Inside this Issue:
- More Covid Relief Spending: All but a Done Deal
- The Job Market: Better but Still Bitter
- Technology Psychology: Investors Getting Bearish
- Dwelling Selling: Housing Market Still Hot
- Bank Robber: Walmart Launches Poach Attacks on Goldman Sachs
- Gassing Up: Oil Prices on the Rise; Food Prices Too
- Fungy Jumping: The NFT Collectible Craze
- Sinosaurus Rex: U.S.-China Tensions Boil
- Looking Back: The Tumultuous History of Citibank
- Debate: Student Loan Relief, Yes or No?
- And This Week’s Featured Place: New Orleans, America’s Netherlands?
Quote of the Week
“Disasters always accelerate existing trends.”
– Lamar Gardere, Executive Director of Data Center, a New Orleans-based nonprofit (speaking at a virtual event hosted by the W.L. Kellogg Foundation in February).
Consider it done. Washington’s $1.9 trillion spending package is now days away from enactment. The House passed it. The Senate passed it. And once the two bodies agree on the final language, the President will sign it, probably sometime this week. Most Americans will receive $1,400 checks. The bill also provides additional unemployment benefits, money for education and health care, and aid for state and local governments. No minimum wage hike though.
Supporters see the bill as one leg of a recovery tripod, the other legs being vaccinations and loose monetary policy. Others, however, see the economy recovering without the need for more spending—spending with the potential to cause destabilizing inflation.
Parts of the economy are indeed recovering. Flourishing, in fact. As retailers like Costco and Target showed again last week, if something’s used in a dwelling, it’s probably quickly selling. Retail, housing, finance, autos, technology, media… it’s mostly good news. Many expect GDP to expand a bullish 5% or 6% this year. But until the labor-intensive travel and restaurant sectors recover, the job market won’t look pretty. The latest Labor Department report released Friday revealed some encouraging trends, including job gains for the leisure and hospitality sector (which includes restaurants, bars and hotels). But don’t be too comforted: Employment in the sector remains 20% below its pre-Covid level. Across the economy, worryingly low labor participation rates are a major concern, with implications for future economic health. Note also that more than 4m people say they can’t even look for work right now due to Covid-related health risks. Both Treasury and Fed worry a lot more about this still-bleak employment situation than they do the risk of overcooking the economy.
Do they worry about rising interest rates? It doesn’t seem so, though rates did rise again last week. Stocks wound up rising a bit too, but not before some roller-coaster movements. Tech stocks, specifically, are experiencing a multi-week tumble from their stratospheric highs. Maybe Tesla isn’t really worth more than the entire solar system.
Earnings season for the fourth quarter is now nearly finished, though Oracle for one presents its numbers this week for the three months through February. With March now well underway, reports for the first quarter of 2021 aren’t far off. As they approach, key uncertainties include the impact of the new stimulus, the prospects for legislation on infrastructure and immigration, the durability of rising commodity prices, the duration of supply shortages (i.e., for semiconductors and shipping containers) and potential shifts in spending patterns as travel and leisure opportunities reopen. And the number one uncertainty, of course, is how much longer the virus will torment.
- Costco: Among Big Box retailers in the U.S., only Walmart is bigger, measured by revenues. But Costco’s business model is in many ways different. Walmart has its own Costco-like membership chain in Sam’s Club. But for Costco, member-only warehouse stores are chiefly what it does. Membership fees, indeed, are a critical profit driver. And Costco also tends to target somewhat more affluent customers, even selling items like expensive jewelry and wine. As explained in a Wall Street Journal feature last week, the Seattle-based company also employs the lure of discovery, frequently adjusting its inventory and designing its stores so that shoppers feel like they’re treasure hunting. “It’s not engineered for a quick shopping trip,” says the WSJ’s Sarah Nassauer. “It’s just the opposite.” In any case, Costco was no less galvanized by pandemic-era shopping habits than Walmart, producing strong profits and revenue growth during 2020. It did so even while significantly raising wages and sharply growing online sales, which are now approaching 10% of its total. Management did express some concern about rising commodity prices, notably for gasoline and pork. Costco is also a travel distributor, which obviously suffered last year. But it did say trips to Hawaii and Mexico are now picking up. As for booming items like food, furniture, appliances and cleaning supplies, will people stop buying as much when the pandemic subsides?
- Target, based in Minneapolis, is right there in the parade of triumphant U.S. mega-retailers. Digital sales are now 18% of its total, aided by the use of its stores as fulfillment centers (this avoids needing as many costly warehouses). The stores, it adds, also serve as showrooms and service centers. And remember, rival Amazon doesn’t have stores, Whole Foods and a few other exceptions notwithstanding. Like Costco, it targets (pun intended) more affluent areas of American suburbia. A current focus of growth is in urban areas, college towns and tourist sites. Target is also partnering with more brands including Levi’s Jeans and Ulta Beauty. It’s also doubling the store floor space it’s dedicating to Apple products. To be sure, Target sells its own brands too—these account for about a third of total sales and typically generate higher margins. Expect more self-branded products. Curbside pickup is a priority. So is same-day delivery. So is building Target Circle, a membership loyalty program now with 90m members. Like other big retailers, Target boosted wages last year. And demand still looks good in the early months of 2021. Management won’t make any full-year forecasts though, not with high levels of lingering uncertainty about the virus, the stimulus, the timing of school reopenings and the potential return of pre-Covid spending habits. Whatever transpires, Target’s top goal is to deliver value for all customers, whether they’re strolling (in stores) or scrolling (online).
- Airbnb had an IPO for the ages in December—its share price more than doubled on the first day of trading. Why are investors so enthusiastic about a travel company, at a time when travel is at the epicenter of a global economic crisis? Irrational exuberance perhaps. But some are enticed by Airbnb’s prospects as a giant online platform connecting travelers across the globe to a network of hosts and property managers. “Their business model is effectively the same as Amazon’s third-party marketplace,” says Seth Borko, Senior Research Analyst at Skift. Airbnb similarly aggregates content online, generating revenues through fees (it calls them “service fees”), charged to both guests and more importantly hosts. It has huge scale, having booked more than 800m guests since its founding in 2007. It has about 4m hosts in cities across the globe. Some of these hosts are highly valued growth companies in their own right, including the highly valued vacation rental firm Vacasa. Airbnb bulls also like the company’s youthful user base, its potential to sell add-on experiences, the growing popularity of alternative accommodations, its many repeat customers, the rise of remote working and its well-liked user experience (both during bookings and during stays). Unlike its online travel agency rivals (i.e., Booking and Expedia), Airbnb doesn’t depend on commissions from the consolidating hotel sector. It helpfully gets many of its bookings direct rather than via Google or other third parties—that’s thanks to strong brand awareness and effective advertising. It’s recently eased tensions with some hostile cities by agreeing to pay accommodation taxes like hotels. And besides, cities need its help more than ever to make up for lost tourism during the pandemic. On the other hand, Airbnb lost a lot of money last year. More precisely, its operating loss, even excluding depreciation and amortization, was $251m, with revenues dropping by $1.4b, or 30%. That’s better than first feared; travelers did start coming back as the year progressed, notably within North America and Europe. By Q4, y/y revenues were down a relatively mild 22%. Costs fell sharply too, driven down by mass layoffs. But the losses nevertheless hurt. In a 2019 report, Borko and his Skift colleague Wouter Geerts estimated the size of the short-term rental market to be $116b, separate from the $600b market for hotels and motels.
- Nextar: Local newspapers are dying. Local radio has its troubles too. But local television? It’s just the opposite. Nextstar, a broadcasting media company based in Dallas-Fort Worth, was among the many corporate winners of 2020, for two main reasons. First: It was a hotly contested election year, so much so that Nextar sold half a billion dollars in political ads—that was 11% of the company’s total 2020 revenue. Second: More people were at home watching television, with local news a particular attraction during these times of anxiety (Covid, social unrest, tense elections, severe weather…). That rising viewership is crucial because it also enabled Nextar to sell a lot more non-political advertising, which accounted for another 35% of revenues. Its largest category of advertisers is the auto sector. But executives also mentioned strong gains from merchants selling insurance, furniture, home services, groceries and health care services. Nextar is pushing into digital media too, selling ads via its television station websites, for example. But this is still just 5% of revenue. Its biggest revenue source, representing nearly half, comes largely from multichannel video programming distributors, a fancy way of saying cable and satellite companies like Comcast, Verizon or AT&T’s DirecTV (soon to be spun off). They pay for the right to retransmit signals of Nextar’s many television stations across the U.S.—it’s currently the biggest local broadcaster nationwide, reaching 38% of all American households. As for costs, the two big ones are labor and programming. Nextsar stations produce a lot of their own programming—local newscasts, for example. But they also purchase the right to rerun syndicated shows like Seinfeld. And they negotiate longtime contracts with the big networks ABC, NBC, CBS and FOX, so they can show their programs and events (think Dancing with the Stars and the Super Bowl). Nearly all of Nextar’s roughly 200 stations are affiliated with one of these big networks. In cities where the company owns more than one station, implying more than one network affiliation, profits tend to be stronger. By law though, it can’t own more than two per market. A rare Nextar-owned station that doesn’t have a network affiliate: WGN of Chicago, the country’s third-largest media market. In one of the company’s biggest strategic initiatives, another channel WGN America is now rebranded as NewsNation, hoping to compete with the likes of CNN, FoxNews and MSNBC. That aside, CEO Perry Sook says local news is more important than ever during emergencies. “People did not go to Apple TV to find out when the water crisis was going to be dealt with in Dallas-Fort Worth. They went to local broadcast television.” Rival digital platforms, however, including sites like YouTube, are surely a potential threat, whether watched via TV sets or mobile devices. There’s also the question of whether TV viewership will decline from Covid-era highs as people start leaving the house more.
Tweet of the Week