E-Commerce Offers Expanded Opportunities
It’s still 15 weeks until Christmas, but who’s counting? Evidently, a lot of people ranging from shoppers to merchants, both in the brick and mortar world and the cyber world of the Internet. Of course, many will wait until the last minute to do their shopping, whether it is through the courtesy of a mall or a mouse.
A recent study indicated that about 15% of Internet usage involves e-commerce. Last year, a new e-commerce record was set with non-travel (retail) spending surpassing $102.1 billion, thereby eclipsing the 2005 total by more than $20 billion. With travel expenditures added, online spending in 2006 exceeded $170.8 billion. More than a quarter of the expenditures occurred during the end-of-the-year holiday season.
In the first two quarters of 2007, e-commerce retail spending, which represents about 3.3% of total retail sales, surpassed $55.1 billion, with the April-June period at 23% over the 2nd quarter of 2006. With travel added, online spending for the first six months of this year reached nearly $95 billion. This amount puts overall online e-commerce on a course to set another record for 2007.
The hike in e-commerce is due to many factors, but perhaps the most notable one is growth in the online population, which has been experiencing 8.2% annual expansion in the past several years.
During that timeframe, because of the favorable economy, annual US online retail sales per person also climbed rapidly. About 63% of online purchases are made by women, and people with children are more likely to shop online than those without children. Interestingly, English is the preferred language of just 35.2% of Internet users worldwide. Chinese follows at 13.7%, then Spanish at 9.0%, Japanese 8.4%, and German 6.9%.
The Internet, of course, is not only good for purchasing, it is also an important tool for product browsing and comparing, often the first two steps taken by online consumers before they buy. Some 89% of consumers seek information about products online. According to a survey sponsored by Google, approximately 63% of people who do product searches usually end up purchasing offline in a physical store.
And what are the popular e-commerce searches? They include travel arrangements, computers and related products, apparel and accessories, office supplies, and consumer packaged goods. Video games, consoles, and accessories continue to be the most desired e-commerce categories. Other well-used online sites include those that advertise sports and fitness equipment; electronics; event tickets; jewelry and watches; furniture and appliances; music, movies and videos; and books and magazines.
Has online shopping harmed the business of brick and mortar stores? Most definitely. Some have closed due at least in part to the heavy competition from computer outlets. Others have adapted and reinvented themselves, some even creating online opportunities for their products within their own confines. Many have also benefited from the greater efficiency associated with “pre-shopping” online before purchasing in stores. Virtually all have been forced to be more price competitive.
A unique sidebar associated with online previewing and in-store purchasing is that on average those who “pre-shop” spend upwards of 41% more than customers who do not take advantage of this kind of opportunity.
Of course, many people continue to resist the ongoing e-commerce “revolution,” either because of unfamiliarity or the lack of a computer, or perhaps because of a desire for the more personal and “touch and feel” operation within a store. Even so, each year, with the improvement and expansion of online offerings, holdouts are becoming fewer and fewer, especially with the holiday season fast approaching.
posted @ 07:59 AM CST [link]
Friday, August 24, 2007
Through the Looking Glass
The recent rumblings in the financial markets may well have your head spinning, and you are not alone. If it seems as if there is a lot of confusion and even irrationality, you are pretty much on target. Let’s take a step back and get some perspective.
“Subprime” mortgages began when new credit information resources made it possible to extend credit to folks who were traditionally excluded, thus allowing many more to achieve the dream of home ownership. That was (and is) a very good thing. The problem arose when these mortgages were securitized and sold in large bundles to investors. As they were gobbled up by yield-hungry funds, some lenders became more aggressive, using various schemes (such as negative amortizations in the early years or very low initial interest rates) and more relaxed underwriting and documentation requirements to induce additional loans. To make matters worse, the investment pools that were buying the loans often did so primarily with borrowed money in order to raise the returns they were receiving on their “cash” commitments.
All of this works fine as long as prices continue to go up; the rising equity values of the homes, like any type of inflation, can hide a multitude of sins. As has been the case for centuries, however, markets do not work that way¯and we never learn!!
Even so, if you calculate all of the mortgages in this category (overall credit quality is quite acceptable, and the subprime segment is only about 14% of the total), the probable foreclosure rates in a struggling housing market, and the likely losses when all is said and done, you get a number around $100 billion to $150 billion. That is a lot of money for sure, but not enough to stifle a multi-trillion dollar global financial system. So what happened?
Things are now integrated like never before, and this was the first situation of this nature to occur in the “online” world. Moreover, this was the first time it had happened since a lot of new (largely foreign) money entered these types of investments. These funds tend to be “headline” driven. Markets are remarkably efficient, but they do overreact in certain situations. Computerized trading also played a role, as the tendency of institutional investors to travel in packs is now reinforced by machines making preordained decisions without the benefit of wise old heads who could step back and take a deep breath.
Mechanically, the losses in the mortgage funds lead to “margin calls” which require that additional funds be committed to cover declines in the value of the mortgage pools purchased with borrowed money. Investors then sell other assets to cover these losses, and a chain reaction starts. At the same time, knee-jerk reactions such as the French government’s freeze of subprime mortgage funds created a feeding frenzy. The “headline” money then decides that all residential lending is bad, and funds start to dry up. The market demands stricter underwriting criteria, which is probably good in principle but, if carried too far (and it always is at the outset), it can turn perfectly good loans into bad ones. Regulators will also get involved in setting criteria, but the market will be a far tougher taskmaster.
It appears that the central banks of the world (especially the Federal Reserve System) will respond in a productive manner. After the French fiasco, they immediately pumped money into the system to assure liquidity. If you ever wondered how they do this, they simply buy securities. If I buy a security from you, we are merely trading cash and bonds among ourselves. If the Fed buys a security from you, however, they pay for it with “new” money that wasn’t in the system before.
The Fed also lowered the discount rate (the rate at which banks borrow from the Fed) by ½ point, extended the time period of such loans from overnight to 30 days, and allowed an expanded range of security to be used (including mortgages). The message was simply that liquidity was available to the markets. Although it hasn’t happened as of the time I picked up my pen, the Fed will also likely lower the Federal Funds rate (the rate at which banks borrow from one another) as well in the near future. These actions help to calm markets and are reasonable responses to the current environment.
There were clearly other factors involved, but this is the gist of it. At the end of the day, the underlying economy is quite healthy, and there is still a lot of money out there for investments (trillions of dollars, in fact). The tail definitely wagged the dog, and it will take a while to work through it. I would like to be able to say we will learn lessons from this debacle that will serve us well in the future, but centuries of evidence prove otherwise.
posted @ 08:11 AM CST [link]
Friday, August 17, 2007
America’s Pastime
Traditionally, baseball has been considered “America’s favorite pastime.” And with the recent hoopla over the breaking of Hank Aaron’s home-run record, it would seem that the sport certainly does generate enough interest to deserve that moniker.
But perhaps there is a new pastime that is fast overtaking baseball, if it hasn’t already. Whereas baseball is limited to specific ball parks and certain dates and times, the new pastime knows no boundaries, either in time or location. It can be done in stores or sitting on the couch at home.
So what is it? Some consider it (or used to consider it) primarily the purview of women, but that is not entirely correct. It’s gaining ground with men, and teenagers are completely off the charts. I’m talking, of course, about shopping. I guess our obsession is a good thing, because consumer spending accounts for approximately two-thirds of the US total economic activity.
The latest Commerce Department report indicated that retail sales climbed about 0.3% last month. That was excellent news, especially since spending had dropped 0.7% in June, the worst showing in some 16 months.
High gasoline prices and the fallout from the slump in the housing market have caused shoppers to be a little more cautious in opening their wallets. However, with the US economy’s growth rate during the second quarter of the year at 3.4% and a continued modest pace anticipated for the remainder of 2007, consumers are still willing to part with a lot of their hard-earned income.
And just what are we spending our money on these days? On average, Americans spend about 16.7% of their income on “essentials” such as living quarters and furnishings. Another 11.5% is spent on medical care, with 8.2% going for food. Transportation, recreation, and clothes account for some 7.9%, 5.8%, and 4.1%, respectively. Last month, most consumers focused their attention on clothes, furniture, and electronic products, while the purchase of automobiles declined slightly.
Of course, the definition of “essential” varies widely, depending on the lifestyle to which one is accustomed. College students, for instance, spend more than $11 billion per year on snacks and beverages. Another $3 billion is being spent on CDs and tapes. (Now I know where some of my children’s money is going.)
If you grew up drinking tap water as I did, you might be surprised to know that Americans spent around $15 billion on bottled water last year. It’s expected to top $16 billion this year! Times have certainly changed. Today’s generation frequently views with disdain any water than doesn’t come in a clear plastic bottle. For a product that you can get practically free, that’s a big change in attitude, especially considering the fact that the bottled water industry barely existed 30 years ago.
For those who have pets, it’s certainly no surprise that the upkeep for these furry friends is often quite expensive. Last year, Americans spent approximately $41 billion taking care of their pets. That’s more than the gross domestic product of all but 64 countries in the world! It’s also double the amount spent a decade ago. Over the next couple of years, total expenditures for our family pets will likely hit $52 billion.
So what’s behind today’s shopping habits? Generally speaking, it’s an expanding economy, a relatively strong employment market, and rising incomes. There is also a new attitude that’s supporting spending. A couple of generations back, most families had one income earner and a couple or more kids. Frugality was the key word. Today, only around 25% of households are represented by a married couple with children; the lowest percentage since 1960 (and many of those have more than one person in the workforce).
Without the burden of meeting the needs of growing children, more households are now open to joining the culture of spending. Not nearly as much thought is given to savings as in the past. It’s not just the teeny-boppers, however, who are doing the spending. Older citizens are also playing an important role in this new custom. The Baby Boomer generation’s accumulated wealth and associated spending is now flowing into the economy as they reward themselves for their successful careers and purchase the things they didn’t have when they were younger.
The concern for caution wrought by the Great Depression is fading from our collective memory in light of the continuing upward surge in our economy. Even so, Americans are very savvy consumers and look for value in their purchases. The rise of discount retailers, big box stores, and the Internet has fundamentally changed shopping attitudes. For many Texans, an opportunity for value will happen this weekend during the state’s ninth annual sales-tax holiday weekend. Since it was created in 1999, Texas shoppers have saved some $336 million in state and local taxes over this special three-day period.
If consumers participate in this year’s shopping opportunity as expected, they will incur a tax savings of approximately $52.1 million. While a discount of 8.25% wouldn’t seem like much in a different context, we love a chance to avoid paying the government. Moreover, retailers use the “holiday” as a time for sales and promotions. All-in-all, it should be a good weekend for our new favorite pastime.
posted @ 08:01 AM CST [link]
Friday, August 10, 2007
Dow Jones
Frequently, when making presentations at various places across the United States, I’m asked to give a forecast on the stock market. My stock answer (pardon the pun) is that it will fluctuate. While this answer does not often allay the concerns of the various audiences I’m addressing, nevertheless, it is a safe and predictable projection and one that never fails to come true.
For those who watch the stock market, especially those that tune in on a daily basis, it would seem that lately they might need some motion sickness medicine to keep up with the ongoing gyrations.
As you are aware, the market advances or retreats often on what seems like a whim, though the process is normally far more complicated. There is always an underlying, long-term pattern that reflects what is supposed to happen (the long-term earnings capacity of the firm in question, properly discounted for risk and timing), but it is sometimes hard to spot amongst the chaos. The market is a reactionary force, and it often moves up or down based on a perception, which in turn is based on an incident that is considered significant. Many times it could be the failure of a major corporation to reach the predicted level of earnings by a certain time—even by a penny a share, or the unexpected news that a company has exceeded its goal—once again even by just a penny. Both results tend to make the market move, almost immediately.
Within a few days, however, the markets may recognize that the news is not indicative of a driving force that will make or break the economy. As a result, more settled forces come into play, and the ticker moves in the opposite direction.
Last month, the Dow Jones Industrial Average closed above 14,000 for the first time. It was a new record, and the financial world was joyous. Why? Almost every time the Dow passes another 1,000 level, happy chatter abounds, even though such an artificial goal rarely has any substantive meaning. Remember what happened next? Almost before you could catch your breath, the bottom (so to speak) dropped out, and the market plummeted some 585 points.
Such triple digit moves, though once rare, have become commonplace. In 2006, there were 19 hikes and 14 dips of 100 or more points. Through the end of July, the market has already experienced climbs of 100 or more points 15 times along with 14 drops of similar amounts. Though the change shows that such moves are frequent, the numbers for those years pales in comparison to the 106 changes (53 up and 53 down) in 2000. Such alternations frequently result in reactions by investors.
Occasionally, buyers seem to go on strike, refusing to impart funds into particular stocks. But such movements last only until buyers divine what they think the assets are worth and put their money into action once again.
Other forces that are currently creating turbulence in the market include such matters as the rise or fall in the price of oil, the number of jobs created in comparison to the amount anticipated, the woes or booms of the housing market (seemingly more woes than booms these days), and even speculation as to what the Fed will do at each meeting, and the nuances of its words when it does nothing.
The almost-daily media proclamations about the problems in the debt and subprime mortgage sector have sparked wild swings lately amid concerns that tightening of credit might have a wider impact on consumers and the economy as a whole. This kind of tumult will probably continue while the housing sector remains on its journey toward even-keel stability. Uncertainty frequently breeds anxiety and tends to shove investors to the exits, while leaving sellers left holding the bag looking for buyers.
The most important matter related to the swings in the market is the direction of the economy. In all recent advancements and retreats in the Dow, the economy has kept on rolling forward, generally at a fairly healthy pace—a 3.4% annual rate for the second quarter of this year. As long as the economy remains strong, and I predict that it will, the market will continue to see a general incline even amidst triple-digit twist and turns.
posted @ 08:11 AM CST [link]
Friday, August 3, 2007
Making Stuff
Have you noticed that it seems like there are more trucks on the highway nowadays? Some people might construe that as bad news because of the increased traffic. For me, however, it’s good news because it indicates our economy is very healthy and that products are being manufactured and shipped.
A recent Commerce Department report noted that during the last quarter (April-June), the nation’s total gross domestic product (GDP or output) grew at a 3.4% annual rate, the best quarterly increase since the first three months of 2006.
Although we are an increasingly service-oriented economy, it is expected that future economic advancement will nonetheless depend heavily on manufacturing. This will especially be true in Texas where there are a significant number of positives that favor this industry. Among them are a central geographic location; a fast-growing labor pool, excellent distribution facilities, economical land and construction costs, and an attractive business-friendly climate, as well as a low cost of living and good quality of life. In addition, the proximity of the maquiladora plants has influenced many manufacturers to locate or expand their operations in the state in order to utilize Mexican partners as effective links in their highly efficient supply chains.
From 1990 and 2005, Texas emerged as the fastest-growing manufacturing hub in the US. The Lone Star State now produces more than 8% of the nation’s output, ranking second behind California in factory production. Furthermore, Texas is the country’s leading exporter of manufactured goods. Despite recent weaknesses in some of the economies of the state’s main trading partners, shipment of products and services are up some 7.4% above year-ago levels.
Across the nation, construction activity has slowed due to the difficulties in the housing market. This situation has restricted the manufacture of construction-related products. Even with all the wet weather across the state, however, construction is better in Texas compared with the rest of the nation, and forecasters predict a rebound in this aspect of manufacturing over the next several months.
Demand still remains strong for transportation manufacturing in Texas. Refinery utilization is up slightly despite several unplanned outages and shortage of skilled labor to fill important maintenance roles. While high-tech manufacturing has stalled somewhat after an early start this year, the sector’s growth rate is still ahead of the nation as a whole and is likely to accelerate with new advances in the coming years.
Texas has experienced relatively consistent and ongoing increases in productivity due to use of efficiency-enhancing technologies and has effectively shifted the composition of its output to meet the demands of a dynamic global market. In many cases, the state has mirrored the national manufacturing trend, i.e., keeping the value-added production opportunities and moving the less-productive operations abroad.
Manufacturing, of course, is cyclically sensitive, more so than the other industrial sectors. As a result, manufacturers sometimes experience swings in business activity quicker and at a more intense level. The outlook for goods producers in the Lone Star State over the rest of the year is highly positive with the majority of firms expecting production and orders to soon pick up. In 2006, Texas created approximately 26,300 manufacturing jobs. An additional 12,000 new manufacturing jobs are expected to be added this year with about the same number in 2008. The statistics for last year are truly remarkable, as virtually every other state and the nation as a whole continued a trend of declining manufacturing jobs.
Innovation, as well as the implementation of new technologies, techniques, and the best business practices, will continue to promote increases in production. There is a myth that the US is no longer a manufacturing economy. That is simply not true. We set a record virtually every year in the output of goods. We do so, however, with fewer workers, a reflection of the inexorable march of technology and automated processes. Texas is in the enviable position of growing both manufacturing jobs and production. Perhaps more than any other measure, the gains in employment in the face of a notable national trend to the contrary speak to the underlying vitality of the Texas economy.