Tuesday, August 13, 2013

Department Stores vs. Nonstore Retailers: A Zero Sum Game

Click to enlarge.

Click to enlarge.

This is what we know.

1. If the trend continues (might not), department store sales go to zero and department store employees go to zero.

2. If the trend continues (might not), there will be an exponential trend failure in nonstore retailer sales in the not too distant future. Much of the nonstore growth is apparently coming at the expense of department stores. There's only so much blood left to squeeze dry.

3. If the trend continues (might not), then Bill Ackman made an even poorer long-term decision to invest in JC Penney than most believe. What was he thinking?

4. Historically speaking, it was dangerous to invest in the stock market when the the real spending per capita was near its peak. That's assuming Dec 2000 and Feb 2007 would not be considered particularly good entry points of course. As a side note, we may be very near a peak right now. The recent peak was in April at $164.55. As of June, we're down 97 cents to $163.58. It's noisy data. Hard to say if that was the ultimate peak in this cycle. I can say that the peak in the last cycle was $163.67 though. The retailer "recovery" therefore seems complete. Yay.

We don't yet know the data point for July since the CPI for July hasn't been released yet. I suspect that it won't be pretty though. Many nominal dollars were spent on food and gasoline, and there just weren't that many left over.

As always, just opinions! This is not investment advice.

Source Data:
U.S. Census: Retail Trade
St. Louis Fed: CPI
St. Louis Fed: Population


Mr Slippery said...

I am not sure per capita is the best measure of retail sales. That says something about average wealth, but if there are more people spending at the same per capita rate, then the economy should be bigger.

More people = bigger economy all else being equal.

No question that non-retail sales should eliminate retail jobs, or convert a retail salesperson into an Amazon warehouse picker.

I don't feel great about contributing to the increase of warehouse pickers, but it beats driving to a store.

Stagflationary Mark said...

Mr Slippery,

But spending is about psychology. Once people reach their personal peak spending their psychology will begin to change.

Put another way, once the average spender is tapped out, well...

Stagflationary Mark said...

Here's another thing to consider, if one is a stock market investor.

More people does translate into bigger economy, but more people also translates into more companies.

Picture it from the standpoint of an owner of one restaurant in a town of 1,000. Not bad.

If the population doubles but the number of restaurants doubles to 2, is that restaurant owner going to be more prosperous?

If I was that restaurant owner in that example, I'd be very much wanting to see how much per capita spending was going on around me.

Stagflationary Mark said...

I'm not trying to suggest that the total amount spent is not important. It most certainly is. I do that a lot on my blog. I'm simply trying to say that per capita spending is important too, but in a different way.

This has been a topic of interest to me for a long time, mostly as a thought experiment.

I don't think it is a given that a given company grows as the population grows, mainly because more people could easily translate into more companies.

For example, picture if every business in America were sold to one giant business. Let's call it Company A. It would own 100% of all retail sales.

Now picture another company starting up that Company A did not own. Let's call it Company B.

Picture what would happen if 1% of the population fell in love with Company B's products. Company A would take a hit. So what does Company A do about it?

Well, it could buy Company A to put an end to it! It would hurt the profits to do so though, but let's say they did.

Now picture the founders of Company B laughing as they start up Company C and repeat. ;)

I've given this a lot of thought. It's actually a minor reason why I am not a stock market investor.

There is dilution going on that few want to talk about. Those who bought all the companies in the stock market in 1950 owned pieces of all of the market. If they held to today the would not own all of the market. Competition came along and took market share. (Some companies didn't even exist in 1950.)

That was all fine and dandy when the country was growing rapidly. I'm not so sure it will be fine and dandy when it isn't.

It's just a thought. I think people underestimate the impact of competition, especially with these record profit margins lately.

Stagflationary Mark said...

Well, it could buy Company A to put an end to it! It would hurt the profits to do so though, but let's say they did.

That should say "buy Company B".

Stagflationary Mark said...

I just can't stop with this topic so I've spent the past 30 minutes thinking about what I could concisely say next (if that is even possible, lol).

The economic health of an individual within a country is directly related to their sustainable per capita spending power.

The economic health of a company is related to both the number of its customers and the economic health of its customers. A given company is not guaranteed to have more economic health simply because the population grows, especially if the number of companies grow at the same pace as the population grows (say 1% per year). The economic health of its customers can be extremely important though. Should the average customer no longer be economically healthy, then attendance at theme parks can drop off big time. It is not as important to grocery stores for obvious reasons, but even then it can be somewhat important. Grocery stores would prefer to sell high priced luxury foods over the low margin basics.

The economic health of the government is related to the economic health of its citizens and the economic health of its companies.

We know that the economic health of Americans is not doing all that well lately.

We're told that the economic health of our companies is doing fantastic right now though. Perhaps I shall believe it, high current profit margins notwithstanding, when the number of AAA rated companies rises from 4 out of 500 to something more than 4. Until then, I remain skeptical over the long-term.

Mr Slippery said...

You covered a lot of ground in the those last few comments. I get that per capita purchasing power is important, but not in the same way as total purchasing power. For example, Luxembourg has a higher per capita GDP than the US, but it is not the economic power the US is.

I can think of lots of reasons not to invest in the stock market, no argument.

The ratings agencies, by their own admission, are full of "puffery". Ratings are bought and sold to the highest bidder. A low rating just means you aren't paying the agencies enough in fees. They do offer a pretty good hindsight view -- after a bankruptcy occurs, they usually downgrade a company shortly after. I am not saying that more companies deserve a AAA rating, though.

Stagflationary Mark said...

Mr Slippery,

For example, Luxembourg has a higher per capita GDP than the US, but it is not the economic power the US is.


Which is better?

1. 300 companies and 300,000 people
2. 300,000 companies and 300,000,000 people

The government is always going to choose the 2nd one. It's 1,000 times better!

Most people and companies would probably pick the 2nd option. It wouldn't be 1,000 times better though, and could even be worse. Probably best to ask how much land is available. If it was a small island in the South Pacific then I would personally choose #1 by a very wide margin, lol. :)

Stagflationary Mark said...

Mr Slippery,

They do offer a pretty good hindsight view -- after a bankruptcy occurs, they usually downgrade a company shortly after.

Yeah, the rating agencies truly stink. The question is do they stink uniformly over time or have they been getting even worse?

If it is the latter, then companies could actually be getting better over time. In theory of course. Like you, I'm not trying to suggest more companies deserve an AAA rating.

It's like doing a study to verify global warming but the plan is to use barometers made in China to measure the typical speed of drunk drivers. That data is then processed by hand (to avoid any computer errors) by a crack team of political lobbyists.

It's called getting back to the basics. Hard provable science, lol. ;)

Anonymous said...

Both charts appear to exhibit an wave pattern - very unusual for economic charts


Stagflationary Mark said...


Many of my charts are aimed at capturing long-term trend failures.

These are more cyclical. By using inflation adjusted per capita data in a stagnant economy, I was basically targeting the business cycle.

My primary intent was to show that there was a zero sum game possibly going on between department stores and nonstore retailers. These charts can't prove it, but it appears that each extra dollar a consumer uses to make an online purchase is one less dollar a department store gets. Common sense says that there is a definite link here. Of course, there are other things at play here too, like the rise of Costco.