Is this a restaurant meal occasion?
Is this a restaurant meal occasion?
If you've been following my footwear postings, you know the drill. Years of oversupply in China and margin extraction from US brands has reached its tipping point. Now factory margins are close to zero (down from 10%) and capacity growth is going from +5% to flat at best. Now the supply chain squeeze hits the US brands, who in turn stick it to the retailers (or at least they go down swinging).
Well here's a couple of nuggets for you...
1. For the first time since the 1980s, factories located in Southern China are telling mid-tier brands (and the sourcing agents that represent them) that the long-standing $19.99 price point simply can not hold anymore at the current margin structure. The factories are actually turning away business. This is unheard of, and a major consideration for mass market retailers (WMT, TGT, and the family footwear channel).
2. The Chinese government set into motion a mandatory initiative to hold factories responsible for issuing back pay for vacations that were never given. This is causing a financial chain reaction, causing many factories to either close or take a huge hit. Anyone who thinks that China will refrain from passing this through the supply chain is not keeping their eye on the ball.
Simply put, brands matter again. A lot. Is it any wonder that Payless went from 80% private label down to 60% (and on its way to 25%)? Does it make sense now why Target did a deal with Nike for an offshoot of the Converse brand and took down private label but took UP footwear pricing in the stores?
We'd be very weary of any brand that is simply 'average.' In this environment, 'average' is lethal.
That means less discounting, and a well-needed glimmer of hope for a down-and-out industry. The chart below from NPD Fashionworld (data I've found to be statistically significant) shows the y/y change in average price point spike to a three week trend of about 8%. That hasn't happened in years. Yes, compares are easy, but even on a 2 and 3-year run rate the numbers are looking more stable.
This synchs perfectly with comments from a source of ours who buys off-price merchandise at a relatively large US retailer -- "I've got money burning a hole in my pocket, and not enough product to buy." A disproportionate portion of these buys usually come from Sporting Goods retailers. That sends us a positive sign about the footwear inventory position at the Dick's, Sports Authority's, and Hibbetts' of the world. It also reaffirms what we already know -- that the major brands are showing some restraint as it relates to overbuilding product.
Let's not get too excited here -- the longer term trend here is still likely to turn this industry upside down (see past postings). But such change is not linear.
This is something to watch.
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In conjunction with that comment, the CEO said that he is more focused on driving sales than he is on traffic as traffic is not a measure of customers. It's not a customer count mechanism. It just tells you how many transactions you had during the day or the year so if you and I go into lunch together and I say, I'll buy, that's one transaction although it's two customers.
He went on to say, I think transactions are really not all that relevant and almost a misnomer. I am more concerned with how many people we have in the restaurants and how many transactions we ring up on the register. By the time, the CEO ended his longwinded response, we were not exactly clear on what he was saying, but in our view, it is never a good idea to move your focus away from driving traffic, and in today's current economic environment, that might mean driving more transactions at lower price points...as long as the customers keep coming!
Taking the other side transaction counts is MCD. MCD senior management said on its last conference call that MCD took market share, and we measure that on traffic, as you know, not on sales. And our focus is on traffic, because that's the critical component. If we get them in the restaurants, we'll figure out how to get the successful average check from them down the road.
We understand that there needs to be a balance between driving traffic and discounting (and protecting margins), but we think MCD wins this argument with significantly higher average unit volumes.
With this thought in mind, CKE Restaurants put out a press release yesterday that said - Hardee's(R) announced that it is thumbing its nose at the current value menu movement by rolling out the ultimate premium burger, the Prime Rib Thickburger(R).
We've never been ones to follow the fast-food herd mentality! (It should be noted at this point that Hardee's has one of the lowest AUV in the industry).
So, while other places are hopping on the value bandwagon and, thus, promoting their smallest and lowest-quality menu items, we'll keep doing what we do best by giving our customers what they really crave: big, delicious, premium-quality burgers.
The small size Prime Rib Thickburger combo featuring Hardee's Natural-Cut Fries and a drink will be sold at participating restaurants for $6.49. Prices may vary.
Research Edge thought......
The industry is a zero sum game and every restaurant company is in a battle for market share. Currently, Hardee's is losing market share. How is this going to help? At a $6.49 price point, Hardee's is priced in line with casual dining, with less value
For nearly the same price here are two examples of what you can get at casual dining:
Chili's - The Bottomless Express lunch - your choice of soup and salad, served with house-made chips & salsa as soon as you order, and all with unlimited refills.
Olive garden - Lunch entrees are priced between $6.00 and $9.00 and you get freshly baked garlic bread sticks and your choice of homemade soup or garden-fresh salad.
No wonder the big boys are all emphasizing value and convenience!
I can't wait to see how this one ends!
Though not known to most Wall Street types as a performance brand of choice, we'd note that Russell has 5% market share of apparel in the sporting goods channel. This compares to Champion at 2%, 5% for The North Face, and 16% and 14% for Under Armour and Nike, respectively.
This smells a bit like when Liz Claiborne went down market to JC Penney with its 'Liz & Co' brand and then Macy's cut floorspace for the core Liz Brand by a third. Not a good trade.
We could see some brand rotation here, and suspect that Hanesbrands (owner of Champion) is licking its chops.
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