Money And Change

Why the Retail Crisis Could Be Coming to American Groceries
These five forces are going to shake up the American supermarket.
 
by Craig Giammona     Bloomberg.com
May 4, 2017, 5:00 AM EDT

The American grocery store has so far been mostly immune to the ravages of online shopping and the all around apocalyptic outlook facing the nation's retailers. But a war is coming to the staid supermarket, and that could mean more consolidation, bankruptcies, and falling prices.
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An invasion is getting under way. Lidl, a German retailer known for low prices and efficient operations, is expected to start an aggressive U.S. expansion in the coming weeks that could open as many as 100 new stores across the East Coast by the summer of 2018. The company, which runs about 10,000 stores in Europe, has also set its sights on Texas, one of the most competitive grocery markets in the U.S. Analysts expect Lidl to expand to nearly $9 billion in sales by 2023.

The last thing U.S. grocers need is more cutthroat competition. As the ranks of U.S. grocery stores have swelled, food has become a way for struggling brick-and-mortar retailers such as dollar stores and pharmacies to compete for customers. Even though groceries have been somewhat insulated from online pressure, Amazon.com remains dedicated to cracking the code, finally, on fresh food.

"It's an intimidating time for a lot of these retailers," said Jennifer Bartashus, an analyst at Bloomberg Intelligence. "We're poised to see a lot more change in the next couple of years." These are the five forces that are going shake up the landscape of American groceries. 
 
It Looked As Though There Was Safety Selling Food

These are tough times for the U.S. retail industry, with stores closing at a record pace so far in 2017. It’s no secret why: Amazon is gobbling up more and more sales of clothing, electronics, and other items that once drew shoppers to department stores and malls. The grocery business has been a safe haven in recent years. Only about 1 percent of the roughly $1.5 trillion industry has moved online. That’s made supermarkets an attractive real estate tenant in an era when other shopping has moved from the mall to the living room couch. The reliability of food sales has also drawn more and more stores into the market for prepared food, snacks, and other traditional grocery items as a reliable driver of store traffic. After all, we have to eat and get more garbage bags.

“It’s perceived as relatively impervious to the shift online,” James Cook, director of retail research at JLL, said of the grocery business. "For most of America, food is not purchased online.”

Now Groceries Are Everywhere

More food is sold in more places these days, with pharmacies and dollar stores looking to groceries to lure customers. Dollar General alone added more than 900 stores last year, ending 2016 with more than 13,000 locations. The chain, which generates roughly 75 percent of revenue from consumable items such as food, soap, and paper towels, is planning to open another 1,000 stores this year. CVS, which operates nearly 8,000 standalone locations, is betting on food to boost store traffic. Like other pharmacies, where shoppers would traditionally visit to pick up deodorant along with a prescription, the chain has boosted its food offerings to add more healthy snacks and grab-and-go options.

Grocery Prices Are Falling Fast

All this competition has come amid an historic bout of food deflation. Grocers have engaged in a price war that has been a boon for consumers while weighing down on corporate earnings—and those trends will only get more intense once Lidl opens its doors in the U.S. The company has long battled rival German grocer Aldi in markets across Europe. Both companies have taken on entrenched grocers and eaten into market share with their low prices and no-frills stores. Aldi, which has more than 1,600 U.S. stores, has spent the past couple years preparing for Lidl's arrival by aggressively expanding in Southern California and spending $1.6 billion to spruce up its locations. That has put pressure on Wal-Mart and the dollar stores in the competition for budget-conscious shoppers. Wal-Mart Stores, which generates more than half of its revenue from groceries, has been working to improve its fresh food offerings. The retail giant's low grocery prices have made things tough for Kroger Co., the largest supermarket chain in the U.S.
Lidl is slated to open 20 locations in Virginia, North Carolina, and South Carolina this summer and could reach 630 locations over the next six years, according to Kantar Retail. The company had sales of roughly $69 billion last year. Expect Lidl's entrance into the U.S. to ramp up the price war and possibly force smaller, regional companies to close or consolidate. "It's definitely making the regional players nervous," said Bartashus. "It's like a stack of dominoes; it takes one thing to tip it, and they all start moving in one direction." 

Trips Americans made to buy food rose rose 1 percent last year, according to Nielsen data. That may not sound like much, but it's the first annual gain in at least a decade. The shift in shopping behavior is being driven, in part, by the increasing preference for fresh food. Americans are shopping more often and buying fewer items per trip. The weekly trip to load up the station wagon is also being supplemented by everything from meal-kit services, such as Blue Apron, grocery deliveries, and visits to the local farmer’s market. The grocery business is known for its razor-thin margins and survival driven by repeat business. The fracturing of this pattern is a long-term risk for grocers, who have responded by boosting prepared food offerings.

Amazon Is Hungry for Groceries

So far, at least, e-commerce has struggled to encroach on the grocery business. Amazon has tried for nearly a decade to find its way into delivering fresh food without much success. Now the online retail giant is opening brick-and-mortar stores, experimenting with drive-in grocery kiosks where consumers can pick up orders, and working on a hybrid supermarket that mixes the best of online and in-store shopping. Even though customers have been slow to adopt delivery for groceries, the business is expanding. There was a time when analysts felt consumers would never buy shoes online because they wanted to try them on. That sentiment is still applied to grocers—most people, the thinking goes, still want to touch the avocados or talk to a butcher. The looming threat of Amazon's encroachment is another potential headwind for the grocery business. 

Are American Debt Slaves Getting In Trouble Again?

ZeroHedge.com      May 2, 2017 12:09 PM
 
Authored by Wolf Richter via WolfStreet.com, 

The economy depends on them, but they’re cracking.

American consumers are holding $1 trillion in revolving credit, mostly in credit card debt. So how well is this segment of consumer debt holding up?

Synchrony Financial – GE’s spin-off that issues credit cards for Walmart and Amazon – disclosed on Friday that, despite assurances to the contrary just three months ago, net charge-off would rise to at least 5% this year. Its shares plunged 16% and are down 27% year-to-date.

Credit-card specialist Capital One disclosed in its Q1 earnings report last week that provisions for credit losses rose to $2 billion, with net charge-offs jumping 28% year-over-year to $1.5 billion.
Synchrony, Capital One, and Discover – a gauge of how well over-indebted consumers are managing to hang on – have together increased their Q1 provisions for bad loans by 36% year-over-year. So this is happening.

Other worries about consumer debt in the US are piling up. The $1.4 trillion in student loans are already in crisis, though the government backs them, and they cannot be charged off in bankruptcy. Mortgage debt is still hanging in there, given the surge in home prices that make defaults unlikely. But of the $1.1 trillion in auto loans, subprime loans packaged into asset backed securities are getting crushed by net charge-off rates that are worse than during the Financial Crisis.

The US economy is fueled by credit. Americans turning themselves into debt slaves makes it tick. Take it away, and what little growth there is – nearly zero in the first quarter – will dissipate into ambient air altogether. So it’s time to take the pulse of our American debt slaves. In a new study, life insurer and financial services provider Northwestern Mutual found that 45% of Americans that have debt spend “up to half of their monthly income on debt repayment.” Those are the true debt slaves.

Excluding mortgage debt, American carry an average debt of $37,000. Of them, 47% carry $25,000 or more, and more than 10% carry $100,000 or more in debt, excluding mortgage debt.
Most of them expect to get out of debt before they die, but 14% expect to be in debt “for the rest of their lives.”

This debt adds stress. About 40% said that debt has a “substantial” or “moderate” impact on their financial security; and about as many consider debt a “high” or “moderate” source of anxiety. Given the rising defaults, this is likely to get worse.

And what changes would most positively affect their financial situations? The top two: earning more money (29%) and getting rid of debt (26%). Alas, those two, for many people, are precisely the most elusive factors in the current economy.

But there is a lot of irony in how Americans look at debt. The study asked them what they would do with a $2,000 windfall: 40% said they’d pay down debt. And this is the irony: they’d pay down their maxed out credit cards, but a few months later, their credit cards would be maxed out again, and thus that $2,000 would be consumed. Because the money always has to get spent.

It’s not like consumers don’t know this. According to the study, one quarter of Americans flagged “excessive/frivolous” spending as the financial pitfall they are prone to. And how are these debt slaves keeping the plates spinning? According to the study:

• 35% said they pay as much as they can on each of their debts each month.
• 19% said they pay off debts with the highest interest first and make minimum payments to others.”
• 18% (and 25% of Millennials) said they pay what I can when they can.
• 17% make minimum monthly payments to each creditor.
  
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The study didn’t say how many of them are beginning to fall behind on their debts. But that number is growing, as the soaring net charge-offs at Capital One, Synchrony, and Discover show.
“One of the hardest challenges is resisting the urge to splurge on items that are beyond our budget,” explained Rebekah Barsch, VP of planning, Northwestern Mutual. “While giving into temptation can feel good in the short-term, it often contributes to an ongoing cycle of buy and borrow that can become hard to escape.”

All the more so because buy-and-borrow has become the replacement American dream for a large number of people – with the corollary: if you can borrow more, you can buy more. But these debt slaves are a crucial driver of the economy. Spending money they don’t have on goods and services they cannot afford and may not need keeps the economy from sinking. If they ever started living within their means and paying off debt as they go, the economy would quickly reveal its true colors.