Robert Loftus'  Instablog

Recently several apparel retailers have posted less than impressive gains in their quarterly reports.  GAP stores and American Eagle Outfitters are two notable examples.  Investors may want to consider a concept related to the marketing of Chinese made consumer goods.  That concept -referred to in the title of this article- is Brand Exhaustion.  Brand Exhaustion occurs when a formerly respectable name brand loses cache with consumers because that retailer attempts to charge premium prices for goods while failing to differentiate themselves in the market-place by providing a superior quality product.   Those retailers are essentially trying to earn a retail premium based solely upon their name brand.  A culture of excessive brand-pride amongst America's shopping mall retailers seems to have led to an inability to understand consumer sentiment. This appears to be an issue of retail culture that and created endless opportunities to short mall-based retail stocks.      

"You can fool some of the people all of the time; you can fool all of the people some of the time; but you can't fool all of the people all of the time." 

Abe Lincoln

Retailers should have seen this coming and prepared for this outcome.  Attempts by some retail firms to blame profit shortfalls on cotton prices and shipping costs fall on deaf ears when it's common knowledge that markups on Chinese made apparel can exceed the 1000% mark.  Also, given the massive decline in CRE values over the course of the last few years these retailers should be posting massive gains as a result of significant cost-savings through the re-negotiation of CRE leases.  For America's shopping mall retailers to have operated all these years under the assumption that consumers were desperate for brand-names and had no interest in or concern for quality was to assume a customer-base of fools. During the Cold War years Americans made fun of Russian blue-jeans because of stories about the blue dye coming off on your socks when you wore them or the crotch of the jeans tearing out if you bent or squatted over while weariing them; I've heard similar complaints about jeans from the Hollister store.  Eventually, no matter how much cache a brand name may have, if the quality of the product being sold is sub-par consumers will start to pass by the store rather than shop the store.  Furthermore, it's no secret that "Made in China" fatique is a growing issue with many American consumers and failure to diversify product lines to include products made in North America and the European Union is not acceptable to some consumers.  

I believe the issues of brand exhaustion is endemic to the majority of America's shopping mall chains, and expect weakness across this entire sector throughout Q2 and Q3 of 2011.  




Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Lately many have been debating the issue of whether demand destruction for gasoline is really occurring.  This author believes there are multiple factors pointing toward the likelihood of demand destruction, and I intend to provide a brief illustration of key factors pointing to the Demand Destruction outcome: Consumer reaction to high gas prices; dollar per mile versus dollar per gallon concerns and demographic factors.  

Consumer Reaction to High Gas Prices 

Recent EIA oil inventory reports have indicated a gradual decline in the amount of gasoline delivered to market.  The EIA Weekly Oil Inventory Report for the week ending April 29th indicated that gasoline consumption had fallen 1.9% compared to the same period last year.  Given that the economy has returned to growth within the past year, one would expect gasoline consumption to have increased rather than decreased.  Therefore a consumption drawback of 1.9% may be considered comparable to the 4% decline in gasoline consumption observed during the Price Spike in the Summer of 2008, when the economy was slowing.

Recent news reports of significant increases in YOY profits for oil and gasoline refiners and retailers in spite of a decline in production volumes have done the industry no favors in terms of public perceptions.  Sales of small cars have increased.  Every time the price of gasoline approaches the $4 mark consumers start switching over to smaller vehicles.  

Dollars Per Mile versus Dollars Per Gallon 

The issue that really affects consumers is not how much they pay per gallon of gas but how many miles they are able to drive for each dollar they spend on fuel. There's no denying that the recent increase in gas prices has had a greater effect on owners of SUVs and pickup trucks that get less than 20 mpg than it has had on owners of smaller cars that get better than 30 mpg.  According to Department of Transportation figures, the average US fleet fuel efficiency of passenger vehicles for 2008 (the last year for which fleet figures are available) was 22.6 mpg.  This is quite a bit lower than the 2010 figures for new vehicle fuel efficiency ratings of 33.7 mpg for passenger cars and 25.1 mpg for light trucks.  The reason this comparison is important is that if consumers react to high gas prices by driving fewer miles on an individual basis - which leads to relative stasis in the total number of miles driven per year -then a 1% decline in national consumption only requires an increase in fleet mileage of roughly 0.015x, where x is the fleet mpg rating from the previous year.  Given the significantly greater mpg ratings for new vehicles, such an increase in national fleet fuel consumption is easily attainable, it's a change that doesn't require everyone go out and buy hybrid cars, and it's a change that automakers seem ready to make.  Also, higher gas prices lead to reduced demand for used SUVs and pickup trucks, which means those vehicles see greater depreciation.  Vehicle depreciation figures and Blue Book values can impact consumers' purchase decisions and are likely to lead to reduced overall demand for large vehicles in the future, which creates a likelihood that fleet mileage figures will increase more rapidly.  

Demographic Factors 

As more of the Baby-Boomers decide to retire the total number of Americans who are driving to work everyday is likely to decline.  If fuel prices remain high then the number of Baby Boomers who choose to pursue interests that involve using a great deal of fuel -like recreational boating or RV touring- is likely to decrease. Fewer commuters, fewer people gasing up at the boat dock and fewer people deciding to drive America in a giant 40' mobile home all point to less annual growth in the total number of miles driven (on land or water) and reduced fuel demand given increasing rates of efficiency. 

Consumer responses to high gas prices, the dollars per gallon versus dollars per mile problem, and demographic factors all point towards demand destruction. Some of these factors are inevitable, and oil refiners and gasoline retailers can -as they've done recently- end up magnifying their own troubles.  Others are unavoidable by-products of an aging population.  While others are the result of business decisions made in response to consumer demand.  Given this combination of factors, the existence of demand destruction seems inevitable. 






Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

American workers have been the subject of efficiency studies, job-losses in the name of "economies of scale" and out-sourcing for many years.  Home ownership has not benefited from these same kinds of advances in efficiency and viability.  American culture has put the ideal of home ownership on a pedestal, as a means of building stable communities with a reliable tax base for the support of municipal functions.  Given the state of the modern economy, and demographic trends which apply to younger people today, home ownership has become an untenable position, and an irrational choice for those who are expected to switch careers and follow the jobs as necessity demands.  The above conditions have been brought into stark relief by the recent sub-prime mortgage bust.  The traditional model of individuals and families purchasing homes as an investment has become out-dated and irrelevant.  The only hope for a significant revival in RE markets will be the formation of large scale holding companies that are able to make use of significant economies of scale in negotiating purchase contracts, performing property maintenance and negotiation of property tax rates.  Until we start to see significant growth in those types of property holding firms, and significant increases in the amount of rental property available for a highly mobile working population, RE indexes are likely to indicate a steady and long-term downward trend in RE prices.  Without some degree of innovation in current models of property ownership, this author fully expects to see the 20 City Case-Schiller composite index well below the 100 mark before too much longer.  

This change will be violently opposed by many in the Real Estate and home improvement industries, as it means their cash cows - individual homeowners - will be replaced by professional property managers who are going to be far more savvy in negotiating commission rates and materials costs.  Those industries will have to adapt to changes in home ownership models, or see a continuous down-trend in sales that will likely far exceed the losses they would face in a world of large scale RE Holding firms.  Municipalities will also have to adapt.  Property tax rates in many communities - especially in the Northeast have reached the point of the ridiculous.  In some areas of New York state local taxes on a $250,000 home can exceed $1000 per month.  Areas that are suffering from high rates of property foreclosures will have to be prepared to offer PILOT programs for RE developers who are able to soak up large portions of foreclosure inventory and turn those properties over to create reasonably priced rental property.  

The outcome described above is the only realistic means for RE markets in this country to ever stabilize.  Sitting around waiting for an increase in Mortgage applications is - at this point - about as productive as watching pigs and waiting for them to grow wings. 



Disclosure: No Positions