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Where Is Consumer Spending Heading?

Category insights on the future of retail and delivery.

Dear Friend, Subscriber, and Category Pirate,

A recent report from the Wall Street Journal shows consumer spending (and thus, the U.S. economy) is holding steady.

The question is, what categories are people spending money on?

It’s a tale of two categories: experiences and personal transformation. This shift signals what we’ve written about in the past—that Native Digitals continue to choose experiences over “stuff.” But we’re now seeing the negative impact on massive retail Category Queens, like Target, Walmart, and Bed, Bath & Beyond (so long, expired 20% off coupons).

In this week’s Pirates Perspective, you’ll hear our take on the latest consumer spending reports and the opportunities for retail and food category leaders.

You’ll also learn how business owners can capitalize on these spending trends.

Hint: It has something to do with the Non-Obvious bundles we wrote about in our How to Reframe a Problem and Win mini-book.


Category Pirates

Eddie Yoon

Christopher Lochhead

Katrina Kirsch

Category Pirates is a reader-supported publication. (That means we stay afloat thanks to our paid subscribers!) If you get value from our work, the best way to support us is by taking out a paid monthly or annual subscription.

Video Transcript

Katrina Kirsch  00:02

All right, Eddie. Let's talk a little bit about what's going on recently in in the economic market and with the US consumer. Tell us your Category Science lens on it?

Eddie Yoon  00:13

Well, funny, you should ask that. Looks like at the most macro level, you look at the data from the government that these are kind of wonky things but disposable personal income. It's up only 0.15% In July, which is the lowest level it's gone up in all of this year. And what's called personal consumption expenditures, what so what disposable income? What do I have to spend PCE (personal consumption expenditures)? What am I spending? That's up 0.82% in July, which is the highest in 2023. So in July, discretionary spending income is the lowest and spending is the highest.

And so what's going on? Is that good or bad news?

It is interesting in that, that it's a little bit scary, in my opinion. You know, student loans were put on hiatus for a while. They're kicking back in October. So on average, anyone with a student loan is paying about 503 bucks a month, and that's less. That's 503 bucks less than they have each month to spend on whatever else. Loan delinquencies are approaching Q2 2020 rates, per the St. Louis Fed. And, you know, what we see is that consumers are kind of making big lifestyle changes.

Eddie Yoon  01:26

One of the stats that kind of threw me for a loop was the number of young adults that are 25 to 34 living with their parents is four times higher than it's been since the 1960s. And so it's just kind of insane on that front. And I think you see kind of a tale of two cities and, or as Pirates would say, a tale of two categories: experiences and personal transformation categories—they're growing.

You know, international travel demand is at a 46 year high, that 22% of Americans are planning to travel abroad, per the Conference Board, in the next six months. In categories where I spent a lot of time in, like medical esthetics, that's going to grow from 16 billion in 2017 to 40 billion in 2027, according to BCG.

So if it's about experience or transformation, people are buying it.

But if it's about physical goods, people aren't interested in it.

So these are some scary numbers from a macroeconomic perspective. Target's revenue in July, down 5%. Kroger's revenue in August, down 3%. Home Depot's revenue in July, down 2%. And part of this you know. What's hard to figure out if it's actual demand, which I do think that we're at peak goods, like people have bought too much stuff, and they're gonna buy less of better quality and higher price points going forward. But retail theft, which is a major problem, it was $100 billion in 2022. Target is saying that merchandise theft is going to rob shareholders of a half billion dollars in earnings. Walmart says they lost $3 billion to thieves. And so you kind of funnel this whole kind of film out forward. More retail is going out of business.

Christopher Lochhead  02:57

Hey Eddie, maybe we should make crime illegal again.

Eddie Yoon  03:10

That's a thought. Well, yeah, I mean, it'll be retail business. You guys know, it's razor-thin margins anyway. They can't afford this kind of thing. And so what's going to end up happening is consumers who are doing this thievery, you're gonna get what you asked for, which is there aren't going to be as many retailers out there. David's Bridal filed for bankruptcy in April 2023. Independent pet retailers filed for bankruptcy in Feb. 2023. Bed Bath and Beyond is gone. You know, Instant Pot—a very successful product—they went bankrupt as well.

I think what the future is going to look like is a world where categories that are not in the experience or transformation business, they're going to consolidate, a lot of M&A as we've written about.

And it's going to look like shopping at Costco, meaning there will be one or two great brands that are leftover and private label. That's it. Everybody else is going out of business.

Christopher Lochhead  03:42

Now, Eddie, I'm curious to ask you. The economy's been weird for quite a while and weird in a specific way where we appear to get some mixed signals.

So I'm looking at the Wall Street Journal, September 14, 2023, Justin Lahart, the headline says, “Don't bet against the American consumer now.” And in the article, Justin talks about how the Commerce Department on Thursday reported retail sales grew 0.6% in August from the prior month. And they go on to say that economists at JP Morgan Chase, a forecast real GDP growth at 3.5% on an annual rate in the third quarter. That's what they're forecasting for the third quarter.

And then the other interesting thing in this, this report was an increase in the number of people who don't have a GED, who got employment. So the employment-to-population ratio for people 25 and over who hadn't completed high school was 45% in August, versus 42.6% a year ago. These things seem to be sort of some positive indicators.

And so how do we, Eddie, make sense of dual signals that seem to be signaling somewhat different things? How do we make sense of this?

Eddie Yoon  05:05

It's a great example of how more than one thing can be true.

The consumer drives 2/3 of the US GDP. So they are the backbone of our economy. And they are spending on credit.

And so the question becomes, how long can they do that? Right?

I don't have a bone to pick with the predictions on GDP. I think it'll grow. I think that what the consumer is doing is actually making some balance sheet changes in their household P&L in a way that would make 3G and every other, you know, bankruptcy consultant, very proud. In that college enrollments down over the last 10 years. No one's moving and buying a new house. You know, you can't get credit to buy a car. So all the big capital purchases are not happening. The birth rate is declining. You know, marriages are not happening at the pace that they were beforehand.

Christopher Lochhead  05:58

So hey, go make some babies and buy some fridges, would you?

Katrina Kirsch 06:00

That’s all they keep telling us.

Eddie Yoon  06:01

Yeah, I mean, you know, no pressure being spouted by me. But the percentage of single-person households in America went from 18% to 29% in the last few decades. I think what we're seeing is that the macro may still be positive, but there's a fundamental reshift and remake of what the American economy is going to be, predicated on the fact that the nuclear household is not going to be the norm anymore.

Christopher Lochhead  06:31

Well, and there's a very interesting thing about that, that I think some people maybe are not paying attention to. The radical shift in what a consumer is, what a person is. And we've talked about this a lot and the shift to Native Digitals from Native Analogs.

And recently, McDonald's came out and announced I forget, by when I think maybe 2030, Kat, they said they're going to get rid of fountains for drinks inside the McDonald's. [Note: McDonald’s stated it would happen by 2032.] And they gave a number of reasons. But one of them was that now 40% of their revenue comes from app purchases, delivery, and/or drive-thru.

That is to say, consumers are using the restaurant less and less.

Now let's think about this.

If you're a Native Digital, and Native Digitals are now pushing 40, how do you want to buy your food? You want to buy it on your phone. And so that's having radical implications for literally the business models of the biggest consumer-facing companies in the world.

And so, Eddie, as people start to be a little bit more parsimonious, as people start to maybe be, in their mind, they're changing the value equation of what categories they want to invest in, and what they don't.

I want less stuff and more experiences. I want more Native Digital, digital first, analog second, as opposed to analog first, digital second. If you could maybe share some light on how you see some of this playing out from the, I'm a business person trying to capitalize on this mega trend. How should I think about it?

Eddie Yoon  08:04

There’s a bunch of massive mega trends that are tailwinds, and there's a bunch that are headwinds. And the sooner that companies get ahead of this, the better they're going to be.

I mean, McDonald's, the fast food one is fascinating because the vast majority of the margins (my data is old, so I might be wrong on this one) comes from fountain drinks. It is the single greatest profitable thing that McDonald's sells. Not food. And they like fries, but they don't make money on fries the way they do drinks. What the fries do, they're salty, they make you thirsty for the fountain drinks. It’s a couple of pennies.

Christopher Lochhead 08:42

Fries make you drink more Coke, right?

Eddie Yoon 08:45

There it is. McDonald's has a real challenge.

On the one hand, they're leaning into a couple of good trends that are tailwinds for them. Digital, app focused. 70% of fast food sales come through the drive-thru. So all that's positive, right.

But the mix of what they're going to sell, I just don't believe you're going to buy the ginormous you know, big gulp size drinks at McDonald's. It's hard to deliver. You’re at home. You probably have lots of drinks that you have already there. So I think on the one hand, they're chasing the trends to keep up and on the other hand, they're going to kill the golden goose, which is, you know, beverages where all the money is on the margin is.

You know, this is one of those things that what they ought to be doing is number one, all these delivery services, they're all money losers. They've created a lot of market cap out there. Christopher, there's some companies that are just products or services. They're not meant to be companies, right? Things like DoorDash and things of that nature like great market creation. I don't know that they are standalone businesses on their own.

McDonald's should have been the one to create the category of delivery.

Christopher Lochhead  09:53

They missed it, right? And they could still purchase DoorDash. And if they were smart, like Keurig, when Keurig decided to open the aperture and allow competitive coffee brands into their platform, their ecosystem. McDonald's buys DoorDash and will deliver you Pizza Hut through DoorDash.

Eddie Yoon  10:14

You know what, Christopher, the genius of what you just said. It's so great. I have to tell you another food story to make it work.

The number one SKU stock-keeping unit in all of candy (candy is a $20 billion category) and the biggest brands are around a billion dollars give or take. But the number one SKU—so not a brand, product of candy—comes from Costco. It is the brand of the product they sell at Halloween.

That is the Halloween bag where they physically get candy from all the competitors—Hershey, Nestle, you know whomever else, Mars—they assemble the Avengers, you know, Wonder Twins and Power Rangers unite into one bag, that single SKU is $400 to $500 million dollars.

You imagine the profitability of one SKU, the throughput that comes through. And it is because Costco is like they have a problem that trying to solve Halloween.

The single greatest thing that McDonald's could do is exactly what you just said. Ray Kroc famously said I'm not in the hamburger business, I'm in the real estate business. Time to reinvent the category. They could have been in the delivery business. And they could have been it for the entire category. And the way out for McDonald's is to go the Netflix route. Because DoorDash wants you to be a subscriber.

Christopher Lochhead  11:49

They could even call it Mickey D's for delivery. Mickey D's delivery.

The other thing too, that's interesting about the Costco story with the Halloween candy is Costco, either explicitly or intuitively, understood a Super of 1 is a Super of 9. That is to say, if I like I don't know, a Snickers, then maybe I like KitKat.

And so a Super of 1 is a super of 9, even if they're competitive.

And what they're doing, of course, with that magic competitive bundle, is they're doing what category designers always do, which is increase the TAM for the category.

By putting it together, chances are we buy more Halloween candy than we would if we had to buy all the pieces ourselves. Yes? Yes. And so is one of the things that we should be doing here is always thinking in what Kevin Maney calls the adjacent possible always thinking, what are the adjacent categories? What's next to us? What's near us? and even in some cases, what's not near us, but is potentially our Supers might be a Super of something, which leads to an unpredictable bundle.

Eddie Yoon  13:18

100 percent. If you follow the adjacent possible Super of 1 is a Super of 9, you can see the playbook happening out.

The chessboard is McDonald's buys or builds delivery service they offer Mickey D's, as well said by Christopher, offers it up to the entire category competition be damned so that you can get a Big Mac with a Wendy's frosty and some Taco Bell you know, whatever all in one delivery because guess what? People like variety. And then eventually what the natural logical conclusion is that what are now quick serve restaurants, they’re in the real estate business become smaller footprint places or repurpose where they become commissaries where you can cook food at greater scale so that they can be delivered at greater scale.

And guess what? Cloud kitchens.

Yeah, ghost kitchens where you can have it. Yeah, Donald's and a Wendy's and a Taco Bell and a pizza all in the same place. So that the consumer gets what they want. And that McDonald's can be in the delivery, the real estate business, and the digital subscription business. Because a super consumer of fast food would absolutely pay 10 to 20 bucks a month to be able to for the privilege of being able to order whatever I want from wherever I want.

Christopher Lochhead  14:37

Like the Amazon Prime service for delivery of food. Yes. And here's the other thing. So we've written about. We've talked a lot about the power of a digital flywheel.

So now imagine you’re McDonald's—you acquire DoorDash. What do you have?

You have the largest training data set in the world of what people want to eat at home from delivery.

All of a sudden, Mickey D's would have the greatest advantage in the history of restaurants, which is they would have radical insight into a delivery Superconsumers tastes, wants, desires, when they want it, how they want it, etc. And McDonald's buying DoorDash to make it Mickey D's delivery would be the equivalent, see if I can bounce this one off you, Eddie, the equivalent of Microsoft buying LinkedIn.

Why did Microsoft buy LinkedIn?

Because LinkedIn is a great business.

They're a category King? Sure. But guess what?

If you're the number one maker of software for white collar workers around the world, wouldn't you love an AI training data set of opt in data, where all the white collar knowledge workers in the world tell you what they're doing, if they've been promoted, if they've got a new job, where they went to school, what training they're taking, et cetera, et cetera, et cetera. Microsoft has an insight into what's going on with their customers via AI training data through LinkedIn like no other application software company in the history of the world does.

Is there an analogy there, Eddie on McDonalds?

Eddie Yoon  16:18

You know what, the only people who would do this analogy are piratey people like us, because what Microsoft did with LinkedIn is they understood that one of the single greatest transformations in business is you’re go-to-market is not the consumer comes to you. You go to the consumer.

Microsoft buying LinkedIn is allowing them to go to the consumer where they are talking about work, looking for jobs, everything else.

McDonald's buying DoorDash would be the same thing.

McDonald's, yes, people used to come to you—now you go to them. And that's the single greatest shift that you can make. And if you can do that, you will be best setup for the next 30 years of wherever the category and the consumer is gonna go.

Christopher Lochhead  17:04

Now's a good time to be paying attention.

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