The latest from Bill Conerly:
In like a lion, out like a lamb
My friend, Dean Chaloupka, offers the following commentary on the spring season:
Talking with growers around the country, most did very well through the peak of the Spring 2009 season and have seen sales drop off during June. Depending on what part of the country you are in, this could be viewed as significant (North) or not (South).
I won’t go into the economic factors which contibuted to the industry fairing well through most of the Spring but will touch on a couple which growers and retailers should think about as softer June sales have reminded us.
1. While consumers stayed home in Spring and focused on decorating their homes and yards, the economy is still on peoples minds and many consumers are on budgets. Consumers will not spend as freely as in better economic times.
2. People will make their purchases last longer. Plants will be maintained and not pulled out and replanted as often.
3. Disposable income still plays a role in how much people will purchase for plant material. Gasoline has started to move upward again and can impact sales going forward if the trend continues.
4. Consumers need a reason continue to purchase plant material. Later in the season, new and fresh planters, baskets, etc will generate new sales but it should not be expected that left over flats, 4″, 6″ pots and items which are the same thing consumers saw earlier will meet a need. At this time, consumers will no longer “grow” the plant.
It is my expectation that consumers will view plants and horticultural products for the rest of 2009 just as they have done in June. They will need to be enticed to decorate and the same old products, plants, packaging, and messages will not do it.
Banking Math
Interesting banking figures from Mark Perry:
Number of bank failures this year so far: 45
Total Assets of the 45 failed banks: $36.965 billion
Total Bank Assets of All 8,246 FDIC-insured banks: $13.542 trillion
Failed Bank Assets as a Percent of Total Bank Assets: .27% (or about 1/4 of 1%)
Bottom Line: The worst of the banking crisis seems to be behind us, the percent last year was 2.69%.
Retailers cutting back variety
Stan Pohmer (Pohmer Consulting Group) sent me a link this morning to a WSJ article discussing retailer moves to cut back on the number of SKU’s. Here is an excerpt (for the full article, click here):
For years, supermarkets, drugstores and discount retailers packed their shelves with an ever-expanding array of products in different brands, sizes, colors, flavors, fragrances and prices. Now, though, they believe less is more.
Pharmacy chain Walgreen Co. is cutting the types of superglues it carries to 11 from 25. Wal-Mart Stores Inc. has decided that 24 different tape measures is 20 too many. Kroger Co. has tested stripping out about 30% of its cereal varieties.
In the next year or so, these and a few of the other largest retailers are expected to slice the assortment of products in their stores …
Stan made a few elaborative comments in his email saying:
Line simplification, making it easier for the consumer, reducing SKU’s for better inventory control, back to basics, reduction of confusion…
As explained in the book The Paradox of Choice: Why More Is Less by Barry Schwartz, and explained in the article, having the retailer be the gatekeeper of the assortment, reducing the SKU count to reduce customer confusion and only stocking the best of the best, could increase sales, rather than hinder them (which goes against the logic of most producers).
This could have major implications for the L&G; industry…do we really need another red petunia? If the Boxes embrace this philosophy of short and deep, is this an opportunity for the IGC’s, to fill the gap and gain differentiation? Or is this a fundamental shift for all retailers?
To which I replied with my own comments:
In our industry, we have already seen brand blurring erode brand equity; product proliferation whittle away at the length of the product life cycle; and analysis paralysis on the part of our consumers (as you stated). I contend that retailers should put each product category and each product within the category to the value proposition test. We [as an industry] need to remember that we are in the solutions business. Even in our research regarding the value of landscapes to perceived home value, the sophistication of the design was the number one contributing factor, followed by size of the plant material. The diversity of the plant material was still a contributing factor, but well behind the other two.
To which Stan replied with the following:
As far back as the early 1990’s, the Big Boxes (specifically TGT and WMT) went through an exercise they called ‘space wars’ where every department, every planogram and every item on that planogram was evaluated through multiple metrics (i..e unit and $ sales and net contribution (GM less markdowns of all types, adv costs, internal/external distribution costs, plus any internal charges…down to the item level!). Looking at the numbers at the macro level, management determined division and dept space re-allocations, and then the individual departments did their micro level critiques. Using this information in building the assts for the next season, category, asst and unit decisions were made, down to the # of facings and shelf inventory.
Overall this system worked (one had to make judgment decisions and couldn’t let the numbers force stupid decisions). Every item had to justify it’s existence every year…there were no sacred cows. Even if the buyer wasn’t a product expert, the numbers forced him to, at least at the top level, make more intelligent decisions based on sales (consumer demand) and profit. It makes me wonder, however, how the SKU proliferation that’s taken place over the past few years survived the space wars analysis process (unless one incorrectly equated breadth of asst with differentiation)
Want to join in the discussion???
Home sales gaining slightly
The existing home sales report for May just came out. Here’s what the figures showed:
- Existing home sales gained 2.4% to a seasonally adjusted annual rate of 4.77 million units from 4.66 million in April. That was slightly below forecasts for a reading of 4.82 million and down 3.6% from 4.95 million a year earlier.
- Single-family sales climbed 1.9%, while condo and cooperative sales rose 6.1%. Regionally, sales were mixed. They rose 3.9% in the Northeast and 9% in the Midwest. But transaction volume was unchanged in the South and down 0.9% in the West.
- The raw number of homes for sale fell 3.5% to 3.798 million units from 3.937 million in April. That was also down 15.3% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 9.6 from 10.1, with single family inventory falling to 9 from 9.5 and condo inventory slipping to 15 from 15.4.
- The median price of an existing home rose 3.8% to $173,000 from $166,600 in April. That was down 16.8% from $207,900 in the year-ago period.
We saw another month of modest improvement in the housing sector in May. Existing home sales rose, led by the Midwest region. Sales were particularly strong in the condo sector, while the supply of homes on the market dipped. The biggest fly in the ointment continues to be pricing. It remains weak, with yet another double-digit decline from year-earlier levels showing up in the data.
Stepping back for a moment and looking at the big picture, it’s clear that the housing sector is no longer in freefall. But neither is it rebounding strongly. We’re seeing modest declines in inventory, modest improvement in sales, and some tentative signs of stabilization in pricing. But that’s it. And that should come as no surprise. We just experienced the longest, largest housing bubble in U.S. history. As a result, the recovery process will be a long, drawn-out affair.
Another thing to keep an eye on: Mortgage rates. They didn’t begin to rise significantly until late May. Since the existing home sales figures are based on contract closings, rather than contract signings, the impact of higher rates wasn’t captured in this report. We’ll likely see housing demand trail off as we head deeper into the summer unless financing costs ease back.
WASHINGTON (Dow Jones) — Existing-home sales improved again in May, but falling prices and bloated supply promise to make a housing sector recovery slow.
From Mark Perry: That’s one way to look at it. Here are some alternative views:
1. The April to May increases in median home prices (3.84%) and mean home prices (3.26%) were the largest monthly price increases in more than a year (data here).
2. The monthly May increase in both median home prices (3.84%) and homes sold (2.36%) was only the second time in at least a year that both prices and unit sales increased in the same month.
3. The back-to-back increase in home sales in both April and May is the first time in at least a year of two consecutive monthly increases.
4. The most recent two-month increase in sales of 4.84% is the largest since April 2004 (source).
5. The 9.6 months supply of inventory in May is below last year’s May level of 10.9 months by more than five weeks, and is at the second-lowest level in the last year.
According to Brian Wesbury and Bob Stein:
The data today are consistent with our outlook that the economy is recovering from a panic.
Home sales, building activity, and the rate of decline in home prices all seem to be bottoming or have already formed a bottom. In fact, the level of existing home sales in May was the highest since October 2008.
The new home sales figures for May were also released this morning. Here’s a recap …
- New home sales dipped 0.6% to a seasonally adjusted annual rate of 342,000 from 344,000 in April. The numbers are a disappointment, considering economists were expecting sales of 360,000. Results for the past few months were also downwardly revised by 32,000 units.
- Regionally, sales jumped 28.6% in the Northeast and 18.6% in the Midwest. They inched up 1.3% in the west, but fell 8.5% in the South, the nation’s largest new home market (184,000 units sold at a seasonally adjusted annual rate vs. 80,000 in the West … 51,000 in the Midwest … and 27,000 in the Northeast).
- The raw number of homes for sale continued to decline, falling to 292,000 from 299,000 in April. That’s the lowest reading going back to March 2001. The months supply at current sales pace indicator of inventory dipped to 10.2 from 10.4.
- The median price of a new home rose 4.2% last month to $221,600 from $212,600 in April. On a year-over-year basis, prices were down 3.4%, the best YOY showing since December.
Digging into the May new home sales figures, you see that sales rose in three out of four regions of the country. But they declined sharply in the South, the country’s biggest new home market, so overall sales were a disappointment. On the other hand, for-sale inventory continues to decline — a definite plus. And the year-over-year rate of home price depreciation eased markedly.
Overall, the story remains the same: The housing market is gradually stabilizing, but showing no sign whatsoever of a vigorous rebound. The biggest issues going forward remain unemployment and interest rates. The supply of new homes for sale is back in line with the long-term historical average. But if potential buyers are losing their jobs, and financing costs are going up, builders are going to have a tough time moving product.
NAHSA meeting upbeat
Taking a moment to catch my breath before my next flight, I was reflecting on comments made during last week’s meeting of the North American Horticultural Suppliers Association, otherwise known as NAHSA. This group of manufacturers and distributors is always a delight to interact with and, as usual, I ended up learning a great deal from networking with the group and the other invited speakers. Here are a few tidbits from the meeting:
- Our economy will recover (because it always has) and because Americans work harder than any other developed country in the world.
- “It ain’t what we know that hurts us; it’s what we know that ain’t so!”
- Humans have a special bond with plants (and animals) that speaks well for the future of our industry.
- Over the next six years, the largest transfer of wealth in history will take place as the Great Depression generation will be leaving (literally) a HUGE sum of retirement savings and assets. They were focused on the lowest rung of Maslow’s hierarchy of needs — that is, survival — and they spend considerable less than other demographic segments. As this transfer of wealth takes place, subsequent generations that are more oriented towards Maslow’s higher order of needs (self esteem / self actualization — often referred to as “dream space”) will be depending on our industry to fulfill those needs (see #3 above). “We own the dream space!”
- Weather influences us as much — and sometimes more — than the economy does, in the short run. For the past 12 years, the correlation between U.S. same-store sales and national temperatures was 81.9 percent. Weather variability has an impact on economic activity in every state (GSP) and in every sector. Aggregated over all sectors and states using 70 years of historical weather data, this is estimated to be approximately 3.6 percent of annual GDP, or $260 billion (in 2000 dollars). Agriculture — which has been the sector most studied for weather impacts on specific production for specific crops — is less able to undertake temporal or geographic substitution within a year and thus is one of the most sensitive sectors at 12.1% sensitivity.
- Downturns always create opportunities. Invest in stocks related to pharmaceuticals, energy, banking (yes, banking), construction equipment (Caterpillar), and delivery services (FedEx).
- You can create, buy, and change in troughs better than at peaks. It’s all about your value proposition — why should you buy from me? Shout your differentiation from the rooftop!
- The long-term credit market is loosening up, albeit slowly. The Fed is expected to hold the fed funds rate in its current 0 to 1/4% range for the next year.
- “It is always the adventurers who do great things, not the sovereigns of great empires.” Charles de Montesquieu
- Fear keeps us average.
See what I mean about it being a great meeting! If you missed it, you really missed a good one. Here’s a silver lining though — you can listen to my recorded sessions by clicking here. Wish you could have heard the other guys though!
Steps Businesses Should Take in the Midst of Financial Crisis
Here is an EXCELLENT short-list of action steps for the rest of the economic downturn heading into recovery:
- Love your customers. Get closer to them than you have ever been; understand and aggressively address their issues. In a poor economy, competition will increasingly be based on price, so that you need to be able to articulate your value proposition in order to justify holding your prices above the competition’s, or to be able to just hold on to the business;
- Love your bankers. Communicate with them; let them know what you are doing. Convince them that you are thinking about them and you will do whatever it takes to make sure their loans are repaid. The biggest mistake companies make with bankers is not staying in constant communication with them and then at the last minute surprising them with bad news. Debt will be difficult to obtain so make sure your credibility and communications are in place so that you will be in line to get your share. Keep your loans in good repair – do not bust covenants. Bankers will be less forgiving in this environment;
- Love your shareholders. It is much easier to get additional capital from people who know you than from people who do not know you;
- Love your employees, particularly your key employees. Although unemployment will increase, there will continue to be demand for key people and for people having skills that are in short supply. Your employees will feel insecure about the company and about their jobs. Keep them informed and involved in the process so that they do not make an uninformed decision to leave your company.
- Be relentlessly focused and realistic about your business and its prospects. You are now in survival mode and you need to be clear about what it takes to survive. Review your business strategy and value proposition to ensure they are in line with the needs of the current market environment;
- Cut costs, cut costs again, and cut costs for the third time;
- Watch your customers’ credit rating and payment history. Most will attempt to use you as a financing source and it is likely that several will fail.
- Review your payables policies. Take full advantage of the time your vendors will allow you to pay and pay just before you endanger critical relationships.
- Consider alternative sources of financing, such as asset-based lenders.
- Look for opportunities – crises breed extraordinary opportunities.
Source: Bill Patterson and Kit Webster, BridgePoint Consulting, Inc.
Hat Tip to Paul Wright for the link!
Cut costs, not customer experience
Here’s a quote from a recent blog entry by Jeffrey Pfeffer, a professor of organizational behavior at Stanford’s Graduate School of Business and is the author or co-author of 12 books including “What Were They Thinking? Unconventional Wisdom About Management.”
Not all cuts are the same. Management, which is invisible to the customer, seldom cuts itself, because no one thinks they’re redundant. … The companies that will do the best are those that recognize their own particular “moments of truth” — the small but crucial experiences that matter most to their clientele — and figure out ways to reduce costs that don’t adversely affect these small but psychologically important customer interactions.
From the BNET Report…click here for full post!
Housing Market Update
This is a HUGE subject and I probably can’t do it justice in one blog entry. But here goes.
Sales of new one-family houses in April 2009 were at a seasonally adjusted annual rate of 352,000, according to estimates released jointly last week by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.3 percent (±14.5%)* above the revised March rate of 351,000, but is 34.0 percent (±11.0%) below the April 2008 estimate of 533,000.
The median sales price of new houses sold in April 2009 was $209,700; the average sales price was $254,000. The seasonally adjusted estimate of new houses for sale at the end of April was 297,000. This represents a supply of 10.1 months at the current sales rate.
Below are some viewpoints from some housing pundits regarding this latest report:
- The new home sales numbers seem to confirm what the single-family housing starts and permits numbers imply — that the market for new single-family homes is flattening — indeed, that it may have hit bottom in January — and that the recovery will be a slow one. Despite improving numbers, we are not ready to say that the market has hit bottom. These numbers are estimates with large standard deviations. Because the margin of errors is big, the footnote in the press release warns, “It takes four months to establish a trend for new homes sold.” We still project that this market will start expanding in the second half of this year. –Patrick Newport, IHS Global Insight
- As opposed to the resale volumes, which increased by 2.9% month-to-month in April, new home sales remain sluggish. Plunging prices, record-low mortgage rates and an $8000 tax credit for first time buyers did not help much to push up hew housing demand. We believe, new home sales is probably a better reflection of the underlying demand than the existing home sales which have been highly boosted by the increasing foreclosure numbers recently. Nevertheless, new home inventories kept declining in April which sent the months’ supply in new homes to 2.3 month below a record of 12.4 months reached in January. In addition, the home prices kept falling and were 14.9% below last April’s levels. Even though we see builders are becoming more optimistic about the future of the housing industry and there is some stabilization in housing demand, surging foreclosures, rising mortgage rates and high unemployment rates will weigh heavily on new home sales and will prevent a sharp rebound in the housing market in the near future. –Yelena Shulyatyeva, BNP Paribas
- New homes are now sitting on the market for a median 10.9 months before selling, and completed homes still comprise an extraordinarily high share of total homes for sale. While sales have stabilized within a fairly narrow range over recent months, there is little to suggest that the sales rate will post a meaningful and sustained increase any time soon. Despite the Fed’s efforts, mortgage rates are heading higher, while the ongoing erosion in the labor market and tougher mortgage lending standards will continue to act as drags on sales. It is true that the first-time buyer tax credit is stimulating sales, but this will not be sufficient to sustain a meaningful increase in new home sales. –Richard F. Moody, Forward Capital
- Even with some normalization of unsold inventory of newly constructed homes, it’s unlikely that the real estate market can support any significant pick-up in homebuilding activity in the foreseeable future. That’s because foreclosure activity is still increasing and these properties are flooding the market. –David Greenlaw, Morgan Stanley
- The report was a bit of a mixed bag, as the weaker than expected gains in new home sales will likely be offset by the improvement in the inventory data. –Millan L. B. Mulraine, TD Securities
- This is a bit disappointing, given the hefty increase in homebuilder sentiment in the past couple of months. The relatively late Easter might have restrained activity, we suppose, but we cannot be sure. Either way, we still think the combination of very low mortgage rates and falling inventory will entice people back into the market in greater numbers over the next few months. –Ian Shepherdson, High Frequency Economics
- Looking ahead, reports from homebuilders indicate that activity picked up in April and then a bit further in May, led by first-time homebuyers attracted by steep price declines at the bottom end of the market. The same appears to be true of existing homes, where first-timers are being tempted by deeply discounted properties coming out of foreclosure. Therefore, while sales rates may well have bottomed, it seems clear that gains in activity will remain concentrated in lower priced homes. However, supply will remain enormous, particularly with increased competition coming from distressed sales of existing homes. This suggests that prices will continue to edge lower at the bottom end of the market even as demand for these homes picks up a bit –Joshua Shapiro, MFR Inc.
- Although new single-family sales were a little below expectations in April, we judge the data to be consistent with a bottoming out in new housing construction activity as also suggested by single-family housing starts and permits and the NAHB’s housing market index. Perhaps the most constructive indicator is the decline in the number of homes for sale in April, both in absolute terms and in relation to sales (though the months’ supply remains elevated). The latest mortgage delinquency data for the first quarter remind us that there are still very significant problems in the housing market. –RDQ Economics
Here are a few charts that depict the current housing situation:
Lower prices and historically low borrowing costs have increased affordability. The average 30-year mortgage rate was 4.81% in April, down from 5.00% in March and 5.92% in April 2008, Freddie Mac data show.
The housing industry hopes demand is stirred by the $8,000 tax credit for first-time home buyers included in the Obama administration’s economic stimulus package. However, tighter mortgage lending standards and rising unemployment are working against sellers. The unemployment rate in April climbed to 8.9% from 8.5% during March.
Regionally la
st month, new-home sales were flat in the Midwest and the Northeast. Sales fell 3.8% in the West and climbed 1.9% in the South.The market is bedeviled, however, by foreclosures. Buyers are gobbling distressed property, priced cheaply, and passing up on new homes. This restrains construction, hurting builders as well as the kinds of commerce that feed off new subdivisions and might otherwise emerge — in the form of shopping malls, for instance.
Last Wednesday, the National Association of Realtors reported existing-home sales increased 2.9% to a 4.68 million annual rate. About 45% of the 4.68 million were foreclosures and short sales. The median home price dropped 15.4% to $170,200 from $201,300 in April 2008.
About half of the new foreclosures were in four states: California, Florida, Arizona and Nevada, according to the report. Measuring both old and new defaults, 11 percent of all mortgages in Florida were in foreclosure at the end of the first quarter, the highest in the U.S. In Nevada, it was 7.8 percent, in Arizona, it was 5.6 percent, and in California, it was 5.2 percent. New Jersey’s foreclosure inventory was 4.3 percent, New York was 3 percent, and Massachusetts was 2.8 percent.
It is important to note (once again) that the monthly data is statistical noise at 0.3% with a ±14.5% margin of error; the annual fall of 34% is statistically significant.
The usual headlines got it wrong:
• Bloomberg: New-Home Sales in U.S. Climbed 0.3%
• Marketwatch: Home sales up a paltry 0.3%
• Reuters: US new home sales rose 0.3 percent in April
• Associated Press: April new home sales inch upward
• WSJ: New-Home Sales Rise as Prices Tumble
The bottom line… we cannot accurately state (in a statistically significant manner) that home sales went up in April 2009. But, we do know confidently that sales fell (between 23% and 45%) year over year.
But the real question is…have we reached bottom yet in the housing market???
Maybe.
Quote of the week
“Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make.”
Federal Reserve Chairman Ben Bernanke at the Boston College School of Law commencement, May 22, 2009