken, et cetera.) And it was here where they heard what seemed for the first time in response to their: “You’ll do it our way, and at our price, or no way!” demands. That response?

“Take a hike, a don’t let the door hit you on the way out. Oh, and welcome to the meat business.”

The meat industry was the only industry that (at least to my knowledge) sent Walmart reeling with no way for recourse other than to deal on meat industry terms and pricing. In other words Walmart’s “size” or “buying power” wasn’t a dominating factor that could gain leverage for discount. In fact – it could actually work against them, something considered unfathomable to its product buyers. I’ll give you a quick example to help clarify.

If a company wants to purchase 1mm widgets they can find a factory that already has supply with excess inventory if needed (or can ramp up) and negotiate a price. Simple construct for this example. Now: want to buy 1mm pounds of meat?

If there’s some available on the spot market, fine. If not? What are you going to do – make it?

You can – but – that takes well over a year. And here’s the other key – 1mm pounds how often? Daily? Weekly? Monthly? And if you begin buying all the “spot” available? Guess what? Prices may go up for you – and not your competition. For your competition may already be locked into long-term contracts. And what can be even more baffling to the uninformed is this: All your competitors will have it, as in product – and you won’t. Maybe at any price.

Again, it’s a different business. And in the end it took them (Walmart) years with a lot of painful trial and errors as to try to innovate pricing and suppliers for differentiation. Today, if you look at meat prices from their cases comparing to any other (in my opinion) they’re basically right in line with any other national retailer. You don’t see any “WOW!” type price discrepancies unless, it’s a sale item.

The above thumbnail sketch is important, because it will help explain why this, Whole Foods™/Amazon merger might come into resistance not only from the competition, or suppliers. But also – from its existing customer base.

Whole Foods (WF) has garnered the moniker “whole-paycheck” for as long as I can remember, and with good reason. As I stated, being in the food industry for most of my career, when I walk around any supermarket, it’s with a far different eye than most, especially when it comes down to pricing. And WF has never ceased to amaze me.

I am always stunned (again, all my opinion) at the prices being paid by its customers. But there’s a reason for this. And it’s not what most people think. The reason why people pay those exorbitant prices is because of what they deem as some form of “exclusivity” shopping there gives them. e.g., They are showing they can afford it.

Sure, some may say the ambience is better than most other national stores (although I would argue today, that’s far from true) and there’s certainly a different product selection than others. But that’s everywhere. But where the rubber-hits-the-road (i.e., the meat department) all I’ll say too that is: I go “WOW!!!” But not for the reasons WF would like. Which brings me to my point.

WF customers aren’t buying there because of some form of pricing structure that lends itself to discounting. In actuality – it’s the exact opposite.

There are now multiple competitors surrounding many a WF that offer the same type of “wholesomeness” implied by shopping there. One example that’s in my own area is called FreshThyme™ (FT), and I’ll use them to demonstrate my point using a friend of my wife.

Her friend shops WF, but within the last year FT opened here less than 2 miles away from her recently opened WF about a year prior. My wife took her around the store where she purchased similar items as her go-to store. But this time her bill was noticeably cheaper. And I mean much, as in even she was quite surprised. Did she switch? Has she been back there again? Answer: No. And here’s where you begin to understand where I’m going.

Why hasn’t she? Is it because she doesn’t “need” or care to save money? Again, the price differences were not nickel and dimes, but rather, dollars on many items. Was it the “2 miles away” that did it, because we’re all such creature of habit? The answer again is no, because she doesn’t even live in this town, she actually lives some 20 miles outside. But location is the key. And here’s why…

The new WF was built in what is known in my area as “Easton.” It is a very exclusive retailing area. To give you an idea, if you’re walking around the shops and suddenly you have an impulse to buy a Tesla™ after your dinner at Smith & Wollensky™, you can do just that by crossing the walkway. And if you want to celebrate that with some one-of-a-kind key ring? Tiffany™ is right there to accommodate you along with many others. All within a manageable stroll – even if you’re in heels.

Why this is important is this: You are not going to gain market share, or customers, via the discounting model. It just doesn’t work that way to this clientele. And that is an “Achilles heel” to any management team coming from a “race to the bottom” pricing model, which Amazon is. And that leads to the following for consideration.

What advantages does Amazon bring to the WF concept model? Pricing? Management? Logistics? I would argue they aren’t relevant. And actually, the mindset of current senior management at both companies are in for a culture shock that will surely be epic. Imagine the meetings that will be discussed (as in shouting matches) on why reducing prices doesn’t work, or not spending money for a key display in an effort to cut costs, not understanding (or listening to reasoning) that reducing the display purely for “cost” might reduce actual sales.

I’ve seen it happen, and I know how they turn out. All I’ll say is this: not good.

Walmart was a different animal, for they already had brick and mortar stores – adding on a grocery store to existing models was (for lack of a better term) a natural fit. But it has been anything but the slam dunk many first envisioned. Especially Walmart itself.

WF is different, for it is a stand alone market. It has to fight to get (let alone retain) every customer into its store for a specific purchase. There’s no “We’ve got TV’s, and furnishings over here, toys over there. Oh, and now you can shop for groceries also!” e.g., There is no other reason to go to WF than to buy at WF. And they don’t go there because it’s cheaper than the competition, far from it.

If the culture of Amazon doesn’t mesh properly with the now management of WF the resulting missteps that may send customers once loyal elsewhere to shop alternatives (and they’re everywhere) could unfold faster than a next day delivery. And if you’re looking for further clues of where such missteps can happen, look no further than what is currently unfolding at the Washington Post™.

Again, this is the type of “culture shock” that typically takes place when an “outsider” comes in, and its management team (along with style) tries to impose what it now deems as “policy” going forward. More often that not the backlash that result over time begins to cripple the management of both. This WF deal could add to that already mixing cauldron.

Maybe the best indication of where this might all be going comes from none other than what is surely this whole war’s leading general. e.g., Rodney McMullen, CEO of Krogers™. To wit:

“Whole Foods is a ‘good fit’ for Amazon.”

I believe Wellington said something similar as he watched Napoleon deploy his troops. But that’s pure speculation.

A Former Lehman Brothers Trader: It's Time To Buy Brick And Mortar

Authored by Jared Dillian via MauldinEconomics.com,

Everyone thinks it is only a matter of time before Amazon puts every department store, every mall, every brick-and-mortar retailer out of business. Amazon gets an infinity market cap and everyone else gets zero.

Sound familiar?

That’s the accepted wisdom.

Is Amazon a great business? Yes.

Is a department store a bad business? Probably.

Does Amazon get 100% market share, with department stores getting zero? Probably not.

Amazon has over 80 million Prime subscribers in the US. It’s not quite saturated, but it’s getting close.

Source: Business Insider

I admit to being a Prime member, a late adopter.

It is pretty cool. Stuff shows up on my doorstep in two days, for free. The huge poker chip set I just ordered probably weighs about 40 pounds—free shipping! And I get all the Prime movies and TV shows.

But here is my thesis: Amazon will grow and grow, but there will always be a role for physical retailers. A reduced role, for sure, but there will always be a role.

From a capital markets standpoint, now might be the time to put on the trade.

The Bottom of Brick and Mortar

This is when I started thinking that we"ve reached a bottom in physical retailers.

Last week, ProShares—a $27 billion ETF manager—registered to list some double short leveraged ETFs on brick-and-mortar retailers! 

Ding!

In my experience, specialty ETFs like this are usually listed at the worst possible times. Plus, you know my thoughts on leveraged ETFs. When 2x short leveraged ETFs are being listed on physical retailers… it is probably time to buy physical retailers.

The graphic from AEI below is a couple of months old. Since then, Amazon’s market cap has soared to $481 billion. Meanwhile, Macy’s market cap has fallen to a little under $6.5 billion.

Source: Yahoo Finance

Amazon is worth around 75 times more than Macy’s? That doesn’t seem right.

I hope by this point I have you thinking.

I am no Macy’s fan. It is a pretty terrible business, it sells middlebrow stuff in middlebrow locations. Although its online business is actually not bad.

I used to buy ties at Macy’s, back in 2001. People laughed at those ties. I no longer buy ties at Macy’s.

But look—at a $6.5 billion market cap, Macy’s is reaching distressed levels…

That means we have to put our distressed investor hat on, pick this business apart, and see if there is value—in all parts of the capital structure. Maybe we don’t like the stock, but maybe we like the bonds, for example.  

And, Staples was bought by private equity recently for about 0.4 times revenue. Apply that standard to Macy’s and you get to a $10 billion valuation. They’re still kicking.

Plus, there’s an argument that this whole Internet retailing thing is just a giant bubble, according to the chart below.

Source: @bySamRo

How Do You Play It?

This is a smart trade, but it is also a dangerous trade unless you are smart.

There are two ways to do this:

1)  Be a distressed investor: Look at the worst-case scenario, look at all parts of the capital structure, and find value.

2) Be a quant:  Buy a basket of physical retailers, sell a basket of Internet retailers, and wait for them to converge.

The worst way to play it is just to naively buy Macy’s (or another retailer) and hope for the best.

Furthermore, I think it’s time to go dumpster-diving in mall REITs.

One final remark. As you look around for ideas, invest in things that would get you laughed off the set of CNBC. I assure you, if I went on Fast Money and pitched Macy’s as a long idea, I would get laughed off the set.

Those are the best trades.

Dead Mall Stalking: One Hedge Fund Manager’s Tour Across Middle-America – Part 2

Via AdventuresInCapitalism.com,

Continued from Part 1...

Malls are bearing the brunt of changes in retail, but they’re only the canary in the coal mine.

Let’s start with a simple premise; commercial real estate (CRE) will change more in the next decade than it has in the past hundred years. Anyone who thinks they can fully foresee how it will evolve is lying to you. The only certainty is that highly leveraged real estate investors and lenders will be obliterated as current models evolve faster than anticipated.

In the past, retail was retail, warehouse was warehouse and office was office—the same for all other CRE classes. There was some cross-over, but the main commercial real estate components stayed segmented for the most part. Now, with big box stores, the lowest hanging fruit for online shopping to knock off, going to dodo-land, there will be hundreds of millions of feet of well-located space suddenly becoming available. People act as if there are enough Ulta Beauty and Dick’s Sporting Goods to go around. However, you cannot fill all of this space with the few big box retail concepts still expanding—especially as many stalwarts are themselves shrinking.

As a result, a huge game of musical chairs is about to take place. Why pay $20/ft for mid-rise office space, if you can now move into an abandoned Sports Authority for $5/ft. Sure, it doesn’t come with windows, but employees like open plan space and there’s plenty of parking. Besides, with the rental savings, you can offer your staff an in-house fitness facility and cafeteria for free. Does your mega-church need a larger space? There’s probably a former Sears or Kmart that perfectly accommodates you at $3/ft. Have an assisted living facility with an expiring lease? Why not move it to an abandoned JC Penney—the geriatrics will feel right at home, as they’re the only ones still shopping there.  

Go onto any real estate website and you will find out that huge plan space is nearly free. No one knows what the hell to do with it and the waves of bankruptcy in big box are just starting. As online evolves, these waves will engulf other segments of retail as well.

Type Macy’s into Loopnet.com and look at how many millions of feet of old Macy’s are available for under $10/ft to purchase. Retail’s problems are about to become everyone’s problems in CRE. When the old Macy’s rents for $2/ft, what happens to everyone else’s rents? EXACTLY!!! What happens if a CRE owner is leveraged at 60% (currently considered conservative) and leasing at $15/ft when the old HHGregg across the street is offered for rent at $3/ft? An office owner can lower his rents a few dollars, but at the new price deck, he cannot cover his interest cost, much less his other operating expenses. What happens to a suddenly emptying mid-rise office building? It has higher operating expenses than the box store due to full-time security and cleaning—maybe it’s a zero—in that future market rents no longer cover the operating expenses of the asset, much less offer a return on investment. I know, crazy—that’s how musical chairs works when demand contracts and the supply stays the same.

What happens to the guys who lent against these assets? Kaplooey!!!

America currently has more feet of retail space per capita than any other country. For that matter, America has more feet of office and other CRE types per capita as well. A decade of low interest rates has made this problem substantially worse. Think of the two malls that I spoke about in the last piece—they weren’t done in by the internet, they were done in by a tripling of retail space in a cities that are barely growing. These cities simply ran out of shoppers for all of this space. Now the mall is empty—heck the strip retail is only partly filled in. The next step is that rents will drop—dramatically. The owners of each asset, the mall and the strip center will go bust. Neither has a cap structure that is designed for dramatically lower rents. Neither has an org structure designed for carving up this space for the sorts of eclectic tenants that will eventually absorb it over the next few decades.

CRE has had it so good for the past 35 years, that most owners have never seen a down cycle. Sure, Dallas had too much supply in the early ‘90’s. Silicon Valley over-expanded in the early ‘00’s. It took a few years for it to be absorbed. Anyone who had capital during the bust made a fortune. This time may really be different. There’s too much supply. Short of blowing it up, it will be with us for years into the future. Without dramatic economic or population growth, some of it may NEVER be absorbed.

As an investor, this is all interesting to understand, but you don’t fully comprehend it until you have visited a few dozen of these facilities and seen how owners are trying to cope with the problem. In Miami, space is constricted. In Texas, there’s more CRE than I’ve ever seen. They keep putting it up—even if there isn’t demand currently. For three decades, they’ve always been able to fill it over time. For the first time ever, they can’t seem to fill it—in fact, demand is now declining. It is now obvious; there will be a whole lot of pain for CRE owners and lenders. Of course, someone’s pain can be someone’s gain.

To be continued…

With New Patent, Amazon Will Collect As Much Customer Data As Google

A day after Amazon announced it would jump head-long into the bricks-and-mortar grocery business by agreeing to buy Whole Foods Market for $13.4 billion, reports from earlier this week about a new patent issued to the company are starting to make more sense. The patent, which was first reported by the Verge, is for wireless technology that can effectively block customers in Whole Food’s retail locations from “showrooming." "Showrooming" is the practice of using retail locations to test out products before buying them online - a practice that Amazon, by making it easy to comparison shop on a smartphone, helped pioneer.

In its report, the Verge focuses on how the technology will help the company solve a problem that Amazon itself helped create – a problem that has plagued virtually every other traditional retailer.

"Systems and methods for controlling online shopping within a physical store or retailer location are provided. A wireless network connection may be provided to a consumer device at a retailer location on behalf of a retailer, and content requested by the consumer device via the wireless network connection may be identified. Based upon an evaluation of the identified content, a determination may be made that the consumer device is attempting to access information associated with a competitor of the retailer or an item offered for sale by the retailer. At least one control action may then be directed based upon the determination.”

But the technology described in the patent also raises serious concerns about the company’s plans for vastly expanding its capacity to collect and store customers" data. As MarketWatch’s Theresa Poletti reports, with this added capability, Amazon may soon be gathering as much data on its consumers now as Alphabet’s Google Inc.

Stephen DiFranco, an executive-in-residence at the Plug and Play Tech Center in Sunnyvale, Calif., offered a few disturbing hints about the scope of Amazon’s data-collection capabilities in an interview with MarketWatch.

“[The technology] will also triangulate your position in the store, market to you while you are in the store, and understand your behavior in the store,” said DiFranco, who previously worked at Broadcom’s Internet of Things business and led the sale to Cypress Semiconductor CY, -1.72% “If they can collect the same kind of info that they can get while I am surfing on their site, they are going to be able to deliver the same value, the same experience that I get on their site...The company that knows more about the online behavior of me, will now own this same science...while I am in the Whole Foods retail environment.”

 

The positive aspect, he said, is that it will result in better, more convenient shopping experiences for consumers, with their preferences and habits known. It has the ability to turn into a real assistant for shopping. “You passed the milk, you always get milk,” your smartphone may tell you while shopping.

 

DiFranco said that by combining the data Amazon already has about its current customers, plus far more frequent data that comes from grocery shopping, will turn it into an even bigger giant with vastly more data. “This is jet fuel in retail analytics that no one else will have.”

But while some customers might balk at the prospect of shopping in a store where literally every single action and preference is being recorded, investors don"t seem to mind.

Whole Foods’ Market’s largest competitors lost a combined $32 billion in market capitalization yesterday after the announcement. Sell-side analysts have long been calling for a stronger management team to step in and take control of Whole Foods after years of chronically weak earnings and sluggish stock performance. Amazon’s stock also climbed 2.4% on the news, helping it slough off broader weakness in the FAAMG contingent.

Amazon, which already operates a grocery-delivery service in select markets, announced its plans for entering the bricks-and-mortar grocery business late last year when it opened its first small-format grocery store. At the time, the company said it could envision expanding to 2,000 stores. One of the store"s most widely publicized features was its use of automation and AI technology to eliminate check-out lines and allow customers to freely walk out with their purchases. But following the latest revelation about Amazon’s big-data tactics, investors should hope the ecommerce giant also plans to address the more prosaic flaws plaguing Whole Food’s business: Namely, that, as stagnant wages and rising rents force consumers to cut back on spending, the “Whole Paycheck” image will likely continue to alienate shoppers.

The Marlboro Red Consumer Sentiment Indicator

After last earnings season I noted without a strong rebound in consumer spending, I expect aggregate earnings growth to slow later this year (especially if declining energy prices cause credit to tighten). While asset inflation remains unchecked, consumer spending does not appear to be responding or accelerating. Two consumer companies on my possible buy list announced earnings this week – both suggest the operating environment remains challenging.

Casey General Stores (CASY), the convenience store operator, reported results on Monday with sales and earnings that were less than expected. Specifically EPS declined to $0.76 from $1.19 during the quarter and $4.48 vs. $5.73 for the year. During the quarter, same-store fuel gallons declined -0.5%, while grocery same-store comps increased 1.5% and prepared food/fountain comps were up 3.2%.

Management noted that similar to others in its sector, Casey’s “experienced downward pressure on customer traffic which had virtually impacted same-store sales across all of our categories.” Management blamed decelerating customer traffic on the weak agricultural economy, the difference in food away and food at home prices, and competitor promotional activities.

Management commented further on the agriculture economy saying, “The USDA anticipates either a flat to slightly declining farm income in calendar 2017. So we’d anticipate this piece of the challenging environment to continue to at least to the end of the calendar year.”

Labor costs were also discussed, with management calling labor very tight and wage pressures challenging. I thought the following comment was interesting, “It’s not uncommon for people to jump ship for $0.25 raise here and there, and so that has been a challenge.”

One of my favorite economic reports, the Marlboro Red Consumer Sentiment Indicator (MRCSI), was mentioned again this quarter and continued to suggest the consumer remains cautious.

Management commented, “I mean one of the things that we faced in the cigarette category, we do see, albeit it’s gradual but it’s been continuing for the next several quarters, a movement away from carton to pack purchasing. We’ve also seen it moving away from full value purchasing to a more discounted brand, which could be a generic brand.”

And finally, management had some interesting comments on their fiscal 2017 expectations versus actual results. Management explains, “…there’s no question that when we put our goals out for fiscal 2017, I’m not sure we fully anticipated the customer response, the consumer response I should say in relation to the economic conditions.” Management went on to note they are taking economic conditions into account more this year than they did last year.

Although Casey’s stock declined 8% on the news, trading at 18x EV/EBIT, it continues to trade over my estimated business valuation. Casey’s is one of the many high-quality companies I follow and like, but in my opinion, remains too expensive to generate future adequate absolute returns. Hence, it remains on my possible buy list, but not in my portfolio.

United Natural Foods (UNFI), the distributor of natural and organic foods, also announced earnings results this week. Although results appeared as expected, annual sales guidance was revised lower and its stock declined -4%.

Management noted the grocery environment remains challenging (side note: Isn’t it interesting restaurants often blame grocery stores for taking market share, yet grocers continue to struggle? Maybe it’s not where the consumer is spending, but how much the consumer has to spend).

Specifically, management stated,

“Net sales finished below our expectations in the third quarter driven by broad-based retail softness, the rationalization of business in conjunction with our margin initiatives and lack of inflation.”

“Same-store sales in many of our retail customers were under pressure or negative during the quarter. Our retail customers are facing competitive pressure not only from other food retailers but also from many channels now carrying assortment of better-for-you products.”

“…when you look at general same-store sales and year-over-year, quarter-over-quarter, many of the retailers across most of the channels are facing some real headwinds in terms of growth. And as part of that, we’ve seen certainly a fair number of store closings as retailers are coming together. And so in the near term, that’s been a real headwind for us.”

Kroger reports next week, hopefully providing us with more useful grocery and consumer data points. That said, for those waiting for the consumer to get the U.S. economy out of its 1-2% growth funk, further patience may be required. From a bottom-up perspective, I’m not seeing it.

We Need A 'Third' Economy For The Future

Authored by Charles Hugh Smith via OfTwoMinds blog,

The existing platforms of for-profit cartels/monopolies and the central state are no longer able to provide enough paid work and high-touch services for everyone.

We all know that automation is eating its way up the human-labor food chain at an increasing clip. Yet there is remarkably little insight into this process.

Let"s see if we can"t connect two insightful essays on this topic, one from musician-essayist David Byrne and the second on the business model of Amazon.com:

Eliminating the Human (via GFB). Here is an excerpt:

"We’re a social species--we benefit from passing discoveries on, and we benefit from our tendency to cooperate to achieve what we cannot alone. In his book, Sapiens, Yuval Harari claims this is what allowed us to be so successful. He also claims that this cooperation was often facilitated by a possibility to believe in "fictions" such as nations, money, religions and legal institutions.

Machines don’t believe in fictions, or not yet anyway. That’s not to say they won’t surpass us, but if machines are designed to be mainly self-interested, they may hit a roadblock. If less human interaction enables us to forget how to cooperate, then we lose our advantage.

I’m wondering what we’re left with when there are fewer and fewer human interactions. Remove humans from the equation and we are less complete as people or as a society. "We" do not exist as isolated individuals--we as individuals are inhabitants of networks, we are relationships. That is how we prosper and thrive."

Why Amazon is eating the world. Here is an excerpt:

"I believe that Amazon is the most defensible company on earth, and we haven’t even begun to grasp the scale of its dominance over competitors. Amazon’s lead will only grow over the coming decade, and I don’t think there is much that any other retailer can do to stop it.

...each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition."

There is much more of interest in each piece, but these short excerpts offer a taste of each.

Byrne is commenting on our built-in need for human connection and cooperation, not just for emotional-social reasons but as a competitive, adaptive advantage.

Zack Kanter (author of the essay on Amazon) explains how Amazon"s model avoids the flaws of vertical integration (i.e. each division becoming bloated, inefficient and ineffective due to lack of outside competition).

Correspondent GFB observed that Kanter did not describe a major component of Amazon"s success: the consumer"s willingness to buy commodity-goods without actually seeing the product on the shelves, trying it on, etc.

The unifying thread here is high-touch, low-touch, a concept I covered in my book Get a Job, Build a Real Career and Defy a Bewildering Economy. I was endeavoring to explain why certain kinds of labor are easily automated and other kinds are more immune to automation.

Low-touch transactions / interactions don"t offer much value, connectedness or cooperation. A common example is ordering a fast-food meal or checking out at a market. Our interaction with the human being behind the counter is brief and not something valuable enough that the company can charge extra for being served by a human rather than a machine.

The vast majority of consumers would be OK with (or actually prefer) having a low-touch transaction served by a robot or automated system. Rather than wait in line, many of us prefer to use the self-checkout or airport ticket kiosk. Most of us would be delighted to bypass the entire time-wasting hassle of renewing our licenses at the Dept. of Motor Vehicles and many other low-touch interactions.

In effect, Amazon is automating many ordinary low-touch transactions, and few consumers miss what"s been lost in the move to home/office delivery of commodity (i.e. basically interchangeable) goods and services.

The kinds of connections Byrne is referencing are high-touch: transactions and connections that require communication, sharing, cooperation, and all the other bonds of human relationships.

If ordering a fast-food meal is low-touch, dining at a swank bistro is high-touch. Most people would hesitate to pay a lot of money for food delivered by a robot to a bland sound-proof booth. In other words, we"re paying not just for the food but for a high-touch environment: a knowledgeable wait-person, a sommelier, an atmosphere of conversation, people-watching, etc.

As goods and services become commoditized, the cost of low-touch interactions declines and the cost of high-touch interactions rises.

For example, it"s easy to order a commodity set of house plans for $150 off the Internet. Hiring an architect with whom you establish a professional relationship will cost 10 times more for some consulting and 100 times more for a customized set of architectural plans and specs.

There are many other examples of the difference. Consider the future of medical care. Many observers expect robots to perform many routine care tasks such as visiting patients and making sure they are taking their prescribed medications. This is a low-touch interaction.

While ill people won"t mind interacting with a helpful robot, what they really want is a human being to stop in and express some interest and concern for their condition. This is the high-touch connection we all want as a human birthright.

A great many of the current jobs in our economies are low-touch, and these will relentlessly be automated, as the value of the human interaction is not worth enough to consumers to pay extra for. If consumers will pay significantly extra for a human taxi driver rather than an automated taxi, then human-driven taxis will be available. But if consumers aren"t willing to shoulder the higher costs of humans performing low-touch tasks, human labor in low-touch environments will disappear as a financial necessity.

One of my concerns is that high-touch interactions and connections may well become too costly for many people to afford.

This may not matter much, as most high-touch connections are not monetary--we communicate, share, and cooperate with friends, family members, neighbors, etc., and there is no direct financial facet to these transactions.

It seems obvious to me that we need a new organizational structure to enable high-touch transactions and connections that aren"t necessarily for-profit or personal (friends/family). This is the foundation of my proposed CLIME system: community labor integrated money economy-- that I outline in my book A Radically Beneficial World: Automation, Technology & Creating Jobs for All.

CLIME is a non-corporate, non-state platform for a high-touch, high-value-creating community economy.

Within the high-low-touch spectrum, clearly there is much middle ground between for-profit commoditized home delivery of goods (low-touch) and personal relationships (high-touch). This middle is what appears to be at risk of disappearing as automation eats up all the low-touch human labor.

This is not a recent trend. Labor"s share of the nation"s output (GDP) has been declining for decades:

The existing platforms of for-profit cartels/monopolies and the central state (government) are no longer able to provide enough paid work and high-touch services for everyone. We need a Third Economy-- what I call The Community Economy, with its own platform, network and non-state, non-central-bank-controlled currency.

Amazon is Now Worth More Than Every Store in the Mall Combined

Content originally published at iBankCoin.com

Everyone knew Amazon was crushing retail, dating back at least a decade. But for some reason, very few went through with the easiest pair trade of all time -- long AMZN, short shopping mall operators. What a simple, yet brilliant, trade. Is it not?

Here"s an old market cap chart of when Amazon topped Walmart. Now it"s worth two Walmarts.

Here"s another old chart that captures the spirit of Amazon"s sales explosion. The current annual run rate is in excess of $140b.

So how does Amazon"s $143b in annual revenues stack up against other retailers?

According to Exodus, there are 31 companies in the Apparel Stores industry, the names you"re all familiar with when shopping at the old dead mall, whose sales equal $107b combined, with net income of $13.6b. Their composite market caps are $81.69b, the inversion of the price/sales ratio is indicative of an industry in duress.

Amazon"s $143b in annual sales and net income of just $9b is rewarded with a market capitalization of $469b.

Think about that for a moment. The entire shopping mall, sporting +1.1% quarterly revenue growth, does more net income than Amazon, on 40% less in revenues, and yet Amazon is valued at 5x what the entire mall is being sold for on the market today.

The Department Stores are an even worse comparison. TJX, M, KSS, SHLD, DDS, JCP, SRSC, SHOS and BONT combined do revenues of $129b, netting $10.17b in income, yet the composite market caps are just $68b on -4.5% quarterly revenue growth.

I get Amazon is the future and they"re growing at 22% per annum. But is it worth more than all the department stores and apparel stores combined 3x over?

And now for the most egregious juxtaposition: Amazon vs the Discount/Variety Store industry.

The Discount Variety stores include WMT, TGT, COST, DG, DLTR, BURL, PSMT, BIG, FRED and TUES. An impressive set of retailers, no doubt. Together, they sport sales of $729b with net income of $51b, enjoying median quarterly revenues growth of nearly 5%.

Their market caps combined equal $389b. If you threw in another COST, you might get to match Amazon"s market cap.

Does any of this shit make sense to you?

Visualizing America's Retail Apocalypse

The steady rise of online retail sales should have surprised no one. As Visual Capitalist"s Jeff Desjardins notes, back in 2000, less than 1% of retail sales came from e-commerce. However, online sales have climbed each and every year since then, even through the Great Recession. By 2009, e-commerce made up about 4.0% of total retail sales, and today the latest number we have is 8.3%.

Here’s another knowledge bomb: it’s going to keep growing for the foreseeable future. Huge surprise, right?

SIGNS OF A RECKONING

Retailers eye their competition relentlessly, and the sector also has notoriously thin margins.

The big retailers must have seen the “retail apocalypse” coming. The question is: what did they do about it?

Well, companies like Sears failed the shift to digital altogether – in fact, it is even widely speculated that the former behemoth might file for bankruptcy later this year.

The majority of other companies, on the other hand, are trying to combine “clicks and bricks” into a cohesive strategy. This sounds good in theory, but for established and sprawling brick and mortar retailers with excessive overhead costs, such tactics may not be enough to ward off this powerful secular trend. Target, for example, has had impressive growth in online sales, but they still only make up just 5% of total sales. As a result, the company’s robustness is also in doubt.

Wal-Mart took another route, which could potentially be the smartest one. The company hedged their bets by buying Jet.com, which was one of the fastest growing online retailers at the time. Later, they followed up by buying an online shoe retailer to help fill a perceived gap in footwear. Recent reports have surfaced, saying that these acquisitions are leading to staff shakeups, as the company re-orients its focus.

After all, going online is not just a tactic to boost sales in the new era of retailing. It has to be a mindset, and one that is central to the company’s strategy. Hopefully Wal-mart gets that, otherwise they will also be in trouble as well.

APOCALYPSE NOW

In the midst of all of this is what is described as the “retail apocalypse”.

There are two main metrics that are pretty black and white:

Number of Bankruptcies: We’re not even one-third through 2017, and we already have about as many retail bankruptcies as the previous year’s total. If they continue at the current pace, we could see over 50 retailers bankrupt by the end of the year.

Number of Store Closings: So far we’ve seen roughly 3,000 store closings announced in 2017, and Credit Suisse estimates that could hit 8,600 by the end of the year. That would easily surpass 2008’s total, which was 6,200 closings, to be the worst year in recent memory.

Here’s some of the companies that have already filed for bankruptcy:

• Gordmans Stores


• Gander Mountain


• Radioshack (again)


• HHGregg


• BCBG Max Azria


• Eastern Outfitters


• Wet Seal


• The Limited


• Vanity Shop of Grand Forks


• Payless Inc.


• MC Sports

And here are the store closings occurring as a result of the retail apocalypse:

BofA Finds Surging Consumer Confidence Does Not Result In Higher Spending

While markets are closed tomorrow for Good Friday, the Census Bureau will release both CPI and Retail Sales data at their regularly scheduled times. And since it will be impossible to trade these numbers as they are released, here is a courtesy advance look from Bank of America which as usual has released its internal debt and credit card data in advance of the government report. What it found is that while there has been a slight improvement to the surprisingly poor data from recent months, it is nowhere near what one would expect based on near record consumer confidence surveys.

As BofA"s Michelle Meyer writes, according to the BAC internal card data, consumer spending improved in March relative to the weak pace in February. The bank"s estimate of retail sales ex-autos, derived from the aggregated credit and debit card data, increased at a 0.4% mom seasonally adjusted pace in March - the highest print in nearly a year - even as gasoline prices declined on a seasonally adjusted basis in March. While Meyer notes that this points to "healthy growth in core control retail sales released by the Census Bureau on Friday", she cautions that "the gain may not be quite as strong given that the BAC data had been trending below the Census and was therefore due for a bounce higher."

Furthermore, the monthly pattern has been particularly noisy of late – sales fell sharply in December (-0.9%), rebounded in January (1.6%) but slipped lower in February (-0.1%). There gave been a number of “special factors” which influenced retail sales, including the timing of the Christmas and New Year’s holidays and the delay in tax refunds which likely delayed spending from February to March. Therefore
it is prudent to smooth through the wiggles – on a three-month moving basis, retail sales ex-autos are up 0.6% mom, while retail sales ex-autos are up 4.5%

And while retail sales point to a modest improvement, Meyer writes that the potential rebound is nowhere near close to matching "the dramatic improvement in consumer confidence", which is also Bank of America"s Chart of the month.

To put it into perspective, the Conference Board measure of confidence has reached the highest level since December 2000 while earlier today the University of Michigan hit highest since November of the same year. Putting 2000 in comparison, back then retail sales ex autos were running above 7% yoy and in 2007, about 4% yoy.  BofA"s take:

While we think there are fundamental reasons for higher confidence – low unemployment rate, increasing wage growth, low borrowing costs and solid stock market performance – we believe that part of the increase in confidence reflects expectations for fiscal stimulus. In our view, there is a rocky road ahead for tax reform which we believe could trigger a partial reversal in confidence. Meanwhile, we expect actual spending to continue to grow at only a moderate pace.

It also means that, as cautioned here repeatedly, the soft data has now plateaued, and is rushing to converge with the "hard" data to the downside.

Some other observations:

don"t expect a sharp rebound in northeast spending.

• The Northeast was hit by a blizzard during the week of March 12th, dropping several feet of snow in parts of the region.


• We can see the impact of the storm in our card data. We find that card spending in the Northeast exceeded the rest of the country in the days heading into the storm as households presumably stocked up with necessities in preparation.


• This was offset by a meaningful drop in card activity during the storm. On balance, we estimate that the blizzard served as a very slight drag on overall spending in the month

Restaurant spending remains recessionary

• Spending growth at restaurants has generally been on a downward trajectory, increasing only 3.2% yoy in March.


• Part of this weakness reflects difficult year-over-year comparatives. As you can see from the month-over-month changes, spending at restaurants is still increasing on a sequential basis, but at a slower pace than last year.


• There was also an unusual swing at the turn of the year where spending was down sharply in December but climbed higher in January. We suspect this may reflect the timing of Christmas Eve and New Year’s Eve which both fell on Saturdays, therefore distorting the typical weekly spending patterns.

Finally, 4 more charts showing that whether it tracks confidence or not, the US consumer has seen far better days.