Weekly Reads
Weekly Reads - February 20, 2023

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Specialty retailers build tailored environments that help generate high customer satisfaction that drives repeat purchases and loyalty despite often times not offering the best prices.

The American Customer Satisfaction Index showed interesting trends developing in retail with specialty retailers posting the highest satisfaction scores in the retail space followed by online retailers. It’s not surprising that online retailers like Amazon continue to generate high satisfaction scores due to their value proposition of delivering attractive prices with the convenience of next day delivery. What is surprising is the high satisfaction score of smaller specialty retailers like Chewy, American Eagle Outfitters, TJX, and Bath & Body Works. These retailers posted satisfaction scores that are similar or higher than Amazon despite the fact that Amazon competes with these retailers in their product category and offers the convenience of next day delivery and overall lower prices. This data shows that to survive in retail nowadays a retailer needs to become more specialized and build a portfolio of niche products and services that will delight a small portion of retail consumers rather than trying to take on retail giants like Amazon and Walmart. The retail losers highlighted in this survey include Gap, Macy’s, GameStop, and Nordstrom. All of these companies have had their products and services replicated by other retailers. These companies are secular decliners and are being replaced by new retail formats that offer unique products and services and foster stronger brand loyalty.

U.S curbs on China’s access to advanced technology create an opportunity for the in-shoring of manufacturing.

Kyocera, a Japanese chip component manufacturer, is aggressively investing in its own domestic facilities to take advantage of the movement away from Chinese manufacturing. Kyocera believes it is becoming non-viable to manufacture in China with wages in the country rising and tensions rising between the U.S. and China. In October, the U.S. announced export controls that would make it more difficult for Chinese companies to develop cutting-edge technologies. Last month, Japan and Netherlands agreed with the U.S to restrict exports of chip manufacturing tools to China. These announcements have worsened tensions between the countries and there is a possibility that the future of U.S. manufacturing is non-China based. We have already seen Apple move away from China into India and more companies choosing to diversify their manufacturing exposure. This growing trend could benefit U.S. industrial production and emerging economies like India and Thailand who offer low wage production with less geopolitical risk. As U.S.-China tensions continue to rise we should see more companies announce large investments in new facilities outside of China.

The growing popularity of private label products is a long-term risk to popular brands potentially decreasing the growth opportunity of these slow growth consumer staple companies.

Private label products hit a record $229 billion in sales growing 11% over last year. National brand sales rose 6.1% to $981 billion bringing industry sales to $1.2 trillion. The food categories that private labels took most market share was bottled water, cookies, and butter. With rising inflation and recession fears it makes sense that consumers opted for cheaper private label brands, however, we see don’t see this as a transitory trend. Compared to 2008/2009 there are way more high-quality private label options and there are private label brands that have developed a cult-like following. Brands like Kirkland and Trader Joes are sought after by both price sensitive and non-price sensitive customers due to their perceived quality. This shift toward private label brands could hamper consumer staples companies who rely on a few key brands to drive growth and margins. In a world in which consumers buy more private label brands these companies will struggle to grow their topline. With many consumer staple companies struggling to grow above low single digits this trend could cause growth trends to dip negative potentially impacting the valuation multiples investors ascribe to these companies.