I recently had the great pleasure to catch up with Simeon Siegel, Managing Director at BMO Capital Markets. Simeon is a leading analyst of retail who has been dubbed “one of the more intellectual students of retail on Wall Street” by Women’s Wear Daily and also named a Top Retail Influencer by RETHINK Retail in 2022 and 2023.
Simeon recently presented at Shop Talk 2023 in Las Vegas, and I wanted to get his POV on the mood of attending retailers. Were they concerned about a recession, and, if so, what were they doing about it? Our discussion begins on the topic of price elasticity — a basic Econ 101 concept — and why, in my experience, so few retailers appear do any kind of price elasticity testing. “I do think that companies do believe they are conducting these studies and I think they are stress-testing, but I think it’s very hard — and I appreciate this — it’s much easier said than done; it’s very hard to go out say ‘I’m going to shrink my business by selling less,’ and that was the beauty — one silver lining — of the pandemic, in my opinion, which did it for you. And so a huge mantra that we have became “sell less, charge more, and you’ll make more money.”
Our conversation turns to supply chain disruption and the role it’s been playing in retail pricing. As Simeon notes, “scarcity is a very powerful market driver — it’s one of the only ones. For better or for worse, thankfully the U.S. has not had scarcity, in anything, as far as the consumer supply chain has been, for the last for however many years. And now all of a sudden, the supply chain shutters. The supply — availability of supply — collapses, and if something is discretionary, there’s always been rare “shoe drops” that have been scarce and commanded pricing power, but generally speaking, staples haven’t had that. Think about diapers; children’s’ medicine, you talked about cars. We watched prices, we watched inflation skyrocket because of inventory scarcity, much more so than because of cost input. And that’s what I think was very interesting, that in the first half, before CPI kicked in in ’21, inventory scarcity kicked in in ’20. And so what happened is that you saw all these companies report beautiful margins — the best margins they’ve ever seen, in some instances — because they got inflation, just not the way we think about it. We’re trained to think about inflation as a cost input — it’s not. It’s a revenue driver. Inflation is how much more, year over year, that it cost you to buy this good. Now, normally, it’s directly correlated and is very strongly linked to some driver on the cost side. But year over year, people were spending a lot of money in 2020. It was called lower promotions and full-price sell-through. It was called a good thing. It wasn’t until the macro took over the next year that it became bad, it became a scary thing called inflation.”
Simeon and I discuss the degree to which Shop Talk brands are still engaged in upper-funnel brand-building, even as recessionary fears loom, and whether, in his opinion, these brands are both aware of the mechanics of auction-based media buying and understand the power of compound marketing. We then turn to the topic of whether going DTC is always a good thing for brands. As Simeon observes, “my team is firmly in the camp that DTC is not all it’s cracked up to be.”
Many of the brands at Shop Talk are also on Amazon’s Marketplace, and I wanted to get Simeon’s take on whether Amazon was a hot topic at the show. “I think there was much more talk about AI, and a little bit of supply chain, and just thinking through retail media than there was on one company subsuming everything else in a way that was definitely the case, whether it was Amazon or Shopify or Walmart. We’re, right now, watching Walmart divest — and a whole lot of these brands that brought them into the e-commerce version, whatever, it wasn’t Web 3; it was before that, but whatever version we were in. So it’s a really interesting question because the answer is, increasingly, less, from a company perspective. But I can tell you that (Amazon) Marketplace has absolutely come up, recently; retail media absolutely comes up. I think the question you have to ask yourself is, is that because they’re buzzwords. Is that because they sound like they’re free money, and remember, free money never is. ‘Monetize today, penalize tomorrow’ will become our new mantra. And so I think that what you have to incorporate and decide is, are these the terms that are popping up because there are actual compelling opportunities to improve your own business, or are they popping up because they appear to be free money buzzword to help forget about challenges you are facing in your core.”
Our discussion concludes with a deep dive into whether the advent of retail media represents an opportunity or a hazard, for retailers, and the retail trends that Simeon is excited about for 2023 and beyond. “I’m an easy guy to please — I’m old school. What’s exciting is brands that are maintaining their brand equity, companies that are able to use technology to improve their business, not to change it, not supplant it. So when I think about that, I think that for the past three years — I say this all the time — behind a retailer is very, very hard. You have to predict demand: that’s a very hard thing to do, considering that we as humans are irrational, more often than not. The problem was that, for the last three years, you also had to predict supply. That doesn’t make your task hard; it makes it impossible. If I have to figure out how many things to get but I can’t even know that I’m going to get them, then A), it’s impossible to do, but B), we’re all on the same playing field — there’s no way to win: you don’t know what you’re going to get. Supply is back: supply chains, thankfully, are open. And so that means we’re back to the normal difficulty of being a retailer. We’re back to the normal difficulty of being able to forecast demand and to know your consumer.”