Stocks fell once again yesterday. Trade talk now suggests that there may not be a deal with China before mid-December. President Trump has previously announced another tranche of tariffs to go into effect on December 15th. Obviously, he believes that threat is leverage to get him the deal he wants. But China isn’t budging, at least not yet. These things always seem to go down to the last minute. Markets are assuming, deal or no deal, that President Trump won’t institute new tariffs just before Christmas. But he can’t cry wolf indefinitely either without backing them up. As December 15th approaches, it is quite likely that market volatility will increase until there is some resolution to the tariff issue. Either there will be some sort of mini-deal or more tariffs will be put into place. Of course, a third possibility is that talks simply continue and President Trump delays implementation of the next round of tariffs. Indeed, that is what markets appear to expect. Any deviation will be matched by a move, up or down, in markets.
On Wednesday, I discussed the woes of retailers. Since then we have seen disappointing earnings reports from Macy’s and Gap Stores, and positive (at least compared to expectations) numbers from Nordstrom. Once again, the company that has invested has been more successful than the two that have changed more slowly. Gap’s strategy in response is to split off its Old Navy division from the rest of the company. How that adds value or solves its competitive deficiencies is beyond me. Macy’s blamed weather and the lack of tourists but the retailers that did well didn’t cite weather as a headwind. If Macy’s wants to figure out what went wrong, it should look inside the company, not outside. In contrast, Nordstrom has spent years investing in a more effective multi-channel presence. One of the new acronyms of this generation is BOPUS. BOPUS means buy online, pick-up at the store. It isn’t the only way that retailers sell on line; they also can deliver directly. But it is the preferred way. To get there, retailers offer incentives. Perhaps there are not shipping or return charges if you pick up at the store. Perhaps, in the case of a fashion retailer like Nordstrom, you can buy online and then have alternations done at the store of your choice. No more going to one store and finding out your size is only available at another store 20 miles away.
Executing omnichannel strategies isn’t cheap. Stores must be reconfigured to handle pick up within the store or delivery at the curb. They need to handle returns more efficiently. Stores within a metropolitan area need to be able to coordinate seamlessly. Companies like Nordstrom, Wal-mart#, Target, Home Depot# and Lowe’s# have spent years implementing and perfecting these strategies. Finally, they are starting to work. Nordstrom faces more headwinds than the others. Malls are seeing lower traffic. Many of its stores are mall-based. Apparel sales lack the rest of retailing. Nordstrom is all about clothes. But the secret to retailing success is the ability to adapt. Otherwise you die. We all go to Home Depot or Lowe’s. There is no more Hechinger store. Ace Hardware is losing share. Wal-Mart and Target aren’t gaining share as much as they are executing better. Speaking of execution, does anyone come close to matching Costco when it comes to the warehouse store concept?
The world of haves and have-nots isn’t isolated to retailing. In a world that has been growing at about 2% in real terms and 4%, plus or minus, in nominal terms, the best take share and grow while the rest loose share and, at best, move sideways. It’s hard to stay on top. Think about a restaurant you frequented 20 years ago. Does it even exist today? What does exist is McDonald’s# and it remains relevant because it has constantly innovated and upgraded its operations. Its food was never gourmet and one could easily argue it is no better or worse than it was 30 years ago. But it provides value and convenience. It’s consistent. Think of all the chains that have come and gone in the interim.
It isn’t just about the consumer. The same points extend to almost every industry. Steel mills that haven’t invested have closed instead. In technology, Microsoft# needed new leadership to hyperspeed its move away from Windows and PCs to the cloud and enterprise software. Even the winners change. During the Internet bubble of the late 1990s, Amazon was an online retailer of books. But it was its move toward being the logistical support to other independent online retailers and its development of public cloud services that led to its explosive growth of the last decade. Netflix started by renting you movie CD’s through the mail. Today its success is worldwide and based on original programming that others are struggling to match. Apple knew the smartphone market would mature quickly. While it introduces new and improved phones each year, everyone around the world has one now. Growth going forward is going to come from services and new products like ear buds and watches that integrate with its phones and computers. Everyone of these changes were built on years of large investment.
You will be very hard pressed to find a successful company that hasn’t invested more and more each year. Look at the difference between Kraft Heinz, which tried to grow profits by cutting costs, and Coca Cola which has had to invest in new products as new generations moved away from traditional cola drinks. That doesn’t mean, however, that all companies that invest heavily will succeed. We have no idea yet whether Uber and the ride sharing business will be profitable at scale. How does the model change in the future when Uber has to own the driverless cabs? Will it keep its advantage or will a manufacturer of autonomous vehicles add ride sharing services and be the winner? We can all guess but no one knows. Even winners like Amazon go into new markets and fail. Does anyone have an Amazon phone?
The bottom line is thus:
- To win and stay on top, you must invest.
- You need to recognize change and adapt. Indeed, many winners create the disruption that causes the need to change.
- If the economic model changes, you will fail trying to protect your legacy business. Think Kodak.
- The winners have to get the formula right. Recognizing the need to change doesn’t guarantee you will change successfully.
- Often changes take years to implement and they can be costly short term. However, if your plan is right, your owners (shareholders) will stand by you. The right decision will always win in the end.
- Each generation brings new winners because the new entrants aren’t held back by needs to support legacy businesses. But most new entrants fail for lack of capital or management expertise. As a newbie, you can beat the incumbent for a while, but you need to invest heavily to stay ahead. Please pass me my Bowmar calculator. No? Then email me to my AOL address.
What we know in the stock market, especially in a market that has moved sideways (with lots of ups and downs) since early 2019, is that winners in a slow growth economy are the companies that invest to stay relevant and gain market share. The losers cut costs to stay alive. You rarely can win while losing market share. In tough times, the wheat separates from the chaff. Winners and losers are revealed. Winners don’t stand still. They keep innovating. I have no idea how the streaming wars will turn out but I believe strongly that Netflix will remain a market leader and relevant because it understands the need to stay in front and will spend to do so. Its stock may or may not be a winner for a variety of reasons but the company that persistently invests less and blames the weather for its problems will persistently come up short. Look at your portfolio and get rid of those trying to defend their legacy. Invest in companies moving forward. Not all growth strategies will work but without one, failure is going to be the net result.
Today, Scarlett Johansson is 35. Mark Ruffalo is 52. Billie Jean King turns 76. And, of course, we all remember where we were 56 years ago today (assuming you are at least 56 years old!) when you heard the news of the assassination of John F. Kennedy.
James M. Meyer, CFA 610-260-2220