@paulcerro

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PM @ Cedar Grove Capital | L/S consumer(tech) and cannabis HF | Thematic investing | Ex IB @MerrillLynch | Disclaimer: Not investment advice
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What’s happening with luxury in 5 charts
In a year of shrinking margins and pulled-back consumer spending, luxury sales have remained relatively immune to the headwinds plaguing other retailers. Here are five charts that break down why the bubble hasn’t burst yet.

  1. Luxury’s inflation immunity

We forecast that personal luxury retail sales will continue to grow through 2026, though the double-digit growth it experienced this year will slow to just 1.3% growth by the end of our forecast period.

Though core luxury consumers may remain unaffected by inflation, younger and middle-income consumers will curb their spending on discretionary categories, causing the tapering decline in sales growth.

  1. Beauty, leather goods are consumer favorites

Product Categories in Which US Adults Have Purchased a Luxury Brand, June 2022 (% of respondents)
The most popular categories for US luxury buyers are footwear, handbags and leather goods, and cosmetics and beauty products.

The beauty category, in particular, has seemed well-insulated (see: the “lipstick effect,” when consumers continue buying little luxuries even in tough economic times because it’s inexpensive and justifiable), with companies like Ulta Beauty and Coty reporting strong sales growth over the past few months.

Meanwhile, LVMH Moet Hennessy Louis Vuitton attributed its third-quarter growth to its fashion and leather goods business.

  1. Shoppers go digital

Despite representing a smaller percentage of total personal luxury retail sales, we forecast that ecommerce sales of personal luxury retail will grow nearly 40% this year, though growth will slow in the years ahead.

This pattern is mirrored In China, where luxury retail has seen a similar bounce-back from pandemic levels, though ecommerce sales will see slightly larger growth than in the US.

  1. What consumers want

So what drives luxury consumers to shop online? Deals. Almost a third reported that online discounts or offers drove them to purchase luxury goods online. In addition, consumers shop online because it offers them more convenience and a better selection of products.

Some brands are experimenting with augmented reality/virtual reality try-on tools and the metaverse to attract online shoppers, but so far consumers remain uninterested in the technologies.

  1. Luxury is a top performer

According to our Industry KPIs, luxury was one of the top-performing categories in terms of indexed average order value growth, driven by wealthier consumers who are spending more per transaction.

Why we care: Inflation hasn’t taken the wind out of luxury’s sails … so far. But if consumers must continue to prioritize need-to-haves over want-to-haves, luxury may not escape unscathed.
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Surprising to see that consumers are uninterested in augmented reality/virtual reality try-on tools. I myself have used it for sunglasses and thought it was actually quite handy but I guess it does not translate the same to categories like clothing.
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Black Friday sales rise 12% YoY
The trend: Consumer spending looks strong this holiday season, despite a challenging economic climate.

The data: MasterCard SpendingPulse reports that US retail sales on Black Friday rose 12% year-over-year (YoY) excluding automotive, with in-store sales increasing 12% YoY and retail ecommerce sales growing 14% YoY.

That said, there is some discrepancy across data providers as Adobe Analytics reported more muted results with retail ecommerce sales rising 2.3% year-over-year (YoY) to $9.12 billion, following a 2.9% YoY increase in retail ecommerce sales on Thanksgiving day to $5.29 billion.
The takeaways:

Steep discounts spurred consumers to spend. Across all retailers, Black Friday discounts for apparel peaked at 13.8%, electronics 23.4%, and toys 31.8%, per Adobe.

Economic uncertainty drove many to alternative payment methods. For example, buy now, pay later (BNPL) orders jumped 78% the week of November 19 compared with the previous week. BNPL revenues rose 81% over the same period.

More people than ever are shopping over the Cyber Five. Roughly 166.3 million people, 8 million more than last year and 1 million more than in 2019, planned to shop over the five-day stretch that runs from Thanksgiving to Cyber Monday, per NRF.

Those gains came even though the majority of holiday shoppers, 60%, started browsing and buying for the season by early November, per NRF. That early start to the season stemmed from Amazon, Walmart, and other retailers featuring high-profile sales that pushed consumers to start their holiday shopping in October.

Reaching a plateau: Insider Intelligence expects consumer spending to remain strong this holiday season with 7.0% growth bringing the total to $1.297 trillion. While that would mark the third-straight year that gains reached at least into upper-single digits, much of this year’s increase will stem from inflation.

With demand pulled forward into October and early November, Insider Intelligence expects the growth rates for the Cyber Five to fall short of overall holiday season growth. That said, we expect Cyber Monday will rank as the top online spending day of the year, with $11.84 billion in ecommerce sales.

Meanwhile, brick-and-mortar retail is more vibrant than it has been in years as in-store traffic rose 2.9%, per Sensormatic Solutions. That growth was expected as a pre-Thanksgiving weekend survey by NRF found 67% of Black Friday shoppers expected to head to stores, a 3 percentage point increase from last year.

Looking ahead: Despite high inflation and consumer sentiment sitting near all-time lows, many consumers remain fairly well off thanks to low unemployment, solid job growth, and rising wages.

While wallets won’t stretch as far this year, there are enough discretionary dollars available to support strong holiday demand.

That bodes well for the rest of the holiday season as it appears consumers are chomping at the bit to buy when they spot a good deal.

While the longer-than-ever holiday season likely means that the rest of the period won’t be as frenzied as in years past, consumers will soon be shifting their focus to brick-and-mortar via in-store shopping and click-and-collect orders.
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Black Friday Sales: Fools Gold Indicator
Despite negative consumer sentiment, US Retail Sales still appear to be booming, rising 7.5% over the last year and hitting a new high in October. But after adjusting for inflation, the story changes. Real Retail Sales peaked in March 2021 and are down 0.3% over the last year.

Given the wide gap between inflation and wages, how has the US consumer been able to maintain their spending? They’re borrowing more and saving less.

Take a look at why I think all those good headlines you saw over the weekend are actually a trap and why the consumer is actually in trouble.

Given that Black Friday has turned into a week-long, sometimes month long time frame for killer deals, I agree that a lot of the data coming out of these sales will be bent to by retailers/media outlets to suggest heavy spending and that the consumer is not reeling in spending. But it’s too important of a caveat that the discount window is so wide now and not just a single day event like it used to be…my spending the last week definitely increased, but because I planned for this exact window and purchased in advanced like a years worth of toothpaste 😅 I agree with your fool’s gold overall take and still think important to tread likely and to take the data coming out of this week with a grain of salt, for now..
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Why Walmart has a case of the (Cyber) Mondays
The strategy: Walmart’s latest Office Space-inspired ad campaign "Case of the Mondays" is a clear shot across the bow at Amazon and part of a bigger strategy to compete with the ecommerce giant head-on.

The ad campaign highlights Walmart’s “Black Friday Deals for Days” promotions, which feature new deals available online every Monday through November.
The campaign seems designed to address the recent decline of Thanksgiving weekend as both online and offline shopping activity has plummeted on Thanksgiving and Black Friday—historically Walmart’s sweet spot for the holiday season, per NRF.

This ad campaign not only aims to stanch the bleeding but reveals an apparent competitive front against Amazon by (1) going after Amazon’s dominance of online shopping holidays, (2) cultivating a stronger third-party marketplace, and (3) competing more directly with Amazon Prime.

Taking on Amazon: Walmart has traditionally owned the big offline shopping days during the holiday season, Thanksgiving weekend, and other weekends. As shoppers return to work on Mondays, they shifted their holiday shopping online—often on sites other than Walmart.

Walmart’s “Case of the Mondays” campaign aims to keep weekend in-store customers shopping with Walmart when the weekend ends. Any progress Walmart makes in capturing more ecommerce market share will likely come at Amazon’s expense.
Cultivating a stronger third-party marketplace: Walmart is quietly but aggressively building out its third-party marketplace. It recently rolled out a suite of new self-service tools to make onboarding and launching campaigns easier for third-party sellers. It’s also rolling out the red carpet to digitally native D2C brands—most of which have resisted selling through Amazon—with the promise of promoting high-performing brands on the marketplace onto Walmart store shelves.

Walmart is using its competitive advantage (physical stores) to attack where Amazon is weak on product selection (D2C brands). This helps Walmart improve selection, which attracts more shoppers, and creates the proverbial flywheel effect for which Amazon is so well-known.
That strong marketplace model is the foundation of a powerhouse retail media network. It’s not a coincidence that Amazon monetizes at much higher rates than its nearest competing RMNs.

Strong marketplaces provide the traffic scale and quality desired by brands, and the ad auction density to drive price efficiency—which in turn encourages more investment from brands. Amazon’s monetization may not be realistic in the near term, but if Walmart could even close the gap with Instacart on average revenues per user, it would add a couple billion dollars in ad revenues.

Competing with Amazon Prime: The Walmart+ paid membership program has been gaining steady traction since its 2021 inception, with 16% of shoppers indicating they are members, according to our latest Bizrate Insights survey.

To encourage even more adoption, Walmart offered an annual membership for 50% off during a recent two-day promotion.
In the short term, Walmart is sacrificing a lot of margin to encourage more membership, and it likely has to do with its fast-growing retail media business, Walmart Connect. Improving its loyalty program and digitizing more transactions are critical to building out its first-party data strategy, the fuel for Walmart Connect.

With a huge portion of its brick-and-mortar transactions happening with non-traceable tender (aka “cash”), Walmart is currently at a relative first-party data disadvantage to its nearest competitors Amazon and Kroger, both of which have almost all transactions via traceable tender.
The big takeaway: Walmart’s flywheel strategy is now coming into sharper focus, and it’s not shying away from competition with Amazon in the process. The bigger a foothold it grabs in ecommerce, the faster that flywheel will accelerate. That’s why Walmart is leaning into ecommerce this holiday season with a major case of the Mondays.
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Going Private. Funding Secured.
Happy to announce that Cedar Grove Capital has entered into the next phase of my plans for it @cedargrovecm is the public investments side which is now a multi-strategy fund and @cedargrovech is the private side specializing in #SMB acquisitions.

I always wondered what would end up being Cedar Grove Capital and while I do not believe that we're quite there, we have reached the next stage @cedargrovech will be focusing on #SMB acquisitions in the consumer space and we're happy to announce our first deal in pet services

Pet services have proven to be heavily recession-resilient and consumer discretionary spending in the pet space has surpassed $110B.

In the post below, you'll be able to see the deal metrics of this transaction.

The timing for acquiring SMBs is perfect right now.

There are
• $30 trillion of SMBs
• 10,000 boomers retire every day
• 2.4M businesses for sale
• 70% are expected to be sold in the next 10-15 years

We plan to capitalize on this trend while delivering >50% CoC returns

Additionally, as part of our offerings, we're also launching a consulting service specifically geared around advising around the search process for an acquisition, the modeling/due diligence, or just consulting for improving existing operations

Very excited to enter this next stage of my professional career and do it under the Cedar Grove Capital umbrella.

If you're interested in getting public research, sign up through the announcement post below - there's a special offering in there.

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A timeline of how consumers have adjusted to inflation in 5 charts
For almost two years, consumers and businesses have battled the effects of inflation. Let’s rewind to see how we got here … and take a peek at what’s ahead.

March: Inflation rears its head

Though inflation had been steadily creeping up throughout 2021, it reached a boiling point in March 2022, when the consumer price index hit a 40-year high. Prices would climb again later in the year.

At this point, many consumers began noticing price increases at the store, at the gas pump, and at the dinner table. But in most categories, only about a third (or less) adjusted their spending in response. Still, concerns about the economy began to surface, with over half (57%) of consumers reporting they were worried about whether they would lose their job or income security due to inflation.

May: Starting to feel the burn

By May, consumers began cutting back on discretionary categories like dining out and clothing. But less than a third said they cut back on gas, groceries, or personal care items.

Interestingly, consumers were hesitant to cut down on streaming services/subscriptions, despite the fact that other entertainment options were among the top five categories where spending was reduced.

July: Prime saves the day?

Though inflation had started to cool in July, consumers were still feeling the pressure. Some even started to curb spending on groceries and gas, despite the fact that they were ranked as high spending priorities.

In hopes of drawing shoppers in with deals and discounts, Amazon held its first Prime Day event in July. During the two-day event, which was its biggest yet, a third of consumers reported buying something they have been waiting to purchase at a lower price. Nearly as many (28%), though, passed on an item that was a great deal but not a necessity, another sign consumers buckled down on spending.

Sales from Amazon’s second Prime Day event in October were also dampened by rising prices; nearly 80% of shoppers said that inflation impacted their choices.

It wasn’t just consumers feeling the pinch. July was the worst month for ad spending since July 2020, declining 12.7% year over year. (Spoiler alert: It hasn’t gotten much better.)

August: Getting priorities straight

Rising prices of food, shelter, and medical services drove the consumer price index up again in August, though gas prices started to ease, giving consumers a little reprieve.

Predictably, a majority of consumers reported spending more on groceries and less on experiences. Additionally, 43% of consumers said they began saving more income in order to have a safety net, showing consumers were less than confident about their economic futures.

September: Value above all

Though many retailers have suffered from the pullback in consumer spending, some have come out swinging, particularly in the grocery category.

Discount retailers like Dollar General and Dollar Tree have seen an influx of consumers who are looking to get more bang for their grocery buck. Walmart, too, reports that nearly 75% of its grocery share in the third quarter came from households making more than $100,000 annually.

October and beyond: Cautious optimism

While still high, inflation has begun to level out, but consumers are still holding tight onto their wallets as we enter the holiday season.

When asked how inflation will impact holiday shopping plans, a third of consumers said that it wouldn’t change anything, according to TransUnion. For those that are adjusting their spending, most plan to buy fewer gifts with less money, though more practical gifts and cheaper versions of gifts are also ways shoppers will keep costs down.

Recession fears persist among many financial analysts and consumers alike. Even if inflation eases, how long will it take for consumer spending to return to somewhat normal levels?
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Good post!

The consumer HAS to psychologically feel as though they're in a recession. I wrote briefly on this topic in my recent Substack.

Even those that are fairing well in the current environment will eventually succumb to the "feelings" of having to cut back spending if enough news, information, and chit-chat, regarding a recession enters their day-to-day life.
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VIX Signaling No Recession?
The most notable times the VIX hit 45 were in 1998, 2002, 2008, 2010, 2011, and 2020. But there’s an issue in how people think that the market needs to blow past 45 to signal the bottom.

So is the VIX broken or our thinking of it? See what I think below. It might surprise you

Great read from the inbox this morning. Loved how you dissected the theory. Definitely watching for possible echos and "rhymes"
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Consumers head back to stores this holiday season
The early results are in: Foot traffic saw increases week over week between September 19 and October 16, suggesting the holiday season may have kicked off earlier in-store, per Placer.ai.
  • Department stores, shopping centers, and specialty clothing stores are benefiting most from early holiday shoppers.
  • Electronics stores haven’t seen a huge jump in foot traffic, indicating consumers may be waiting for Black Friday deals to shop. Similarly, superstores haven’t seen a huge jump in early shopping traffic.
  • When comparing mid-October to early October sales numbers, non-gifting categories like apparel have seen the largest sales growth.
  • However, jewelry also saw significant growth, signaling that some consumers have begun gift shopping.

The forecast: We predict that in-store retail holiday sales will total $1.058 trillion this year, making up the lion’s share (81.6%) of holiday sales.
  • However, growth is slowing, down from 16.5% last year to just 5.9% this year.
  • Black Friday will be the most popular of the Cyber Five for in-store shopping, with 39.7% of consumers planning to shop in-person that day, according to a JLL survey.
  • The final two weeks of the season will also see strong brick-and-mortar sales as last-minute shoppers wrap up their lists.
  • According to Deloitte, US consumers will spend over a third (35%) of their holiday budget in-store.

Who’s shopping in-store? Almost two-thirds (63%) of US consumers plan to do at least some of their holiday shopping in-store this year, up from 58% last year, per JLL.
  • 18- to 24-year-olds are the most likely to do holiday shopping at the mall, with 63% reporting they are very or somewhat likely to engage in the behavior, per CivicScience.
  • Also more likely to shop at the mall: consumers who are in a financially secure situation post-pandemic.

Try it before you buy it: According to JLL, 54.5% of consumers say being able to touch and see products before buying is the thing they enjoy most about in-store shopping.
  • Higher-earning consumers (those making $100,000–$200,000 per year) are more likely to enjoy the holiday ambiance, shopping with others, and getting expert sales advice.
  • Still, you can’t make everyone happy. Nearly one-third (31%) of consumers said they don’t like anything about holiday shopping in stores, per CivicScience.
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Retail media in 5 charts
1) Retail media is growing fast.

According to our forecast, US digital retail media ad spending will grow 31.4% to reach $40.81 billion this year. By 2024, the total will grow to $61.15 billion, making up nearly 20% of digital ad spending.

2) But not all growth is equal.

Instacart will experience the largest boost in retail media ad spending this year, growing by 44.5%. Walmart, Amazon, and Etsy will also see positive growth, while eBay’s retail media ad spending will decline 12.6%. To keep that edge, Instacart, Walmart, and Amazon have all made investments in their ad business this year.

3) Don’t discount in-store.

The top three retailers by US monthly audience reach (both in-store and digital) are Walmart, Target, and The Home Depot. The number of in-store shoppers exceeds digital shoppers at each retailer, indicating that in-store media has a bigger reach. But it also means digital has more room for growth.

4) A variety of retail categories are getting in on the game.

Eighty-two percent of US advertisers plan to increase their spending levels with retail media networks this year, with jewelry and luxury, consumer electronics, beauty, and consumer packaged goods brands leading the charge. Just about everyone wants in, so it’s smart to get started now.

5) The benefits are plentiful.

The most important benefit that retail media offers brands is a closer relationship with retailers, followed by creative services, access to owned and operated media/properties, first-party sales data, and personalization opportunities through creative. For retailers, media networks offer a new revenue source and the opportunity to gather data on customers.
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$TTD said on its Q3 earnings call: "we believe that more than 80% of the largest retailers in the United States partner with The Trade Desk and more of the world’s leading retailers are also now following suit"

$TTD takes a percentage of all ad spend on these networks, as confirmed on a past call when asked about their partnership with $WMT
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Online sales plummet, discounts grow as retailers fight for consumer dollars during the holiday season
In a year plagued with rising prices and supply chain constraints, many retailers are hoping the holiday season will signal a return to normal. But according to Adobe, that may not be the case.

All-time low: This holiday, Adobe expects that US online sales will grow just 2.5% year over year (YoY), totaling $209.7 billion.

  • “This is the slowest growth we’ve ever seen in our time of doing this modeling, and probably the history of the internet,” said Taylor Schreiner, senior director of the Adobe Digital Insights team, during an exclusive eMarketer webinar this week.
  • To put it in perspective though, over $200 billion in ecommerce sales in the US is still a big deal, especially when considering that the larger a number gets, the harder it is to achieve double-digit growth, said Michael Klein, global director, industry strategy and marketing for retail, travel, and consumer goods at Adobe.

Fading five: Normally, the five days between Thanksgiving Day and Cyber Monday, known as the Cyber Five, outpace the general growth of the holiday season, said Schreiner.

  • But this year, Cyber Five growth is roughly in line with general holiday sales growth, hovering at a 2.8% increase YoY.
  • Still, the five days will draw in $34.8 billion, 16.3% of the season’s revenues.
  • Cyber Monday will see the most growth (5.1%) while Thanksgiving will actually see a decrease (-1.0%).
  • Though the holiday season is lengthening, spurred by earlier sales holidays from Amazon and other retailers, customers will still leverage the major Cyber Five days to maximize their buying power.
  • Fun fact: During the “Golden Hours” of ecommerce (taking place on Cyber Monday from 7pm to 11pm PST), consumers will spend $2.6 billion, or 26% of the day’s revenues.

Rain on the parade: Inflation and tightening budgets will continue to dampen consumer spending throughout the season.

  • Online grocery prices are up 14% YoY and flight prices are up more than 21% YoY, which puts a strain on holiday spending.
  • In addition, consumers didn’t receive any cash infusions or stimulus dollars to encourage spending like they did in 2020 and 2021.
  • “This is a unique year in what’s been a sequence of unique years,” said Schreiner.

Power players: Just three categories (consumer electronics, apparel, and grocery) will make up about half of total holiday spend this year.

  • Consumer electronics will be big as strong discounts drive prices down. The category will drive $49.8 billion dollars, a 2.9% growth YoY.
  • Meanwhile, apparel will see a 6.7% decline as consumers flock back to brick-and-mortar stores. The decrease is also due to heavy discounts as retailers continue to unload bloated inventories, noted Klein.
  • Grocery purchases during the holiday season will grow 10.5% to $13.3 billion, though inflation is accounting for most of the dollar growth.
  • Grocery is a relative newcomer to ecommerce. “That’s not something we talked about five years ago, but now [it’s] a crucial part of the online shopping world,” said Schreiner.

Let’s make a deal: Consumers will see record discounting as retailers try to court new customers.

  • Electronics, televisions, toys, apparel, sporting goods, computers, furniture, and appliances will all see double-digit discounts, with computers leading the pack at an average discount of 32%.
  • Though started in October and November, Adobe expects discounts to deepen in December, as retailers scramble to capture last-minute deal shoppers.
  • But the ultimate challenge for retailers will be getting customers back after the holiday is over, said Klein. “How do you drive repeat purchases going into 2023 and take advantage of customer acquisition costs you incurred in the fourth quarter of 2022?”

Hope remains: Though this holiday may be the toughest on record, things should look up, as both Klein and Schreiner believe there will be a return to double-digit ecommerce holiday sales growth in the years to come, especially if consumer confidence builds heading into 2023.
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