23

Retail and Marketing—When and How to Sell What to Whom

WHAT DO YOU think, should I start this chapter off with a question?

Oops, guess I already did, so here’s a second question: How many different retail sectors are there within the retail industry?

Give up? Well, off the top of my head I couldn’t come up with a concrete number either, and I believe that the number is somewhat fluid depending upon how you characterize different retail establishments and on how you characterize online shopping, or “e-tail.” That said, there are five (or six, for those who would include “e-tail”) retail industry areas that cover a total of about twenty industry sectors, give or take (with “e-tail” serving as a possible “give” for those who include it as a retail sector). Below are the retail areas and their related sectors (with “e-tail” included under “General Retailing”).

WHOLESALE & LOGISTICS

Wholesale and Logistics

GENERAL RETAILING

Department Stores

Discount and Variety

E-Tail

SPECIALTY RETAILING

Floristry

Newsagents, Stationery, and Bookshops

Local Pharmacies

Jewelry

Fashion, Clothing, and Footwear

Other Specialty—Hobby Shops, Photography, Green Stores, Novelty Shops, Tourist Shops

FOOD & BEVERAGE

Supermarkets

Liquor and Beer

Fruit and Vegetable

Fast Food and Takeout

Casual and Fine Dining

Specialty Food

WORK, HOME & LIFESTYLE

Entertainment, Communication, and Technology

Sport, Recreation, and Leisure

Furniture and Housewares

Hardware, Trade, and Gardening

Now, you’ve gotten so good at this demographics stuff that you can tell me how the country’s current and projected demographics will affect each of these retail sectors? Right?

Right, but first let me give you a couple of examples and tell you a story: Back in January 2009, I launched a newsletter called The Age Curve Report that was developed to examine specific demographic trends to determine how they might affect the economy and, in particular, specific business sectors and publicly traded companies. It seemed like the absolute worst timing for starting up a new business venture, what with the world teetering on the edge of financial catastrophe during the height of the Great Recession. However, my colleagues in the venture, Logie Cassells and Jamie Moye (aka M. J. Moye, this book’s editorial consultant and researcher), helped allay my trepidation by suggesting that market bottoms were the perfect time to start such ventures and reminding me that Gen Y presented a huge potential economic growth story on many levels. My fears were allayed even more when that first issue came out, and I saw how well we were able to meld demographic trends with real-world business and economic forecasting.

Over the next eighteen months we examined hundreds of publicly traded companies to determine potential demographic influences, picked out ones we felt would benefit the most from demographic change, wrote about them, and included some of their stocks in a model portfolio designed to profit off of demographics, sentiment, and valuation. Both the newsletter and model portfolio were developed in partnership with a boutique investment firm and were supposed to coincide with the establishment of a demographics-based fund, but that’s another story.¹

Anyhow, retail served as a core component of companies profiled and included in our model portfolio. By the end of the newsletter’s run in 2010, the portfolio had risen almost 100 percent, compared to a 30 percent gain in the S&P 500.

And no, I am not going to claim that its success was the result of calling it correctly on the demographics. First off, the overall market was in recovery, and secondly the time frame was too short for demographics to really work their magic. Not that demographics didn’t perhaps play a bit of a role, but having former U.K. “Hedge Fund Manager of the Year” Logie Cassells in charge of sentiment and valuation research was probably more key.

Looking back now over a much longer time frame, I can say that in many cases we called it correctly on the demographic influence on certain retail sectors and businesses. Sure, it turns out we made a couple of bad calls, too, but I don’t think we were mistaken about the demographics.

Among the articles in our first newsletter issue was one titled “Beer Sales Set to Rise with Emergent Generation Y.”

Now, having read this far into the book, you are probably thinking something along the lines of: Wow, you guys probably nailed it! And we did . . . kind of.

Among the observations made in that article were:

Domestic beer consumption went flat in the late 1980s, coinciding with Boomers exiting their prime 21–27-year-old beer drinking years and a smaller Gen X moving in;

The flat beer consumption started turning into a decline in the 1990s;

That Gen X had shown a distinct interest in microbrewed beer, a trend that was likely to continue with Gen Y;

That foreign brewers likely made a smart move in buying up the large U.S. beer companies;

That Generation Y, by sheer force of numbers, was going to provide a significant boon to both major brewers and microbreweries;

And, that the growing Hispanic population would also likely boost sales, especially for those brewers offering imported beer from Mexico.

Several issues later, when we debuted our “Model Portfolio,” Boston Beer Co. (SAM) was a key stock pick in our retail sectors. We had picked up 1,080 “virtual” shares at a cost basis of $25.90, and saw a 15 percent gain in less than six weeks, and 100 percent gain within a year.

And no, Gen Y didn’t just start quickly drinking a lot of beer. As noted, we started the portfolio during the stock market lows, and pretty much everything we bought went up nicely as the market started to recover. Too bad, though, that the “buys” were only virtual.

Especially given that SAM’s stock price climbed more than 700 percent, reaching an all-time high of almost $315 per share in the last days of 2015, before surrendering about 50 percent of that high price, in part, according to analysts, because of strong competition from other microbreweries. All major breweries serving the U.S. market saw significant stock gains as Gen Y entered the beer drinking years, with Constellation Brands (STZ), a key importer of Mexican beer, experiencing a more than 1,000 percent increase in stock price since 2009.

So, I’d say we hit a home run with SAM, nailed the positive impact of Hispanics, and called it correctly on microbreweries, which have seen their overall share of the U.S. beer market double from the 6 percent estimated in 2008 to 12 percent today.

Unfortunately, I can’t prove that we nailed it with regard to Gen Y, as the generation wasn’t necessarily the primary driver of beer company stock price appreciation. In fact, despite the increasing numbers of potential Gen Y beer drinkers, per capita beer consumption in the United States kept declining until 2012, at which point it appears to have made a reversal. So, I can suggest that Gen Y “might be” responsible for the reversal, and point out that much of the significant price appreciation of beer stocks seemed to have started at about the time of the reversal, but I can’t conclusively prove that it is connected to an increase in Gen Y beer drinkers. To put it another way, even though “correlation does not imply causation,” it sure does suggest it at times.

Another “home run” was provided by Chipotle Mexican Grill, which we profiled in the newsletter and added to our Model Portfolio at a cost of $81 in 2009. Our research began by trying to determine which restaurants seemed to be most appealing to Generation Y. McDonald’s proved favorable due to younger members of the generation, who, with their mothers, were a core component of the chain’s customer base. But the relatively new Chipotle Mexican Grill sparked our interest as it seemed to be a big draw with Gen X and older members of Gen Y. We were also aware that Gen Y seemed to show a propensity for “green” businesses and for local produce, both of which are provided by Chipotle. Additionally, the “fast casual” chain relied on “traditional Mexican cooking methods,” which we felt would be a big draw for potential Hispanic customers.

In short, we thought the demographics would totally support the chain going forward, and they did. Since we first reported on it in 2009, the chain has added more than 1,100 new restaurants and its stock price reached an all-time high of almost $750 in July 2015, representing a gain of more than 800 percent.

Remember how I brought up Mattel and “Barbie” back in Chapter 1? The youngest members of Gen Y were 4 years old back when we started that venture. Do you think we considered toy companies as a possible solid demographics-based investment back then?

If you answered yes, you would be correct. On a relative basis compared to most companies, the stock prices of both Hasbro (HAS) and Mattel (MAT) held up fairly well during the Great Recession—i.e., beaten down like all, but not to any extremes. Given that both companies would continue to benefit from at least eight more years of Gen Y–populated childhood and a strong population of the first members of Gen Z, we saw them as good buys. And yes, our virtual buys (HAS at about $30, and MAT at about $20) enjoyed strong short-term gains, not to mention strong long-term performance for Hasbro, which recently hit an all-time high, breaching $87. Mattel enjoyed strength until the end of 2013, when declining sales marked the effects of declining Gen Z births that ensued in 2008.

Naturally you are wondering why this did not impact Hasbro as well. My quick and easy answer is that Mattel’s line of toys seems to be much more generated toward younger children than Hasbro’s line. Perhaps needless to say, but neither one of these companies currently looks favorable on a demographic basis.

With all this retail focus on Gen Y, what of other generational impacts on the retail sector?

A good question, and one we did not ignore back in 2009. We saw the Boomers as being potential significant drivers of organic food, wine, and nuts (go figure). Based on this, we wrote about and added to the model portfolio, Whole Foods Markets (WFM), Tree-House Foods (THS), Willamette Valley Vineyards (WVVI), and John Sanfilippo & Son (JBSS). And yes, all have performed admirably, but no, I cannot conclusively prove that the Boomers were the cause of this success.

Interestingly, for the longer term, the nuts sector has proved to be the biggest gainer, as the stock price of JBSS has climbed almost 400 percent since we named it a buy in 2010. I am not positive that the Boomers actually are the primary driver of the company’s increasing profits and stock price, but we felt it likely back then. As we wrote: “We believe nut producers are well placed to reap the rewards of the changing U.S. demographic landscape. The Nut Spending Curve in the sector overview shows that older households spend the most on nuts. While many consumers limit their nut consumption because of concerns over fat and calories, more and more research is showing the true health benefits of nuts. We believe that as Boomers age into their prime nut-consuming age bracket, spending on nuts is likely to rise.”

Perhaps our only specific call regarding Gen X was that the younger—and noticeably larger—half of this generation was aging into the peak spending years for cosmetics, perfume, and bath products. To add to the potential generational uptick in numbers, we also pointed out that this cohort would be immediately followed by an even larger cadre of Gen Y customers. Additionally, we noted the market would be enhanced by the increasing population of Hispanic women, as they spend on average 28 percent more on cosmetics than other customers. We profiled both Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA), and Nu Skin Enterprises (NUS), and I’ve got to say that we hit one of them out of the park for a grand slam homer. Ulta recently hit an all-time high north of $230, representing a gain of almost 1,400 percent from the $16 cost at which we recommended it in 2009. NUS, which we recommended in 2009 at about $15, saw a 700 percent gain as of the end of 2013 but has since suffered significant declines.

And allow me to just toot our own horn again, as we were quite bullish on Apple Inc. (APPL), which we felt would benefit from all the generations. While APPL is a “tech” company, it is also a highly successful retail operation with products that appeal to all generations, even us tech-challenged Boomers. We wrote about its appeal extensively, and added it to the portfolio at a split-adjusted cost basis of $13.40. It since reached an all-time high of almost $133, representing a gain of about 950 percent. I remain bullish on the company, both because of demographics and its unique product line. Though I doubt I’ll ever get around to figuring out the iWatch.

Now let’s take a look at a big retailer. OK, the biggest. Walmart (WMT). I have been bearish on Walmart for what seems like forever. I wrote about Walmart’s impending generational troubles in my first book, and sang about its impending demise in my blog and in the newsletter.

My basic premise was that Walmart is a Boomer-oriented business, and that its core Boomer customer was reaching the age at which people don’t buy much anymore. Meanwhile, America’s largest potential customer cohort, the 86.6 million members of Gen Y, were a fickle bunch, less interested in “low price” than in “selection,” who would not be enticed by Walmart’s limited selection of cheap merchandise.

I may have been overly pessimistic regarding my feelings for the future of Walmart, as “low prices” will always help drive retail sales. However, the giant retailer has been struggling of late, what with last year’s announced closing of hundreds of stores, thousands of layoffs, flatlining sales growth, and early 2016’s first reported year-over-year annual revenue decline since the company went public. So maybe I was correct when I wrote in 2007 that “there is no new market for Wal-Mart. No market unless it dramatically changes what it is, and it is too big and entrenched to make this change in a timely manner. It will begin to be eroded by the very concept it put out of business twenty years ago: small, fast-changing, entrepreneurial retailers offering selection and service.”

What I failed to take into account when writing that blog was the impending power of Amazon (AMZN), now the world’s largest e-tailer, and by valuation, the world’s largest retailer. But we did have Amazon on our radar at the newsletter. We were bullish on its prospects due to our belief that the younger generations would be eager customers, and added it to our model portfolio at a cost of $120. With a recent all-time high north of $700, that would equate to a 500 percent gain, so yeah, another home run.

So, what of Walmart? Well, it reportedly has a reorganization plan in place, but many business pundits seem to be warning that Walmart has a limited amount of time to turn things around. As noted by Bloomberg, “declining sales might be okay for a year or two, but at some point a turnaround plan could become a failed strategy.”

OK, your turn. Pick a retail sector and tell me what you think—do the demographics support the business? Absent all but demographic considerations, is this business likely to be boomtown or bust?

How about floristry?

I know what I’d say: While not facing a tsunami, the floristry business is likely to see a healthy uptick in business in the coming years, as the two largest generations in America both age into life span time periods that are conducive to spending on flowers. The maturing members of Gen Y are increasingly entering the years in which they are most likely going to get married, while the Boomers are slowly aging into their funeral years. While holidays,² anniversaries, and special occasions constitute a larger overall share of a florist’s business, weddings and funerals combined represent a healthy chunk.

Unfortunately, not everyone agrees with my spur-of-the-moment demographic assessment. While demographics seem to support the business, the florist industry has “been withering away over the past five years,” according to market analysts at IBIS-World. Due to a Great Recession-induced reduction in discretionary spending and increased competition from supermarkets and e-tailers, florist industry annual revenue growth suffered a 1.2 percent decline from 2010 to 2015. The analyst forecasts further declines in the florist business going forward. Additionally, the Bureau of Labor Statistics (BLS) foresees a 3 percent decline by 2024 in the number of U.S. florists job positions.

I wasn’t able to read the full IBISWorld report, nor able to assess how the group determined the revenue decline, but according to Aboutflowers.com, total “floriculture” sales grew by more than $5 billion between 2010 and 2015. I also don’t know whether or not the market analysts or BLS bothered to count people, though I would assume BLS did. Whatever the case, the contrarian views serve as a reminder that demographics is just one tool out of many, and that all parameters of a business should be examined during the decision-making process.

Given that my prior career was in marketing, I cannot leave this chapter without giving you my perspectives on marketing in today’s generational landscape and, in particular, marketing to Generation Y. Consider the design of this enormous Y Generation. They are a kinder, gentler generation that has been taught not to name-call, bully, or be mean. They generally do not see color or race as a defining characteristic, so bigotry and racial prejudice are much rarer than what was once exhibited by earlier generations. They have been taught to be competitive but not combative, to disagree but not disrespect, to achieve but not condescend, and that the end does not justify the means. They tend to be “green,” and seem to favor patronizing a businesses with a real “eco” or humanitarian story over one with a better product or lower price.

It is important to note that any company that is perceived by Generation Y to be disingenuous about “giving back” and tries to fake a green stand will be labeled a “green washer” and could face a crippling boycott. You should not and cannot lie to Generation Y.

They speak cyber as a first language and live in a world of instant information as evidenced by their mastery of social networking sites like YouTube, Facebook, Snapchat, Instagram, Myspace, and newly introduced ones that can hardly be pronounced. They have reinvented communication with their ability to text on their phones without looking at the keyboard.

Marketers are vexed by Gen Y’s rejection of traditional media like radio, television, and newspapers. This makes them difficult to reach and brand with advertising messages. The messages themselves are also in jeopardy and have not found favor with Generation Y because much of the advertising copy has the attendant hyperbole and exaggeration often associated with promoting products and services. Marketers are quickly finding out that the best strategy is veracity and pragmatism. The “sales pitch” is history and has been replaced by relevant communication or “The Truth Well Told.”

The truth, what a concept!

The caliber of products and services should definitely improve under Gen Y’s watch. A good product or service with a fair price and an honest green story will find an endorsement of their offering coursing through Generation Y at light speed. It’s called viral marketing, and it is a whole new ball game.

As we drill down to street-level selling to Gen Y, we need to be aware of some basic considerations, some dos and don’ts. Don’t expect to hold their attention with a boilerplate PowerPoint presentation. These young people are capable of multitasking four and five things at a time. It is not uncommon for them to be listening to music while they are on Instagram, talking to a friend on Skype, texting on their phone, and watching television. In their world a minute is a long time, and they will probably find your technology primitive and a turnoff. Remember, you need to be relevant and even tailored to this generation or they will look at you like you have two heads. Generation Y will understand the concept of responsibility and long-term planning. It goes along with being green.

Just a quick word about prospecting to Generation Y: It is going to be tough. Telemarketers are going to have a difficult time finding them because they don’t use conventional telephones. As we mentioned earlier, they don’t respond to radio, television, or newspapers. Has anyone found the silver bullet for reaching them online? No. So what is the answer? Relationships and referrals. So work hard, put in long hours, and do the right thing and this generation will beat a path to your door.

Demographic-based investing? Sure, but be careful. Among other demographically based selections in our model portfolio were several clothing retailers, including Ross Stores (ROST), Children’s Place (PLCE), Aéropostale (ARO), Pacific Sunwear of California (PSUN), and Skechers (SKX). On a demographic basis we felt they were well positioned to capture Generation Y consumers as they aged through the key teen and young adult clothing-buying years.

Even with a large customer base, retail is a tough business. Competition is bitter, labor difficult, consumers fickle, and margins often slim. While Children’s Place, Ross Stores, and Skechers proved successful, Aéropostale and Pacific Sunwear have recently filed for bankruptcy.

As with companies presented at the end of previous chapters, these are for informational purposes only for use while you contemplate demographics. And of course, say it please: Do your own due diligence prior to making any investment decisions.

Amazon (AMZN)

L Brands (LB)

TJX Companies, Inc. (TJX)

Ross Stores (ROST)

Costco Wholesale Corp. (COST)

Home Depot (HD)

Lululemon Athletica Inc. (LULU)

Blue Nile Inc. (NILE)

Overstock.com, Inc. (OSTK)

Shutterfly Inc. (SFLY)