Distribution July 2020
Retail Sales Jump 17.7%
Retail sales jumped a record 17.7% in May after dropping a downwardly revised 14.7% in April and 8.7% in March. Sales were down 6.1% from May 2019 and off just 8% since February, the last month not affected by the pandemic. The increase was more than double what economists were expecting, and likely was aided by the $3 trillion in rescue funds that the federal government has provided to companies and households. Core retail sales, which exclude automobiles, gasoline and sales at building and supply stores and factor into calculations for GDP, rose 10.6% in May after falling 16.2% in April but are still 3.3% below the March high. Core retail sales were up 2% year over year after being down 7.2% in April. Sales were up in all categories. Sales at building and supply stores rose 10.9% after falling 3.4% in April and were up 14.4% from May 2019. Online sales rose 9% after growing 9.5% in April. Retail sales account for roughly half of all consumer spending; consumer spending accounts for about 70% of US economic output. Essential retailers, which include Walmart, dollar stores and home centers, had robust sales for the three months that ended in May; profits for that group were $8.9 billion for the quarter, down just slightly from $9.1 billion a year ago. A group of 35 nonessential retailers, including department stores, had combined losses of $2.5 billion for the three-month period that ended in May.
Retailers Respond to Civil Unrest
Many retailers closed stores or shortened store hours as protests that began as peaceful demonstrations devolved into violence, with looting and destruction that spread across the country in the aftermath of the death of George Floyd on May 25 at the hands of four Minneapolis police officers. Apple, Target, CVS, Walmart and Amazon were among the retailers taking action to protect employees and customers. Amazon remained open but restricted deliveries, working with local officials to adjust deliveries by zip codes.
Retailers Reward Front Line Employees
Amazon, Lowe’s, Walmart and other major companies announced bonuses for employees working on the front lines during the pandemic at the end of June as cases were surging once again in much of the country. In total, Amazon will award more than $500 million in bonuses, and Lowe’s will reward associates with bonuses totaling $100 million. Walmart and Target also announced another round of bonuses, and Target said it is permanently increasing their minimum wage to $15 an hour beginning July 5.
The Home Depot
RBC Global Consumer & Retail Conference:
CFO Richard McPhail represented THD at this virtual conference.
There were distinct phases to the quarter; the first seven weeks were strong. Then as shelter in place orders were rolled out across the country, they were one of the first retailers to implement significant restrictions on traffic to ensure the safety of customers and employees and sales reflected that.
The measures they took eliminated about 25% of their operating hours each week. Steps taken included limiting the number of customers allowed in stores and closing at 6 pm to allow for thorough cleaning which removed about 25% of their operating hours each week.
They also intentionally restricted traffic in other ways, including cancelling their annual Spring Black Friday event. They explained that while it’s not often that any business has a primary objective of keeping customers out of stores and limiting sales, it was the responsible thing to do.
In week 11 of the quarter, stimulus checks began to hit and they modified operations to open up new ways of serving customers that did not exist prior to CV19, including offering curbside pickup.
They saw sales rebound and comps accelerate back into double digits by the end of the quarter, with strength across most departments except for those requiring installation.
Larger Pros faced a number of headwinds. There were many municipalities that deemed Pro activity as nonessential. Pros had more challenges getting permits and inspections. Many customers were reluctant to have Pros in their homes. Underlying demand is still there; customers are not cancelling installations; they are postponing them. They feel the business from larger Pros will rebound when the pandemic recedes.
The pandemic caused people to focus on their homes, where they were often working, educating their children and spending so much more time. That renewed interest may continue as the nation moves forward.
It is impossible to predict how much of the massive surge in ecommerce will become part of the business on an ongoing basis, but the demand tested the site and their systems and demonstrated to them that the investments they’d made in beefing up the site were well worth it. For weeks on end they operated on a daily basis at a higher level of traffic than Black Friday and Cyber Monday.
If they had not made investments in their IT infrastructure, they would never have been able to pivot and enable curbside pickup or develop an app within hours that could keep track of the number of customers inside each store in real time.
They have not seen anything to suggest customers are trading down.
Sanford Bernstein Strategic Decisions Conference:
Starting in mid-March they did calls with the field leadership twice a day, so that they were getting real-time feedback on conditions and what adjustments needed to be made. CEO Craig Menear also started an end of day recap with his direct reports so they could quickly make cross-functional decisions. In the pandemic environment, speed was critical, and information was vital. They also relied on what Menear called their North Star, the Home Depot culture.
They had to figure out how to serve more customers in conditions with restricted occupancy and shortened hours, so they made a lot of changes in a very short period of time, including starting curbside pickup. They’ve now added back two hours of operation each day
There has been a definite resurgence of do-it-yourself as people tackle projects they’ve put off, spend more time at home and have other activities such as vacations, dining out and entertainment curtailed. They think some of the changes will remain going forward, such as the new emphasis on cleaning and cleaning protocols. They are getting requests from customers who want THD to help them figure out how to create a clean and touchless environment.
The opportunity now is more in products than in services, as people really don’t want people in their homes unless it is absolutely necessary.
They paused some programs, promotions and investment spending that would have resulted in more people in the stores, because right now that is not a responsible thing to do.
When they extended their hours from closing at 6 p.m. to closing at 8 p.m. they had to deal with more than 600 different ordinances around the country. They needed to take a market-by-market, store-by-store approach to opening up and easing back into more normal operations. They have learned from all the disasters they have dealt with that customers yearn for some signs of normalcy even in the most dire of circumstances.
They are very focused on North America’s $650 billion market. There is so much upside potential in North America they don’t see any reason to worry about international markets.
When asked what he would like his legacy as CEO to be, Menear replied that he hoped people would say he was a great steward of the Home Depot culture and he was passionate about bringing innovative products to market.
Canada had some pretty severe restrictions; it was practically a total lockdown in Ontario. Mexico is a bit behind the US, in that the virus did not impact them as quickly. They are just beginning to implement recovery phases.
Their continued build out of their supply chain has been somewhat impacted, because it has been difficult to get inspectors out to sign off on things, so there have been a lot of delays.
There are categories of opportunity going forward that are going to change; they are pretty excited about the resurgence of DIY and the opportunities presented by cleaning standards changing forever and touchless environments.
Lowe’s will pay out another $100 million in bonuses in July, with full-time hourly employees receiving a bonus of $300 and part-time and seasonal employees receiving $150. Lowe’s says they have committed $450 million to their employees and communities since the pandemic began. They also gave employees an hourly pay bump of $2 per hour for the month of April, and in June announced $787 million in profit-sharing bonusses to their front-line associates.
Janice Dupre Little is Lowe’s new evp human resources. She had been filling that role on an interim basis since April. She replaces Jennifer Weber, who’s employment with Lowe’s was terminated April 6.
Walmart is partnering with Shopify to counter Amazon’s third-party sales business, which is Amazon’s fastest growing retail business. Walmart’s third-party sales also outpaced first-party sales (i.e. Walmart’s own sales) during the first quarter. Shopify provides ecommerce tools to more than one million businesses large and small, including PepsiCo and Heinz. Shopify sellers will now be able to list their items on Walmart’s website. Walmart expects to add 1,200 Shopify sellers this year.
Walmart has surpassed eBay in share of ecommerce sales for the first time, according to May data from eMarketer. Amazon remains number one by a large margin, with 38% of all US ecommerce sales, followed by Walmart (5.8%) and eBay US (4.5%).
Ace Hardware is building a massive new warehouse in Plant City, Florida that will replace a nearly 50-year old facility in East Tampa. The new warehouse will nearly double their capacity. Warehouse development and leasing continues to be a major bright spot despite the pandemic and demand for warehouse space is expected to continue to increase as the pandemic and social distancing guidelines cause more shopping to move online. The distribution center will service more than 200 retail locations throughout Florida.
Amazon plans to retain most of the US employees added to meet demand in March and April when so many Americans turned to online deliveries to meet their needs. They plan to give about 125,000 of the 175,000 temporary workers they hired the option to stay on full time.
Amazon’s gains from the pandemic-driven shift to online commerce appear to be at least somewhat sustainable, according to Barron’s. They think online sellers will continue to benefit from a decline in travel spending, growing numbers of store closures and customers who have tried ordering online and now enjoy the convenience.
Amazon’s supply chain is reportedly returning to normal after weeks of delayed shipping times; one of their execs said that Black Friday arrived March 12 and never left, but after hiring 175,000 new employees, they are back up to near-normal flows. Keeping warehouse workers six feet apart means fewer workers in each warehouse and less efficient shifts.
Amazon will soon offer lines of credit to their US-based sellers through a new arrangement with Goldman Sachs. The line of credit will offer fixed interest rates between 6.99% and 20.99% and can be used for a variety of business purposes. Amazon will share merchant data with Goldman, which will then use business revenue data to underwrite the lines of credit.
Amazon plans to produce and sell hundreds of thousands of face shields at cost on Amazon.com. Amazon has already donated 10,000 face shields to medical workers and another 20,000 donations are planned. Amazon says it will be able to offer face shields at a significantly lower price due to design innovations and the capabilities of their supply chain. They will initially only be available to frontline medical workers, but eventually will be available to customers. Amazon is 3D printing some core components and repurposing many of their own manufacturing machines and facilities to create the gear. Amazon has been working with medical professionals to refine the design.
Amazon is adding 12 new planes to their cargo fleet, bringing the total to 81 planes. One has been delivered; the remaining 11 will arrive in 2021. Amazon says that Amazon Air is critical to ensuring fast delivery for their customers. Amazon started their in-house air cargo operations in 2014 and employs thirteen pilots to fly their planes. UPS has 679 planes and FedEx has 564. Amazon delivered 3.5 billion packages globally last year, compared to FedEx (3.9 billion), UPS (5.5 billion) and USPS (6.2 billion).
Amazon is in advanced talks to buy Zoox, a US-based developer of technology for self-driving cars. The deal would reportedly value Zoox at less than the $3.2 billion achieved during its last round of funding in 2018.
Amazon launched a Counterfeit Crimes Unit to combat counterfeit products on their website. The global team is made up of former federal prosecutors, experienced investigators and data analysts. Counterfeit crimes are becoming a bigger issue, with some large brands such as Nike no longer selling on the platform due to unlicensed and imposter sales. Amazon said they have invested more than $500 million to combat counterfeit fraud and have more than 8,000 employees fighting fraud and abuse on their platform. Reportedly, they have already blocked more than 2.5 million bad accounts before they sold a single product and also blocked more than 6 billion suspected bad listings in 2019.
Amazon CEO Jeff Bezos has agreed to testify before a House antitrust investigation into the market power of major tech companies alongside other chief executives from Apple, Facebook and Google. The Congressional investigation is part of a backlash among lawmakers and law enforcement against the power and reach of large tech companies. The House investigation has been in progress for more than a year.
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