Senate File 1859 is only six lines long but it’s one of the more interesting business-related pieces of legislation tossed in the hopper this legislative session.
It is to amend Minnesota statutes to say that “a license for the off-sale of intoxicating liquor may only be issued to a person who is a Minnesota resident.”
The bill’s author is DFL state Sen. James Metzen of a northern Dakota County district.
The public policy goals here are not particularly clear. Have there been residents of Wisconsin who’ve been particularly irresponsible as license holders of a liquor retailer?
In searching the Star Tribune’s archives, no such cases have arisen that would suggest any threat to the public posed by out-of-staters.
What it’s about, of course, is the market entry into the Twin Cities of Total Wine & More, a wine and liquor superstore retailer based in Potomac, Maryland. The company has had a store in Bloomington ready to open since before Christmas but can’t seem to get a license. It’s got another in Roseville that will open next week.
And the company is principally owned by David and Robert Trone, two brothers who appear to live in Maryland.
In the past week the company has put on the public relations push to get the word out that they operate good stores and treat the public responsibly.
In a brief conversation with David Trone this week, he said entering a new market sometimes does generate a little heat with retailers already there, but what he has seen in the Twin Cities so far is an “outlier,” although he seems to not be particularly aggravated.
He said he certainly hasn’t seen legislation banning him from a state before, and added, “The fact that somebody would go to that length is astounding.”
Based on the state’s website, it doesn’t look like the bill will get a hearing this year.
The news out of the big retailers headquartered in our region, Target and Best Buy, certainly reflects the kind of fundamental challenges each of them have in maintaining their traditional market position amid all sorts of competition including Amazon.com.
It is important to understand, however, that other traditional retailers have these challenges, too. Consider Wal-Mart Stores.
Wal-Mart is the largest retailer in the in the world, and one of the things that has always distinguished Target in the investment community is that until Amazon.com came along, it was the only major player to really compete effectively against Wal-Mart.
While it doesn’t have a massive data breach to deal with, it was easily apparent in Wal-Mart’s results for its fourth quarter that it has many of the challenges that Target has.
In its fourth quarter, comparable store sales were down in the U.S., and store traffic was down even more. It was the fourth consecutive quarter of declining comparable-store sales in the fifth consecutive quarter of the lower store traffic.
Weakening store traffic is particularly worrisome, because Wal-Mart can't sell more merchandise if customers don't even come into the stores.
One response to these trends is a plan by Wal-Mart to increase its development of smaller stores, while trying to drive prices for products even lower and take out expense in its traditional retailing operations.
The analysts who follow the company are generally cautious on this strategic approach, because it’s far from clear that building out smaller stores and improving its websites is a growth strategy or just a way to divert customers from its own bigger stores.
And if cutting costs means reducing staff or otherwise making the experience of coming into a big Walmart supercenter just a little less appealing, well, it’s hard to see how this would help with store traffic and sales trends.
The senior analyst at investment research boutique Wolfe Research, Scott Mushkin, summed up his views on Wal-Mart’s plans for 2014 with the simple headline “More of what is not working.”
Looking ahead, he suspects that what Wal-Mart is doing now will put pressure on earnings per share growth and lead to further declines in returns on invested capital.
This is not a one- or two-quarter set of problems, either. Looking back over the past five years, the stocks of both Wal-Mart and Target have dramatically underperformed the S&P 500. But over that time period, Target’s has actually done a lot better than Wal-Mart’s.
As Wal-Mart is proving, the challenges in big company retail have not been that easy to meet.
Sometime in the past week the thought crossed my mind that the Allen Edmonds marketing budget for 2014 had to be nearly exhausted, with more than 10 months to go in the year.
Allen Edmonds, a premium shoe manufacturer and retailer based in Wisconsin, has been on an online advertising campaign so thorough that it seemed that every website open on the screen had a small Allen Edmonds shoes advertisement.
Just a moment ago, when checking the latest stock price for Ecolab on Google Finance, right there on the right-hand side of the screen was a small announcement of the Allen Edmonds winter clearance sale.
It was the only ad on the page.
Paul Grangaard, the CEO of Allen Edmonds and a well-known executive here in his hometown, explained Friday morning that there was something fundamental about online marketing that I didn’t get. The company isn’t really advertising every day on every website in North America.
I had apparently searched for Allen Edmonds at some point using the Google search box, and Google stuck a little piece of software on my personal computer to remind it of that. To get rid of Allen Edmonds ads I would have to cleanse my Google Chrome browser of cookies, although he added that his company's Google campaign was going to be dialed back a bit, anyway.
Ah, now I get it.
That explains also why I see Volvos advertised every day all over, too, usually in a rotation with Allen Edmonds shoes. I had once “googled” Volvos here at work for news on the expected launch date in North America of a new Volvo plug-in hybrid station wagon, and now have long since forgotten why I once considered that something worth knowing.
I’m not sure Allen Edmonds and Volvo are getting their money’s worth repeatedly advertising at my workstation. On the other hand, I really want a new Volvo and I really want a new pair of Allen Edmonds Park Avenue shoes.
And I have budget for at least one of them in 2014.
One of the most interesting parts of Friday’s job report, beyond the headline of just 113,000 new jobs, is news that the labor force participation rate "edged up to 63.0 percent” and the employment-population ratio increased by 0.2 percentage point to 58.8 percent.
If this is the start of a new trend of greater labor force participation, it would be viewed by economists and policymakers as a really good thing.
There isn’t any particularly good reason, however, to think that the trend of lower labor force participation is reversing.
A Congressional Budget Office report earlier in the week projected that the labor force participation rate would decline to 60.8% by 2024. Also this week, the same office put out a report on the budget with an updated forecast of the impact of the Affordable Care Act on workforce participation, which was viewed by gleeful ACA critics as sharply negative, and that was the report that got all the attention during the week.
The CBO forecasts labor force participation to reach 60.8 percent in a decade, quite a drop from the current 63 percent. And as recently as the early 2000s the labor force participation rate was above 67 percent.
As the report states, “Employment at the end of 2013 was about 6 million jobs short of where it would be if the unemployment rate had returned to its prerecession level and if the participation rate had risen to the level it would have attained without the current cyclical weakness.”
The CBO attributed about half of the decline since 2007 to what economists call “inevitable withdrawal from the labor force,” or when someone gets older and elects to retire. Think about baby boomers making their exit, a trend that will accelerate in the next decade.
The rest of the change it attributed to continued weakness in the labor market coming out of the past recession, including what it called “unusual aspects of the slow recovery that led workers to become discouraged and permanently drop out.”
In its look ahead, the CBO cited many more boomers aging out of the workforce as a big factor in declining overall labor force participation, but it also thanks the cyclical weakness in the labor market as a result of the recession and slow recovery will last “throughout the decade.”
Labor force participation is important for a couple of reasons, not least of which is slower economic growth. Having productive people making things and providing service (and spending their good compensation), is sort of what drives economic growth.
But think also of the human tragedy of productive people of working age just giving up and staying at home. Six million workers is a lot of people who could be a whole lot more productive.
One of the most interesting findings in a new study by the Massachusetts Institute of Technology’s housing economist is just how much variation there will be in housing prices among major Metro areas.
The report, released Friday by a team that included MIT's well-known housing economist William Wheaton, takes a look ahead at housing supply and other factors to arrive at a 2022 metro-wide price index. And because of the boom in the middle of the last decade in housing prices, this study uses prices from the boom year of 2007 as one of its starting points.
As the report concluded, “in current dollars, some [metro areas] will still not recover to recent peak (2007) house price levels by 2022, while others should exceed it by as much as 70 percent.”
In fact, in some of the 70 areas in the study, housing prices will not get back to 2007 peaks even in nominal dollars by 2022. In the Las Vegas market, it’s not going to even be close. But because I work in Minneapolis and not Las Vegas, I had to scroll to the back of the paper to see a forecast for the Twin Cities.
According to Wheaton and his colleagues, housing prices will be up about 18 percent in constant dollars, compared to prices in 2007. Because we all pay our mortgages in nominal dollars, not inflation-adjusted dollars, it was interesting to note that in nominal dollars prices will be up 54 percent.
The Twin Cities market is one of the better ones, along with Denver and a few others. How this team of economists arrived at these forecasted values I frankly don’t really understand, but I do foresee a home equity line of credit in many Twin Cities consumers’ futures.
No one with access to Google Finance could have missed the news from Best Buy Co. last week, news bad enough to leave the stock price down by about 35 percent from its high close last week.
The company said comparable store sales in the U.S. were down in the nine-week holiday selling season about 0.9 percent from the year-earlier period, which wasn’t great, but what crushed the stock was talk of a far skinnier gross margin due to aggressive price discounting.
When business people talk about “margins” they usually mean gross margin, the ratio of gross profit to revenue, with gross profit being the money left over from the sale after subtracting just the cost of the product. For a retailer the cost includes what it paid to the supplier for a product as well as some costs for overhead such as freight and warehousing.
The gross profit pot of money is what pays all of the other bills, the sales expense and well as the general and administrative expenses that come from just being in business. In its most recent reported quarter, Best Buy’s gross profit dollars came to just less than $2.2 billion, or 23.2 percent of revenue.
The sales, general and administrative expenses came to a little over $2 billion, or about 21.9 percent of revenue.
Based on what Best Buy said last week, analysts in the investment committee now expect Best Buy’s gross margin to decline significantly in the company’s fourth quarter, which still has a couple of weeks left to go, to about 19 percent.
In a research note, the analyst Aram Rubinson of Wolfe Research pointed out that the gross margin for Best Buy is now in the neighborhood of the gross margin of its principal competitor, Amazon.com.
Amazon.com reported a gross margin of 26.7 percent in 2012, but he adjusts his estimate for the impact of Amazon.com’s third-party marketplace and its web services business, getting to the figure of about 19 percent.
He expects Amazon.com and Best Buy to have a comparable gross margin going forward, arguing “this is not temporary.”
The higher total sales of the holiday selling season compared to the third quarter should help the sales, general and administrative expenses of Best Buy to be lower as a percentage of revenue than they were in the third quarter, but the fundamental problem here is pretty easy to see.
If the gross profit margin is 20 percent and the sales, general and administrative expenses equal 20 percent of revenue, then that means the operating income line will be zero.
And if the gross profit margin is something that Best Buy has difficulty controlling, with the apparent need to aggressively reduce selling prices to defend market share against Amazon.com and all others, then management’s attention has to focus on what it can control. That means ratcheting down the sales, general and administrative expenses.
It has no choice.
There are ways to get sales, general and administrative expenses down without cutting employees, but only so much that can be cut from the travel and consulting budgets. It looks like it could be a very painful year at Best Buy Co.