As an industry analyst I have deployed the shrink to grow theory many times to identify ways to make money buying companies that are right sizing their business to enhance future profitability. With SBUX reporting earlier this week, I have the shrink to grow theme as top of mind. Unfortunately, this theme is everywhere I turn and is one reason to remain cautious on the consumer. From a Macro standpoint, the US economy will likely contract before it can grow again. The US and many global economies are headed down a slippery slope which can be toxic for investors, because of the unknown of how steep the slope will be. I guess this is why I’m still bearish about the consumer.
The market swoon in October provided another shock to the consumer, the impact of which we do not know and most likely has yet to be fully digested by the market. The monthly sales figures reported by companies that rely on discretionary purchase decisions, like restaurant and automobile manufactures, were disastrous in October, and November is not off to a good start. The consumers have not bottomed yet; as a result there continues to be significant excess capacity in many sectors. These sectors need to shrink capacity before they can grow again.
There continues to be significant excess capacity in the restaurant industry that needs to close before the industry can fix the traffic related issues we are seeing today, particularly in casual dining. This is not to say that QSR is immune, but it does not appear to be as bad. QSR has picked up some traffic from casual dining, but the incremental traffic is coming from discounting. Unfortunately, the more stores that close the more people there are out of jobs. Regardless, the restaurant industry still needs to shrink to grow!
Moving to… Discussing the fate of GM is a moot point – the collapse of the credit markets, especially speculative credit, means there is no life support in bankruptcy. So that leaves one of two outcomes for GM; it’s going to file for bankruptcy and liquidate or the government will bail them out. The reality is the government will provide life support, with the stipulation that the company needs real fundamental restructuring – it needs to shrink its excess capacity and thus cut its payrolls. When the US Government bailed out Chrysler it ended up laying off 1/3 of its work force. GM needs to shrink to grow!
The US Banking and financial services has been operating with excess capacity for years. No need to rehash that story, but capacity is finally declining there, too. Shrink to grow!
We are now just beginning to see the severity of the stress in other parts of retail. The retailer du jour is Best Buy – no surprise, but reality. Recently, Circuit City and Linens ‘N Things have either shrunk significantly or liquidated. The US economy is going through a cleansing process that is healthy but takes time to fix. Unfortunately, government intervention in the process is only prolonging the process. Today, companies that are on the brink of collapse don’t go bankrupt, but become socialized by the US government.