May ’23 Lender Update on Continued Retail Stress and Suggested Actions

Steve Katz 

Hi everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco Global Smarter Perspective podcasts. I’m your host, Steve Katz. And if you’re joining us for the first time, we’re glad you did. We have a great discussion today. Returned guest, Ian Fredericks, is joining us on the podcast. He’s the president of Hilco Consumer – Retail. And he’s here for what I would say is a very timely discussion, given the unnerving factors that are at work in the US economy right now. So get ready, we’ll be talking about what he and his team are seeing in terms of consumer demand and factors that are influencing product availability, buying power, and the consumer mindset overall, should be very interesting, because it always is when you join us, Ian, welcome back to the podcast.

Ian Fredericks 

Yeah, thanks so much for having me, Steve. It’s a pleasure to be back.

Steve Katz 

We’re glad to have you. And you know, it seems consumer demand is on the upswing other side, a few figures here for q1 of this year, we’ve got personal consumption up 3.7% versus 1%. In q4 of last year, demand for goods up by 6.5% demand for services up 2.3%. All pretty good. But then at the same time, we’ve got GDP growth slowing and the potential threat of a recession. So a lot of factors, both positive and some potentially negative, that are weighing on the consumer demand right now, including debt ceiling discussions, which I think are ongoing right now, as we speak here today. So let’s address them one at a time, starting with consumer demand, what are you observing there?

Ian Fredericks 

Sure, been really interesting to see the resilience of the consumer. And the one thing I’m not sure of whether those are inflation adjusted or not, but either way, it’s nice to see consumer demand remain strong, the consumer, certainly the driver of the American economy, and to certain extent, the world economy. And so seeing positive numbers is certainly better than seeing negative numbers. What’s interesting to me is that the consumer continues to be resilient, in some areas that are surprising. And you’d expect them to be resilient in grocery and food related areas, because they need, they need to be. Frankly, people need food. And so it’s not a surprise that they would be resilient there. But they’re also saying resilience in what I call more consumer discretionary, you know, around apparel, and, you know, as well as, you know, restaurants and more of your experiential type retail. So, you know, overall, the consumer has stayed resilient. And, you know, and I think what we’re gonna, what’s gonna be interesting to see is whether that resilience can last through the rest of the year, you know, as, you know, certain of the COVID related relief packages peel off and more and more of that the money that was pumped into the economy, you know, filters its way through, will the consumer, you know, be able to continue that level of resilience? We’ll see. I’ve been surprised so far. So I’m skeptical about  predicting the future, because the consumer certainly has been a lot more resilient than I thought they would be at this point.

Steve Katz 

Yeah, I agree. Yeah, a lot of pressure on the pocketbook right now from many standpoints, even just sort of thinking out to the future, and what’s going to happen, I think, it is somewhat surprising that you’re seeing that level of resilience. But we’ll check back in on that in the next few months and see where it stands with you. Okay, let’s move to supply chain. So obviously, supply chain has been a problem since the start of COVID at various levels, easing somewhat right now, what what are your thoughts there?

Ian Fredericks 

Yeah, you’re definitely going to continue to see easing in the supply chain, you don’t have the build up at the port. The time from when a ship leaves the port overseas and arrives is more normalized, container prices have been coming down. What you haven’t really seen are the savings associated with all of the supply chain disruption that happened sort of filtering through, I did mention you are seeing it on Container pricing. And that’s true. That’s one area where you’re definitely starting to see savings relative to the peak. You know what you’re not where you’re not seeing savings, more on the FedEx/UPS, that sort of last mile delivery, you’re not seeing that level of savings, they continue to implement surcharge and they continue to not guarantee certain types of deliveries that they did, you know, pre COVID So you’re definitely still seeing an increased cost there. You definitely your labor inputs into the supply chain continue to be is very high, you haven’t seen that relief in terms of, you know, some of the, you know, wage growth that you saw and a little bit of contraction. So you do have a little bit of a mixed bag here, the supply chain is definitely running something closer to what it ran, you know, pre COVID. What you’re also seeing now, and what you’ll continue to see is more of that nearshoring, or, you know, in terms of like Mexico, Canada, or areas that are closer, at least to the United States, and onshoring, where it absolutely manufacturing in the United States is going to grow. And I will talk about in one of the later topic, as you continue to see manufacturing and near storing growth, you’re going to need to expand the facility that you have in the United States, and in some of our major trade partners, you know, that our near store primarily being Mexico and Canada, by building out more of an infrastructure, you’re going to have a large demand for labor, you’re going to see increased labor costs, you’re likely to continue to see inflation as a result of some of that supply chain near storing/onshoring.

Steve Katz 

Yeah, it is interesting, and obviously, you know, those input costs, you know, even though some of those costs are actually coming down, you know, them not being really passed along. And I think consumers are seeing that too, and the pricing of goods and the, you know, they get to the store and everything in the grocery stores higher priced, they get to the, you know, buy apparel, and apparel continues to be relatively high price. So I think it’s troubling. Yeah.

Ian Fredericks 

Yeah, I think that’s a great point. And I’m glad you brought that up, you’re not seeing a reduction in pricing. So you’re really still seeing that inflationary pressure. But even more so and this is one of the things that absolutely blows my mind about the way that the food companies have dealt with these rising input costs, you know, they choose not to necessarily raise the price, but instead, they actually will reduce the, the amount or the quantity that you get, so they’ll, you know, change the size of the box. So it looks different, maybe instead of being wide, it’s now taller. And you know, now there’s less product actually in the box in terms of food, so that way, they can figure still charging the same price. And you know, they, they’re naive to think that the consumer doesn’t recognize it, the consumer absolutely does recognize the change. And for consumers that are really, you know, living on a tight budget, it’s having a massive impact on them, because they know how much quantity they got for the price. And they know that they’re now getting less quantity for the same price. So, you know, it’s the nuanced way that manufacturers are dealing with it that I think more than anything frustrates the consumer and really, you know, isn’t, in my view, a long term benefit, they’d be better off, you know, raising prices a little bit because the consumer expects that and giving them the thing, quantity. But you’re absolutely right, prices are not coming down. For the consumer, even though they’re staying stagnant, they’re still getting less.

Steve Katz 

Yeah, it’s almost you almost feel like maybe there’s a psychology to it, where I could still buy the same crackers that I love to buy. Whereas if the if the prices were raised incrementally, I wouldn’t be able to buy those crackers and have to buy something else. So I can still get what I want, even though I’m getting a little bit less. So I kind of suck it up and buy it anyway. It’s

Ian Fredericks 

That’s a good way of looking at it. Maybe that psychology is more helpful. I hadn’t looked at it from that perspective.

Steve Katz 

Yeah. Well, that’s, that’s my own interpretation. So not scientific. Alright, let’s keep going. So you’ve touched on inflation, obviously, it seems the Feds’ efforts are paying off to some degree. But clearly we have this, you know, danger that existed from the start with the rate hikes, which is the risk of further inflation, and recession. So can you talk a little bit about those interconnected factors and where you think we’ll land from a consumer demand and purchasing power standpoint, moving ahead.

Ian Fredericks 

Yeah, I absolutely don’t agree that the feds efforts have been paying off I think what you’re seeing in the number is exactly what I’ve been predicting for over a year, you’re not going to see the same level of increase this year as you did last year, same time period because last year and would have factored in place in between 2020 to 2021 and 2021 to 2022. So from an inflation standpoint and it’s going to sound weird, they comped inflation. But if you were comping your inflates in year over year, you would expect inflation right now to be lower because the comps over the same time period last year were the highest they had been so when I look at inflationary numbers right now I look at them and say yeah, I expected this to come back down last year or the month of May in June. Some of the highest inflation we had ever seen, but month over month and year over year, and I don’t think people are looking at it accurately, because they’re not looking at it in the aggregate and saying, Okay, let’s look dart back in 2020, when the Fed started printing trillions of dollars in money, because, you know, to support the economy, so we didn’t go into a depression. And let’s look at what the 2020 to, you know, call it, April, March, April 2020, all the way to March, April 2023. Inflation is, what that aggregate inflationary number is. And, you know, at this point, it’s gotta be in and I haven’t done the math in a few months. But its mid-teens to high 20%, inflation, over a three year period, that same thing, except on a more on a greater basis, it’s happening. And it’s, you know, April of 2023, May of 2023, in June of 2023. So, I mean, June of 2023, last year, I think was my memory, spark was over 9% inflation, year over year, if you put another five on top of that you’re at 14, and then take into consideration what happened between 2020 and 2021. And you’re around 20% inflation that the consumer has experienced between, you know, the pandemic, and now the knot is, you know, that’s what we would typically experience over a 10 year period. So, while inflation is coming down, it’s not coming down, because I believe the Fed interest rate hikes have impacted if they’re having an impact, it’s nominal. I think you’re hearing that from the Fed as well, the interest rate increases that the Fed has done by the tamp down inflation, largely won’t be felt until later this year, early next year, in my opinion, at the earliest.

Steve Katz 

So do we see an easing of those policies now, or no?

Ian Fredericks 

I think you’re definitely going to see an easing in the policies, because, you know, but I don’t think you’re going to see the reversal. So I think you’re going to see an easing in the sense that maybe we have another quarter point, increase the next month, and then maybe the Fed takes a hiatus for a few months, but they’re definitely looking at this month over month, and then what you’re going to, but you know, for markets, to be speculating that the Fed is going to reverse course, on inflation. They’re not going to reverse course, later this year, in my opinion, barring some, you know, major thing in the, you know, in the economic Pitzer. So, you know, if you had, you know, the breakdown of a war, that would be a major thing, if you had another pandemic, that would be a major thing. But barring something major like that happening. I don’t see the Fed reversing course this year and starting to reduce rates. You know, like, as I was saying, I think the Fed knows what’s happened so far, is not a result of the rate increases that they’ve had that you’re not seeing that cycle through the economy yet.

Steve Katz 

Yeah. Well, good perspective, and it’s a good way to a good way to look at it and know, maybe not so much what you’re hearing in the news. So that’s why we talk to you. Lastly, Ian, you know, we’ve seen some notable store closings last year, late last year and early this year with Bed Bath and Beyond. And I know, you and Hilco are actively involved in some of the inventory disposition efforts for Bed Bath and Beyond. How are you advising retailers and their lenders who are in a stressed or distressed mode right now? What what seems to be the best course of action?

Ian Fredericks 

Sure, what’s been interesting, I think about the store closing so far as you definitely have a fairly large amount of stores that are closing, but not necessarily in the first quarter so far, but not necessarily a lot of retailers that are closing stores. And as, and even with some of the playbook that, you know, Bed Bath and Beyond tried to roll out, you know, from the beginning of this year, until they had to file for bankruptcy. And, you know, I know, they’re still working on trying to salvage aspects of the business and they’re marketing them as a going concern. And we’re very hopeful that they’re able to get that and able to sell aspects of the business and keep them going as a going concern. And if they cant, we’ll obviously continue to, you know, help out with the store closing but leading up to the bankruptcy, we worked with them on trying to come up with an inventory procurement facility where they could source of additional inventory from third parties that they wanted to store. You know, that’s the solution that we offer, we actually, you know, signed all the documents and I know they did a press release on it. And you know, and then shortly thereafter, we ended up not closing on the facility, not that art stores, but by their because they realized they had run out of time by the by the point at which they were able to implement that facility. So looking at alternate ways to deal with your inventory procurement and the abilities that we offer typically work really well. When you have a, you’re faster. Stop factoring receivable for your suppliers or trade insurance companies up doing topic doing trade insurance on on a receivable. So those are an area where we can be helpful get you the inventory that you want the inventory that your consumers want to put into stores, that’s one thing that you should be looking at, don’t wait till the last minute, you know, we can look at the Bed Bath and Beyond situation as maybe it just took a little bit too long to get there. And if we talked about those earlier, and we can get them in place, so that retailers can access them, I’d be taking a hard look at your appraisal, you know, appraisals were down appraised values were down during the, you know, since the pandemic, but they were down not necessarily because the intrinsic value of the inventory wasn’t there. But because a lot of our competitors knew the formula, and they adjust appraisals off the formula, they’re not taking into account, you know, the true intrinsic value of that inventory. But I think getting a hard look maybe a second opinion at your appraisal, that’s something that would be really important, you know, to do at that point in time, you know, make sure that you are focusing on your stores , you know, the big shiny objects that everyone’s been facing for years has been omnichannel in e-commerce. And don’t get me wrong, they’re important. But at the same time, the vast majority of most retail sales still happen in stores and for retailers, they also still happen in through their store. So I would take a hard look, and I apologize, I’m doing this from home, the landscaper was out so sorry about the background noise, it’s like going back in time, so the early COVID days. You know, so, you know, focus on your store, focus on your frontline employees, right there’s still a challenge for getting labor in stores, and you don’t want attrition you want your employees to be happy. Focus on them, you know, really lean into them. They’re the, they’re the people who have the direct connection to your customer. And it is critical that they’re happy, they feel empowered, they feel supported, because the better your frontline store employees feel, the better the customer experience is going to be, the more you’re going to sell. So I would say those three things, you know, making sure that you have the facilities in place to be able to procure the inventory that you want that you need, you know, focusing on your store, and then also focusing on your frontline store employees. And one of the ways that you can actually help them to it like putting, you know, technology in their hands that help make their daily routine better. You know, that’s something else that we’ve also, you know, rolled out we have a platform called Restore for resale that really make the frontline team members lot daily lives better, they’re able to focus more with the customer, they’re happier, morale is up and not encourage you to look at things like that, too.

Steve Katz 

Yeah. And we you and I’ve talked about that we should do another podcast and focus in on Restore for retail, because it is very interesting. And it is a great tool, at least as I understand it now having having looked at it for keeping those store employees motivated and feeling part of the greater whole and giving them the tools that they need to succeed. So let’s plan to do that.

Ian Fredericks 

I would love to do that. T hat sounds great. Steve, appreciate the opportunity.

Steve Katz 

All right. Well, listen, as usual, terrific insights. I’m sure there’s going to be some follow up questions from people listening in today. So could you just provide your contact info so they can reach out?

Ian Fredericks 

Sure. I can always be reached on my mobile, it’s Area code 847-687-9375. And my email is IFredericks@hilcoglobal.com.

Steve Katz 

All right, and well, thanks a lot. Come back and join us again soon. We’ll pick up that next topic we talked about.

Ian Fredericks 

I definitely well looking forward to it. Thank you.

Steve Katz 

All right, and listeners. As always, we hope that this smarter perspective podcast provided you with at least one key takeaway you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And if you found today’s discussion insightful, be sure to check out our library of other podcasts. You can find them in Hilcoglobal.com/smarter-perspectives, or on your favorite podcast platform. Until next time, for Hilco Global, I’m Steve Katz.