null Episode 13: Black Friday and Beyond
Double Take podcast

Episode 13: Black Friday and Beyond

00:31:30
Double Take podcast Audio Equity Multi-Asset
November 2020
Episode 13: Black Friday and Beyond

Mellon’s senior consumer analyst and outside consumer research provider review notable trends and changing consumer behaviors this year. We explore what trends and behaviors are likely here to stay as we enter the holiday shopping season. 

Inside Take: Corporations plan for the future

Rafe Lewis: Hello, and welcome to lucky episode number 13 of double take the Mellon podcast, where we indulge our intellectual curiosity and delve into big meaty themes impacting the public markets. I'm Rafe Lewis director of Mellon's investigative research team.

Jack Encarnacao: And I'm Jack Encarnacao a fellow traveler in the investigative machine here at Mellon, welcome all. On this episode, we take on a decidedly more sunny theme than pandemics sessions and contested elections. Yes, that's right. We're talking about holiday shopping, but of course it's not all sunshine out there, sadly. The aforementioned recession and pandemic have had major impacts on where and how we buy everything from toilet paper, to dinner. To better understand these changes and how long or short-lived they might be. We invited two big brains on the topic from inside of Mellon. We have Todd Wakefield, a senior portfolio manager with more than 20 years at the firm. Todd covers plenty of ground, but a favorite area in his investment universe is the consumer.

Rafe: And from outside of Mellon, we have Matt Powell, a senior consumer industry advisor at NPD group, which is a consumer research firm that gathers point of sale data from hundreds of thousands of retail locations as well, tens of thousands of consumer receipts as a panel, which provide deep detail into where, how, when and what people are purchasing.

Jack: All right. So let's start with Todd Wakefield who is taking his maiden voyage here on the good ship double take Todd, welcome to the show.

Todd Wakefield: Hey, thanks so much, guys. I'm thrilled to be on the show am big fan of the double-take podcast.

Jack: There you go. Good start. Good start my friend. Let's start off by confirming or dispelling a widespread notion if we could Todd. That black Friday shopping, which we're upon here, our most unusual one is a crucial element in fourth quarter retail sales. Is that still true? Are there still millions of people willing to crowd into malls and big box stores when we have a pandemic, and when it's really easy to sit around in pajamas and click buy now?

Todd: Hey Jack, I would disagree with that comment. It's still a big day for the retail industry, but it's not as important as it used to be. And I would say, especially for investors and for people who are listening to the media, the headlines about black Friday have been a much less important indicator for holiday sales than has been in the past. And I think a big part of this is the use of gift cards, and that has pushed the week after Christmas into just a huge part of the holiday season. So you really get snip it of the holiday read from black Friday.

Rafe: Todd, it's funny, you're saying this because to me it feels like every day is Cyber Monday now. And that makes me wonder about the real estate assets of brick and mortar retailers. So how should we think about the physical presence of stores? Do they still need all that space or do they paradoxically need even more space to deal with things like curbside delivery and buy online pickup in store?

Todd: I think your assertion is correct. And even more so with COVID. There's been comments recently from a large retailer, an Omni- channel retailer who has stores and e-commerce, and they said during COVID it felt like literally their e-commerce sales were like Cyber Monday every day. And that company with their stores has used the stores to an advantage, in that they are fulfilling both in store sales and omni-channel, or I'm sorry, e-commerce sales through the stores. So in their case, it's been an advantage it's helped reduce shipping costs for them. And a lot of their customers are increasingly liking curbside pickup, which also has helped their unit economics. I would say though, for most companies, the store fleet is a liability more than an asset. And we will continue to see, stores close and a lot of retailers come under pressure because they haven't made the investments and able to leverage the stores in an omni-channel environment.

Rafe: I know the question was about real estate and that's a different direction in a way than sales and the cadence of sales and what Jack was asking about cyber or rather about Black Friday and Cyber Monday. But this does raise a quick follow-up that I think is important to ask. Seasonality and retail has been pretty predictable for generations at this point, but is that something that's actually changing now and something you as an investor have to account for differently?

Todd: So Rafe, I would say that companies who have a lot of their profitability from the holiday season still have that, even though it's maybe spread out over a longer holiday shopping period. So as an investor, I typically want to shy away from companies that have that seasonality because it's really hard to predict holiday shopping and I'd much rather have a company that has more linear sales throughout the year and maybe less exposure, but tends to be apparel and some categories that are harder to forecast.

Jack: That's great. So Todd, as we're talking, my mind is going to retail inventories. You see stuff like patio heaters and badminton sets these categories exploding in pandemic. Are we going to see an Epic glut of merchandise as retailers play catch-up to this unexpected demand that we've seen?

Todd: Yeah. I think the exact opposite is going to happen this holiday period. I think listeners should get out and shop as soon as possible. There were a lot of orders that were canceled earlier in the year when COVID spiked in March and April and demand has come back much better than people expected. And we're going into this holiday season with relatively low inventories. And on top of that, there's a lot of bottlenecks in the supply chain right now. So there's a lot of inventory that retailers hope to get to customers in time for holiday, that I think maybe pushed out a little bit. I think your question really is more relevant for next year. And that's going to come down to, one, the health of the consumer next year, and two, how retailers plan for next year. I think, some retailers may say, Hey, this is a new secular trend and we're going to bet we can camp the camp next year. And some are going to plan more cautiously. I think there's a much better chance that next Q4, we end up having this glut of inventory.

Rafe: Todd, can I push back on that a little? Because what if little Johnny or little Sally doesn't get their gift, at the winter holiday here and the parents just cancel the orders, because they're not going to show up for the next two, three weeks. Isn't there some kind of inventory risk here on the problems that you're highlighting with the supply chain?

Todd: I say no. Because one, I think the message is out that consumers need to shop earlier and they are. And I guess I'd go back to a little bigger picture. One of the attractions of e-commerce has been taking friction out of the shopping experience and this holiday season, we're actually going to see quite a bit of friction in e-commerce. We're going to see orders canceled from retailers. We're going to see products show up maybe with missing parts or other quality issues. And by large, I think consumers are going to accept it because right now they're just happy to get product. During COVID a lot of consumers may have accepted quality and prices that they wouldn't have accepted in the past. And I think if the prospect is getting the gift a week after Christmas versus not getting a gift at all, they're going to wait that extra week.

Todd: And I think as an investor, what I'm looking for and I love consumer companies that have high net promoter scores. And this is a score that basically tells you how many customers would recommend the product to a friend or family member. I think those companies that can maintain high net promoter scores during this time of COVID are going to keep a lot of these new customers they've gotten. And I think a lot of companies who maybe disappoint the customer next year, they're not going to keep those consumers. So, that is really factoring heavily into how we're thinking about our investments in consumer companies today.

Jack: Now, Todd, I guess I should ask you, are there products that folks never really bought unless they could feel and look at them physically that are now migrating heavily online? What does that mean for legacy retailers who used to welcome folks, that was a big part of their value proposition to come in and actually touch the merchandise?

Todd: Yeah. What we're seeing with consumers is much less a need to touch and feel a product, especially big ticket products. And there's no better example than the auto industry, where used cars typically the consumer would want to go in and drive it and at least take a look at it and make sure it's not a lemon. And we've seen success. I'll be at off low numbers, but really dynamic growth for some new e-commerce companies who are addressing this opportunity in used cars. I'll go back to my friction comments. I think why these companies are so successful, is that the buying process for something like used cars been awful, the consumers hated it. So if a company is able to come out and offer the consumer a better experience, they're willing to forgo having to look at the car in a physical location.

Jack: So you're saying Todd, that those commercials I've been seeing all my life, where there's literally a car in the driveway on Christmas morning with a bow around it, something that I have yet to find a human being who's ever experienced, they're probably out there. Maybe actually will happen now because it's just a frictionless one touch be here on Christmas day?

Todd: Absolutely. And I would say the younger generations that are affecting a larger and larger part of the spending in this country, millennials and gen Z, they are much more willing to buy like that and not actually touch the product. They rely a lot in reviews online. And that's increasingly becoming more important in the buying or in the selling process.

Rafe: Todd, the unemployment rate has been coming back a bit over the last few months, but it's still darn elevated relative to where it had been. Why should we expect this to be a holiday period, anything like what we saw in 2019 or 2018?

Todd: Well, what I've learned over my career is that, holiday spending usually happens. The only time I can remember it really being down was in 2008 in the midst of the great financial crisis. And at that time, a lot of the stimulus was aimed at capital markets and not directly at consumers. They're in COVID, we've gotten significant stimulus directed at consumers and we've had elevated savings rates that I think can cushion some of the unemployment, at least during this holiday season.

Jack: Well Todd, we want to thank you so very much for lending your career of investment experience to double take, as we look upon a most unusual Black Friday, there're some things to look forward and some things that might remain just the same. So, we really appreciate you getting a start at this time around.

Todd: It's been a pleasure guys, have a great one.

Outside Take: Changing consumer behavior

Rafe: Welcome back folks so I'm just going to put it out there. Todd Wakefield is one of my favorite human beings. He's big into charity and philanthropic causes, his faith guides his actions, he's a seriously astute fellow. I personally always get a kick out of what's banging around between his ears and I'm just playing stoke that we finally had him on the podcast. But that said, let's turn the Sonic battleship and dive deeper into the fast evolving world of retail and the consumer with our next guest Matt Powell. So Matt has more than 40 years experience in the retail and research industries having counseled some of the world's biggest brands and retailers, he's a frequent speaker at major industry events and in short he knows where of he speaks. Matt's particular focus is in the outdoor, running paddle and snow sports categories as well as cycling and team sports. But he actually has visibility across a really broad spectrum of consumer retail trends thanks to his perch at NPD. Matt, welcome.

Matt Powell: Thanks. So great to be here.

Rafe: Well Matt we're heading into a most unusual holiday shopping season of course, the seasonality that so many brick and mortar retailers count on to put them in the black for the year is going to be anything but certain. We're seeing retailers plan single finer lines for black Friday if they're doing black Friday at all in person with social distancing in place and some retailers that traditionally launched the black Friday shopping season on thanksgiving or opting not to do that and closing this thanksgiving. I think we all expect less crowded malls but I suppose the question is in your mind how much less and how are you envisioning the customers and the categories you follow behaving differently in the midst of a pandemic?

Matt: Well, there's no question that uncertainty is the word of the day. We are really feeling that this holiday is changing on the fly. As we're seeing cases increased hospitalizations increase, we're beginning to hear of governors who are going to impose new shutdowns or lockdowns and how that all plays out remains to be seen. Probably the biggest change that we're looking at when we think about holiday is that it's going to be an extended season. We really believe that holiday kicked off a couple of weeks ago with Amazon prime week. Many retailers and brands responded to the prime event by running promotions of their own, which boosted their business early. I agree with you I think black Friday is going to be very disappointing in the physical store side. And then we really face what is an impending issue around shipping. And will the shipping companies be able to keep up with the demand and will there be earlier cutoff dates than we typically see which may force people back into store so, it's a wild one. We do think the business is going to increase this year, but there really are a whole lot of wildcards that are making it very difficult to put a hard number on that.

Rafe: You know, Matt on the shipping front. What I wonder is if a lot of the retailers are putting in orders earlier than they normally would given what we're expecting from this shop-ageddon, shop-pocalypse. And does that put them in a potentially perilous position? If, the business doesn't show up the way folks are expecting.

Matt: Well, it's interesting. I think that in most cases, the retailers placed their order sometime ago. The typically retail at least on the apparel side and on the equipment side does not react quickly like say the grocery business might. And so, it they've cast their lot some weeks ago. And I think in many cases the retailers and brands have played it safe saying we'd rather sell out and make profit on what we're sold than to have too much and lose business, lose profit because we have to take a lot of markdowns to clear.

Rafe: Matt it's almost like you're Johnny on the spot at the moment because we've spent the past six or seven months cooked up in our houses. Thanks to the pandemic and during that time sales of outdoor and sports related products seem to have been very strong. Can you give us a deeper view I mean how momentous has this pandemic been for the categories you hold nearest and dearest?

Matt: So, the home fitness business for instance, really took off almost from day one. As soon as states began to shut down gyms, the gym rats went out and bought a piece of equipment for their home maybe two, and that business has been up quite strongly all year. It slowed a little bit in recent months we think more because of the short... shortages, no one could have planned that the business would have been as strong as it's been so, there are clearly are shortages out there on home fitness equipment. The same thing happened in cycling and for a period of time, my store visits there were no bicycles available in major retailers across the spectrum that has come back a little bit, but again there's still inventory shortages. The outdoor industry is an interesting one. Parts of the outdoor business had been quite strong and what we're describing as sort of backyard outdoor activities, we're getting outside being with the family.

So grills and coolers and hammocks and recreational tents the kind of tent your kids can sleep in the backyard. All very very strong, the climbing business which had been really good going into the pandemic slowed up dramatically. That was being driven by people going to climbing clubs and those obviously got shut down in the lockdown. One of the other hot categories in outdoor were personal hydration bottles of water bottles, but as since people were not commuting or working in an office the need for a new water bottle went out the window, so that business had got hurt pretty badly. And then the hiking shoe business has been really good in recent months and that's encouraging that we may see a good season around outdoor apparel and footwear, but hiking we think is one of the categories that benefits from the pandemic.

We think that the consumer is going to be very focused on living healthy lifestyles coming out of this when we think about the casualties of the pandemic many of those folks were had pre-existing conditions overweight, smokers and so forth. And we think people are going to be more focused than ever on it living healthy lifestyles. And we think that social distancing will remain as an important social change and so activities that you can do outdoors that you can do socially distant we think are going to be winners. So we're looking at running footwear, hiking footwear, the canoe and kayak business has been really good the bicycle business has been really good as I mentioned. And so these are see changes in these categories.

Rafe: And it's funny you mentioned all this Matt, because just as you're speaking I'm getting all kinds of noise from outside of my home from all kinds of outdoor activities going on around me so, forgive the ambient noise folks, but I want to bore down on this a little bit because it sounds like your wager here is that this is a sustainable phenomenon and not kind of a one-time bolus of demand based on the fact that we're all cooped up. Can you go a little deeper into why you see this as a sustainable change with the consumer and not just a reaction to being locked down?

Matt: Sure, well I think there will be a lull to the business. I don't expect it to grow at its current rate I mean if for instance, if you bought a treadmill in June you don't need a treadmill for three, four or five years. And so I think that some of that bulge in the business that we saw is not sustainable, but going back to what I was saying earlier I think that there will be a renewed interest in living healthy lifestyles and being fit and taking better care of ourselves. And so I think that sustains and then I think things you can do outside people feel safer outside doing activities than being in a closed space and I think that's sustainable as well. So, I don't expect the growth rates to continue at the high level that they're at, but I do expect these categories to continue to grow.

Jack: Matt, if we can look at the flip side of that coin perhaps are there parts of your coverage that were hurt in the pandemic, it just seems at a broad stroke looking at what you cover that most of it are beneficiaries of the things you've talked about wanting to be outside and distant and do recreation outdoors. Have there been sources of pain within your coverage and do you expect those sources of pain to persist or are they just acute effects of the pandemic?

Matt: Yeah, that's a great question I think we have seen across the board not just in sports categories, but across the board real weakness in footwear and apparel and accessories. And we think that there is a consolidation that's happening in people's minds about their wardrobes. you go back 10-15 years ago, we had multiple wardrobes, right? We had a wardrobe for work and we had our wardrobe for the weekend and we had a wardrobe for working out and maybe we had a special occasion wardrobe and now it's down to one and it's cozy and comfy and things that I can do a yoga in or workout in if I want to. And so we've seen these multiple wardrobes really consolidate down to one wardrobe and I think that's driven the business backwards and the same thing with footwear by the way.
So, I think that those businesses have been really hurt. They likely will be the first businesses that start to come back as we come out of this in prior recessions we have seen these categories sink first and get hot first as we come out of it. So, the opportunity here I think is that business will come back, but for right now it's really been hurt badly.

Rafe: So, why don't we pivot a little bit from kind of what folks are buying to kind of where and how they're buying you folks at NPD do a lot of research into the consumer of course. So, why don't you help us understand how the consumer's kind of mindset has changed over the course of this pandemic? Are there other categories that used to have a very small percentage of purchases being made digitally that now have a large percentage that are happening kind of via e-commerce and what about curbside pickup? Is that something that's here to stay and do people actually like it or is it just kind of a function of what you have to do?

Matt: Well, there's no question that every category that we track e-commerce specifically in the NPD universe and we track about 20 different industries, every single one that we're tracking it has shown a surge in the business for instance, in footwear last year about 30% of all were bought online. And we think this year that number is going to settle out at 40%. We had predicted last year that it would grow to about 50% in 5-10 years. We now think that timeline has moved up three to five years in three to five months. And so, a significant sea change in consumer behavior there's no question that BOPUS curbside, BOPUS being buy online pickup in store and curbside pickup have both surged as well. We're having more things delivered. I'm the cook in my house and I was always a snob about going out and buying, picking out exactly the piece of meat that I wanted or the piece of fish.

And then the vegetables that I bought and today I just got a delivery from whole foods and I'm buying from them virtually every day. And I'm a little disappointed sometimes with what I'm getting, but you know what I feel very safe about doing it. And that is weighing over my snobbishness if you will. So, we think consumers have learned new behaviors whether it's buying sneakers or groceries online. And we don't think they go back. You asked about categories that have surged a really funny one, but when I tell you you're going to save sure. The slipper business has been absolutely sensational.

Matt: And so, people at home staying comfortable and comfort is a massive word right now in apparel and footwear cozy things, whether it's the pajama business has been very good again staying home and being cozy. The sweatshirt and sweatpants business has been really strong, the sports bra business has been very strong and I think that's more about comfort than it is about needing a bra to workout in. So, yes there are some sort of smaller more obscure categories like slippers that have been absolutely terrific. 

Rafe: Well, I'll tell you I'm in my formal hoodie right now. So, I've tried to diversify that portfolio. 

Jack: That's funny. Yeah, we all have our zoom wardrobes. I think that's the absolute truth. The button up we'd reach for in a rush, but in a hurry. So Matt, take us if you can into your mind when you picture the mall, the physical retail space, this holiday season it has to look different. We've gotten a sense from many prominent retailers of how they're going to handle traffic flow and as mentioned earlier how they're going to try to maintain social distance sitting at a time where, social distancing is hardly in keeping with the black Friday tradition that we know in this country. How do you think it's going to look and feel through the holiday season to shop in person how are stores physically going to alter their spaces to deal with a new reality and will any of those adjustments last?

Matt: Yeah, so they're going to have fewer racks on the floor so that there's more ability for people to space out. I think that we'll see fewer people in malls as you said that which will drive more business to the internet. I think retail stores are already starting to convert themselves into fulfillment centers either for online delivery or for curbside pickup. It will be a dramatically different world, but that said we're always going to have physical stores and their use, their purpose may change to be more focused on experience and to be, to test the product, to try the product and less about fulfillment. For instance, I think also that the lines between online and physical store continue to blur for instance, buying online pickup in store, the purchase initiated online, but it culminated in the physical store.

So which is it, an online purchase or a physical store purchase. And I have retailers who argue well, it started online so that's where it goes and other retailers just say no, it involved a store associates so we're going to assign it to a stores number. And so, the lines are clearly blurring between no physical purchase and an online purchase and we may not even talk about that in the future because it's become so blurry, but there clearly will always be a need for physical stores and we have far too many stores today selling too much of the same stuff. And we're going through a very painful rationalization to that. But I think these stores are always going to exist, but they'll be operated differently than they are today.

Rafe: That's very helpful I would think putting two and two together from everything you just said it sounds to me like perhaps the retailers who do the best job at fulfillment and kind of customer support and making this an easy, as frictionless as possible are probably going to win the day. Well, last one here Matt, from what I gather NPD as a product that purports to offer an early indicator of retail economic activity. So, kind of pull out your crystal ball a little bit here tell us looking into 2021 you know what does the future hold for being able to make that and beat these comps and look onward and upward.

Matt: Now we've been spending a lot of time on our future of footwear and future of apparel studies and we think next year is going to be better than this year, but we don't think it hits 19 levels. And we think it will be 22 or 23 before we actually hit 2019 levels again. So, it's going to be a slow slog to get back and I actually I think this is an opportunity for brands and retailers to take a step back and talk about, what do I want to look like on the other side of this? What kind of company do I want to be? How many locations can I pair out? How do I improve my systems in my website to make that purchase interaction more frictionless as you said and not try to grow back to 19 levels overnight. I think we need a little bit of a break here and reinvent the business as we think about where it's going.

Rafe: Matt Powell from NPD, tremendous to have you thanks so much for your  . And we look forward to seeing what the other side of this looks like I think that's a unanimous sense of it. So, thanks for helping us chart the course of it here on double-take.

Matt: Thanks for having me.
 

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