Logan Ensign [00:01:23]:
All right, well, excited to dive in here, Joel. A good day to be doing this with earnings reports happening today. So lots to react to and excited to dive in.
Joel Beal [00:01:34]:
Yep. No, we love to look at the economy. We love to try to read the tea leaves and figure out what in the world is going on. And I feel like we've been talking about this for years, trying to make sense of the vibes, the actual data beneath it. I was just thinking, I feel like I've written all these posts about, hey, the economy is so much better, at least over the years, than people have given it credit for if you look at the underlying data. But yeah, we're certainly we're coming up into election season, everyone's, I think, watching things carefully. And to your point, this morning we saw consumer spending coming in a little lower than expected. And so I dont think we should be reading that much into it, but of course, people do preston well, and.
Logan Ensign [00:02:17]:
I think youve been that consistent voice over the last 612, 18 months. But I would say it probably is at least nontraditional. The different signals and how they interact. Curious, just at a high level from your vantage, maybe just talking about what youre seeing in the economy right now youd mentioned the recent earnings reports being about in line with what we expected, but would love to hear you unpack what you're seeing at a high level. Yeah.
Joel Beal [00:02:44]:
So I think we continue. And again, I think this is something that's been happening the last couple years where everyone's just kind of waiting for the bottom to fall out. That's what I feel like has been happening is everyone is just like, we are so far removed from the last real recession in this country. I mean, yeah, technically there was a recession during COVID but it was very short lived. And then there was so much money that was pumped into the economy and then we had this kind of insane period and then inflation hit. So before that, what I mean, you go back, it's been a decade or longer since there was real economic, widespread economic hardship, a real recession. I think that underlines all this, as everybody's looking and saying, hey, the good times have to come to an end. Not that it's been amazing.
Joel Beal [00:03:38]:
And when is that going to happen? The inflation discussion, I mean, that's the one I read the most about, is nobody likes inflation. It's a surefire way to get us all kind of riled up. We don't like paying more for things. And this question over whether the Federal Reserve could kind of navigate this with the increase in interest rates, which, hey, we don't like paying more interest either. Look, I got to give them a lot of credit. This has been handled as well as anybody could probably, possibly hope for. Now, that doesn't mean it will continue you, but interest rates have come down to about where the Federal Reserve would like them. Now, I think some people would like them to start cutting rates.
Logan Ensign [00:04:22]:
Inflation has come down to where.
Joel Beal [00:04:26]:
Yes, maybe I used the wrong term there. Yeah. So inflation is down in that, what? I think it's around 2.6, if I'm remembering correctly. Right now, the Federal Reserve would like to be closer to two. So it's still a little bit elevated. And every time you see these inflation reports, I mean, everyone's trying to, again, disentangle. Well, what is, is it gas, is it housing? Is it consumables? But broadly speaking, we don't have the inflation problem that we had a year or two ago that was upsetting consumers and really matters when we're talking about consumer spending and retail and CBG, the world we really live in. Again, I think it's been handled very well, but there's still just this general sense of unease.
Joel Beal [00:05:07]:
When is it going to end? And theres going to be a reckoning for basically our reckless spending. I think thats a lot of whats going on in my mind.
Logan Ensign [00:05:16]:
Preston, fascinating. Well, we have a few variables going on here, right. Weve got inflation and the rate of inflation and how the Fed is managing that. Weve also got the markets reactions to this maybe softer than expected retail spending, and the markets havent had a significant adjustment. Right. Weve actually seen the markets today and well see over the next few days if theres an adjustment based on those spending reports. Im curious if you have a sense for why that would be the case and general market trends based on the consumer spending.
Joel Beal [00:05:49]:
So the markets are another element in all of this that make it all confusing because markets in some ways almost like negative economic data because they treat it as, ooh, if things are softening, the Federal Reserve is going to go cut rates. And thats really what the markets want right now in large part. So I do think it can be this bizarro world where negative economic data can actually be beneficial to markets. Or conversely, you can see great reports and then people are like, oh, no. And right now the debate is basically, will there be one rate cut this year or will there be two? I mean, thats kind of whats been signaled. So I think the other thing to keep in mind is, as we look at the average american, ill talk about the US here. The last couple of years have been amazing for lower income groups. I feel like my whole life weve been talking about wide income disparity.
Joel Beal [00:06:51]:
How do we bring that down? Well, the last couple of years have been amazing. Youre seeing the highest increases in earnings really happening in those lower groups. I think thats starting to trail off a little bit, but thats where a lot of the gains have been. But then the stock market disproportionately benefits those who are wealthier, who have assets. The run up in home prices. Again, nobody likes that. But at least if you have a home, youre hedged against it. You dont have a home right now.
Joel Beal [00:07:18]:
Then youre waiting on the sideline being like, wow, my homes just went up 40% over the last five years or something. And I think we're seeing that in retail earnings right now. And projections of, there have been comments, I know, from a couple of major retailers. I think Walmart was talking about, hey, we're seeing a softening in that lower income customer and we're going to rely more on our higher income customers to make up for that. Who, again, are seeing these nice stock market returns and are probably feeling okay.
Logan Ensign [00:07:47]:
Yeah, well, and so maybe we have some winners and losers from today or the past couple of days where the Fed is looking and saying, all right, we've got inflation a little bit more under control, the markets are doing okay. On the flip side, we've seen an all time, well, maybe not an all time low, but a continued decline in consumer sentiment. We've got higher prices at the cash register and we've got the sense from maybe manufacturers, brand manufacturers that we work with that it can be a bit more difficult time because theres a lot more pressure on pricing. So as we narrow the focus of our conversation here more to retail spending, whats your perspective on that front? And what trends do you see through h two or expect through h two in that world?
Joel Beal [00:08:32]:
Yeah. So theres no doubt in the retail world. I think the conversation is all about price right now. And I think we've talked about this before. We had, I mean, you could just pass through pricing kind of in prior years in a way you hadn't been able to do for a long time. People were just passing along, you didn't need to sell any more units and you were still comping 810 plus percent a year. And companies were seeing pretty dramatic increases in sales. And those days, I think are very clearly over.
Joel Beal [00:09:06]:
I think actually inflation, when you're talking about like consumables right now, I mean, I think it's flat. I don't think it's going up at all. I think the big news, a week or two ago, we saw a flurry of news articles from Walmart, from Target, from Amazon, all talking about how they were going to be cutting prices on some of their core items. You could see this, we want to get ahead and we want to tell those consumers, hey, prices aren't going to keep going up in the way that they have. One thing to keep in mind when they make those announcements. Why are they making them? Is that purely for the consumers? No, it's also notice to their suppliers that, hey, when we're going to be renegotiating our contracts, when we're talking about our wholesale prices, we're not going to accept increases. And in fact, we're going to be looking for concessions. We might be looking for you to start cutting prices.
Joel Beal [00:09:59]:
So I think that is the big shift on the kind of consumer product side is companies knowing that you got to win now by selling more units. You're not going to win through price increases and get those kinds of comps that maybe you got accustomed to in prior years.
Logan Ensign [00:10:17]:
And that may not necessarily mean just cheaper prices at the cash register, but maybe shrinkflation that we see with, well, let's maybe decrease the size, the volume, the quality so that we can get those units through at the price point.
Joel Beal [00:10:31]:
Retailers are pushing, yeah, everybody's got to figure out how they try to keep their margins. And so you're right, you might have to rely on some trickery. And I find it interesting on like, the shrinkflation. I consume too much Twitter x in my life. I don't use any other social media, really. I feel like people love to show those bag of chips that have like four chips in them now. It's definitely something I think you have to be pretty careful of as a supplier that you find that balancing act of how do I reduce my costs, but not in a way that's going to. Yeah, have me go viral in a negative way.
Logan Ensign [00:11:11]:
The consumer is more empowered.
Joel Beal [00:11:13]:
Right.
Logan Ensign [00:11:13]:
We've all seen the chipotle. You know, I'm going to fill an absurd amount of food in my burrito there.
Joel Beal [00:11:18]:
The dangerous, you know, things that a consumer with a camera can do these days.
Logan Ensign [00:11:23]:
Absolutely, absolutely. And maybe getting more specific as we look to h two, are there sort of consumer spending trends, retailers verticals that we expect to do well given some of the headwinds and maybe conversely, what they not do so well as we look to h two?
Joel Beal [00:11:42]:
Well, I think it seems as though people are talking as though an expectation that the higher income consumer is going to be more resilient now. That may change. I think if markets were to really cool off with how things are going right now, that's the group that I think is still willing to spend. And that's what we're starting to see more of that bifurcation right now. Again, just reading through the earning reports, what people are saying. So who does that benefit? Well, if we just look at the kind of mass retailers, the big ones that we usually talk about, it's amazing. When you look at Costco's performance on the stock market right now, they are priced very, very richly. They have a very aggressive price to earnings ratio.
Joel Beal [00:12:33]:
I think it's around 50. And so clearly, there's an expectation Costco tends to target that higher income customer and that they're going to be doing well. I think Walmart's continued to do quite well. Walmart's been moving up. That's, you know, they're on a long term. When I was younger and a kid, Walmart had, I think, a very different profile and different perception than it has today. And so they've, they've moved up. You know, I think on the flip side, how are the dollar stores going to do? How are some of those now? Sometimes they hold up well, and because people actually trade down, it's almost like more of a middling out where it's the places that are in the middle or the retailers, they do the worst because people are either saying, hey, I'm going to go to the nicer places or I'm going to go to a dollar store because I need to get something that's really affordable.
Joel Beal [00:13:21]:
You might see that broadly speaking on the retail side. The other thing, the long term shift towards more private label that I think we're seeing continue. That's another lever that retailers have to try to bring down prices. I mean speaking on the other side is always kind of secret. But look who's making the private label. Often it's the same branded companies and the companies that make the branded products that you know. So for them it's also another way to bring down their prices without compromising on their kind of staple branded goods. But that's, I think you'll probably continue to see that trend go up.
Joel Beal [00:13:58]:
I mean the one that I saw recently, Walmart just released, I cant remember the exact name of it, but they released a new private label brand across a lot of different products and it looks very target esque. Its interesting when you see it, youre like its clearly targeted toward that. Again, I would assume slightly higher income buyers. So I think thats what youre going to see will be interesting on the promotional side, how aggressive are companies going to be on that side? And I imagine we're going into the summer here, but as we start to hit the fall and probably people have a better idea of how the holidays are going to shape up if things are a little soft, you're going to see people get really aggressive on that side.
Logan Ensign [00:14:42]:
Yeah. Believe it or not, I can't believe we're mid June here.
Joel Beal [00:14:46]:
I think we were looking the other day at back to school and the timing of that and back to school starts in the next couple of weeks. It starts to ramp up. It is pretty wild. I always think of back to school being late August in September, but in reality I think peak back to school is late July these days so it's not far out. And as you said, that really starts then the train of basically holiday significant period to significant period as we end up the year.
Logan Ensign [00:15:17]:
Yeah, no, I think we're going to get a lot of data and interesting insight over the next six months. Well Joel, excellent. Always good to hear from you. Super insightful. Appreciate the time. And we, I'm sure we'll check in more as we get more signals about broader economic trends.
Joel Beal [00:15:34]:
Yeah, next time we're talking, maybe something big will have changed. We'll find out.
Logan Ensign [00:15:39]:
Awesome. Thanks Joel.
Joel Beal [00:15:40]:
Thanks Logan.