Marcuard's Market update by GaveKal Research
The good news is that the Black Friday shopping scrum in the US passed with minimal casualties caused from stampedes, only scattered gunshot incidents and no reported shopper-on-shopper pepper-spray attacks. The bad news for traditional retailers, at least, is that overall sales were down by -2.9% compared to last year, even as online sales look to have soared. As of noon on Friday, Amazon and eBay, for example, had reported that sales were up by 25% and 35% respectively from the previous year’s day-after-Thanksgiving sales.
Whether this could possibly justify Amazon’s valuation of 90x estimated earnings is highly debatable. But the fact that one of best-performing major stocks this year is distinguished by its ability to slash prices does raise broader questions about the future of retail? Never mind that Amazon plans to pepper American suburbs with unmanned delivery drones, should the rest of main street worry that its growing market-heft will eventually squeeze the margins of the broader sector to pulp? And is this trend yet another manifestation of automation in all of its manifestations having a profoundly deflationary impact?
Whether or not the global economy risks entering a broadly deflationary environment is a subject of discussion here at GaveKal—we will publish a debate on the matter later this week. What is less controversial is the fact that purveyors of consumer goods operate in an era when global competition and manufacturing enhancement is constantly eroding pricing power. And yet the impact of these forces is not all negative.
This is because on one side of the ledger, companies face falling average selling prices; on the other side is a remarkably malleable cost environment. Thanks to just-in-time inventory systems, robot-run warehouses and disciplined wage demands, it is very possible to manage costs even sale prices are being driven lower. Will Denyer and Tan Kai Xian highlighted this point a paper last week on why the US profit share in US national income will remain at current above-the-mean levels for the foreseeable future. Pressure for higher wages remains especially muted in large part due to disinflationary pressures from technology and globalization.
This is not to underestimate the disruption caused by the rise of online distribution channels. Big name retailers such as Circuit City have gone to the wall, while the music and publishing industries have seen their entire operating model turned upside down. Yet as a broad group, bricks and mortar retailers are not doing too shabby. The S&P retail index enjoyed an average operating margin of about 8% in the past decade, compared to 6% in the prior decade. WalMart is one of the ten highest-earning US companies and despite recent earnings disappointments, on Friday the stock was driven to a new high.
The biggest challenge looking forward for companies is not profit margins – the labor squeeze looks very long term – but rather revenues. Efficiency after all has a downside: robot-run production lines do not clock off shift and buy consumer goods. This could explain why investors are willing to bid up stocks that have the increasingly rare status of strong revenue growth, like Amazon. The symbol is as potent as it is unnerving: the new “scarcity play” may just be revenues.
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