Shopping is important. It is more than just the next big sale, a Christmas gift for the kids or popping to the store for latest gadget. Shopping, or as an economist would refer to it, consumption, is the lifeblood of a modern economy, making up over 70% of all economic activity.
While the environment for consumers has been tough, recent signs look better. This underpins a more buoyant economic outlook for 2020.
Of course, how we shop is changing and changing dramatically. That has led to significant changes in your portfolios. In short, retail is out, and brand, logistics, payments and data is in.
Where consumption goes there goes the economy
It is not a stretch to say that where consumption goes the global economy goes. If consumers are confident and spending, it is likely the global economy will muddle along. If not it’s bad news.
Life has been difficult for consumers in recent years. Income growth, particularly for middle and low income earners has been anaemic. Low interest rates, despite what many economists would have predicted, have prompted people to save and not spend. And the aging demographic, particularly in the Western World, has meant that consumers are more likely to buy healthcare services than the next new thing down at the mall.
Despite the head winds, consumers are picking themselves up and getting out shopping. These signs of life have led economists to upgrade growth forecasts for next year and have meant fears of recession, which plagued the market in recent months, have receded. It is these fears slipping into the background that led to the superb returns investors enjoyed in November across most share markets.
Black Friday paints a picture of consumer behaviour
If you are like me, emails and digital ads have been bombarding you, shouting about the wonderful sales over what is the Thanksgiving weekend. Yep, another piece of America has made its way to New Zealand stores (joining the party with Valentine’s Day and Halloween).
According to Paymark data kiwis spent $71.4m (excluding grocery and hospitality) this Black Friday, November 29, outpacing spending on the same day last year by over 20%. Black Friday has become the second biggest shopping day (oddly enough behind Easter Thursday) of the year. New Zealanders were out at the proverbial mall in force.
Data from the US gives us a more nuanced picture. Black Friday is an institution in the US and is a great gauge of health of consumer providing useful insight into the important underlying trends in retail.
The numbers are big. The National Retail Federation expects US shoppers to spend more than $725b over the Thanksgiving holiday including Black Friday. This will surpass last year’s spend by a healthy 4.2%. The US consumer is increasingly confident, a view that is echoed by broad consumer confidence surveys and recent wage growth data.
How we shop has changed.
Black Friday is not what it once was. In fact sales in bricks and mortar stores look to have fallen this year on Black Friday itself.
Cyber Monday is the new kid on the block. Cyber Monday was invented by ecommerce retailers and now boasts higher overall sales than Black Friday. Adobe Analytics forecasts that this year sales will top $9bn, growing by 18.9% on last year.
For traditional retailers the increasing penetration of online sales spells risk. Retailers need to change quickly to adapt to the new World of ecommerce.
Macro trends and our investment approach
Over the years, Fisher Funds has invested in a number of retailers and made good money from it. However, it’s notable that many of these companies, while successful when we owned them, have gone on to have much murkier futures or, in some cases, to fail as businesses.
Clients may remember that we have owned and profited from the likes of The Warehouse, Pumpkin Patch, Kathmandu and Michael Hill in New Zealand and companies like Nick Scali, a furniture retailer, and The Reject Shop in Australia. Unfortunately, many of these venerable brands are just shadows of what they once were.
Success in retail now necessitates doing things differently. It is a very tough industry.
For us, in most cases, it is too tough. We prefer to invest where the risks are lower.
That said we are enticed by the growth opportunities in supporting consumer spending. This has meant that rather than invest in retailers directly we look to other parts of the consumer value chain for opportunities.
In our view, there are more interesting investments in the owners of valuable consumer brands, in transport and logistics, in payments or in the providers of data and advertising services to e-commerce.
On the rare occasion, we do invest in a retailer they need to be highly differentiated.
So maybe to wrap up, and one for the Star Trek fans, “it’s retail Jim, but not as we know it.”
