Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

US Retail Sales Stagnant

Retail sales are now as stagnant as middle-class incomes. Average Americans’ rate of spending now so flat it casts serious doubt on the notion of an economic recovery, the latest data from the US Census Bureau.

The volume of retail sales in July 2016 was virtually unchanged from June, The US Census Bureau News for August 12, 2016, indicates. The advance monthly sales for retail and food services in July totaled $457.7 billion which was a .5% increase over June.

The obvious implication here is that there was little or no economic growth in July. If Americans were making more money they were not spending it at stores.

Intriguingly there were two bright spots in the retail sales picture. These bright spots show just how uneven the recovery is, and how income inequality is distorting retail.

Census Bureau Data Explains Why Walmart Bought Jet

Sales at “non-store retailers” were 14.1% higher in July 2016 than in July 2015. This probably reflects the explosive growth of online retailers like Amazon (NASDAQ: AMZN); which saw its revenues grow by $7.22 billion during second quarter 2016, rising to $120.64 billion for the first time.


That indicates the retail sector is expanding but all the expansion is taking place online. That explains why Walmart (NYSE: WMT) was willing to shell out $3 billion for the money-losing online discount unicorn A Walmart press claims that Jet; which started just last year, has already reached $1 billion in gross merchandise and processes 25,000 orders a day.

Another reason why Walmart bought Jet is that its customers are more likely to have incomes of $150,000 or more, USA Today reported. That also positions Walmart to take advantage of a fascinating change in American society.

The Pew Income Study found that the percentage of Americans living in Upper Income Households is growing rising from 14% in 1971 to 21% in 2015. At the same time middle class has been shrinking in 1971 61% of Americans lived in “middle class households” in 2015, only 50% did.

Those numbers bode ill for brick and mortar which is not growing. Not coincidently Macy’s (NYSE: M) announced that it was planning to close 100 of its 728 stores on August 11, 2016. Those closings were on top of 40 shutdowns already underway. Online retail might be hurting brick and mortar in greater ways than we think.

Are Drugstores Really Growing?

The other bright spot was “Health and Personal Care Stores” (I suppose this means drugstores) where business increased by 7.8% between 2015 and 2016. This sounds like good news for Walgreens (NASDAQ: WBA) and CVS Health (NYSE: CVS), but not for consumer products companies like Proctor & Gamble (NYSE: PG).


The problem with this number is that the increase sales here might be driven by prescription drugs. Back in July Walgreens reported that its US retail sales increased by just .1% even as its pharmacy sales grew by 6%. The increase in pharmacy sales was driven mostly by Medicare Part D; which covers prescription drug costs for senior citizens.

This means that sales of items like toiletries and makeup are as flat as the rest of retail. Brick and Mortar is not growing, which should be a warning to investors.

Census Bureau Retail Numbers that Investors Should Take Note Of

The Monthly Sales show that retail has grown over the year but the sector is changing dramatically. Some of the numbers that investors should pay the closest attention to are:


  • Electronics and appliance sales. These actually fell by 3% between 2015 and 2016. This indicates that average families are not making big purchases.


  • Sales at food and beverage stores increased by 2.2%. This is a sign of stagnant income and penny pinching on the part of the middle class because they’re not spending more on groceries. It should be noted that this number is distorted by deep-discounting on the part of retailers like Kroger, Aldi, and Trader Joe’s. Actual sales might be higher but revenues are flat because of the discounting.


  • Sales at gasoline stations fell by 10.4% largely because of the collapse in oil and fuel prices. This can really hurt companies like Kroger (NYSE: KR) and Costco Wholesale (NASDAQ: COST) which augment general retail sales with fuel revenue. One strong possibility is that those retailers may have to raise prices on other items; such as groceries, at some point to cover the lost fuel revenue.


  • Sales at sporting goods, hobby, book and music stores increased by 5.9%. This indicates that Americans are being very selective about their spending. They’re only spending money on stuff they really care about such as hobbies.


  • Sales at general merchandise stores (a catch all category that covers everything from Dollar General to Nordstrom) increased by just .2%. That indicates the rate of overall brick and mortar shopping is falling so Amazon is having an effect.


  • Sales at clothing and accessory stores increased by just .2%. This indicates that Americans are being real frugal on clothing purchases which also indicates a sluggish economy. It also shows that Amazon and competitors like are beginning to have a real effect on this sector.


  • Sales at department stores fell by 3.9%. This figure bodes ill for mall operators because it indicates falling foot traffic. This figure will probably get worse over the next year as companies like Macy’s and Sears (NASDAQ: SHLD) accelerate the closure of money-losing locations.


  • Sales at furniture and home furnishing stores increased by 4.2%. This shows that Americans have a little more money but they’re spending it selectively on furniture. It also indicates that Americans might be replacing old furnishings purchased before the 2008 meltdown.


  • Sales of building materials and lawn and garden supplies increased by 6.4%. This is part of the selective spending similar to hobby purchases. Another factor driving this is high real estate values in some areas which is driving more Americans to fix up properties for sales and rental purposes.


  • Sales at motor vehicle dealers increased by 3%. The most likely cause of this is that Americans are slowly replacing older vehicles that they drove through the economic downturn.

I’ve detected two broad trends in consumer behavior from this data. Americans have become far more selective about their spending; and old-fashioned 1980s style conspicuous consumption and shopping for shopping’s sake is out. Americans are shopping less and spending only on the things they really need or care about.

These trends will accelerate and push more revenue towards the retailers positioned to take advantage of them. The big winners in this new retail landscape will be online retailers, club stores like cost Costco, dollar stores and specialized discounters including home improvement stores like Lowe’s (NYSE: LOW) and specialty grocers like Trader Joe’s.

Big losers will be department-store operators like JC Penney (NYSE: JCP), sporting goods and clothing stores and general merchants such as Target (NYSE: TGT). A few brands including Walmart, Kroger and H&M will buck these trends. Investors need to be careful because the old retail rules do not apply.