Warren Buffett is confused about retail trade stating “retailing is tough for me to figure out“. Not only is the retail model changing – but consumer spending and inflation trends are changing also.
Mr. Buffett was lamenting about missing the Amazon (AMZN) investing train – not understanding that the retail model was changing from the box stores to internet purchasing. But it is not just the trend towards online purchasing occurring in retail – but other significant fundamentals are changing also.
One development is that retail purchases have become a smaller component of disposable income.
Does it come as any surprise that the old brick and mortar stores are in trouble with increased competition (profit margin squeeze) from Amazon et al – as well as retail’s shrinking proportion of consumer spending.
There are three major components of retail – durable goods, non-durable (soft) goods, and services. This post is concentrating on durable and non-durable goods which is what Mr. Buffett was discussing.
This evokes discussion of inflation in the retail sector.
The red line on the above graph is durable goods (items which have more than a three year lifespan). In the last 30 years, durable goods have seen little inflation. On the other hand, non-durables (green line) have been inflating at roughly the same rate as the consumer price index (CPI-U – blue line).
Roughly non-durable goods expenditures are double durable goods expenditures.
What is driving retail is the services sector with double the expenditures of the goods sector – with housing, utilities and health care over half of the services expenditures.
Bottom Line
The goods sector is the easiest to automate – and the lowest cost retail model will continue to dominate (Amazon et al). Currently it is durables with the lowest cost model, but over the last several years inflation has moderated in the non-durable goods suggesting automation is starting to mitigate inflation.
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