Motley Fool Money - Shrinkflation, Balance Sheet Strength, and VR's Potential in Healthcare

Episode Date: June 16, 2022

"Who has pricing power?" may be a less relevant question these days. (0:25) Jason Moser discusses: - The strength of a company's balance sheet becoming more important - Increasing data that customers are starting to spend less - Shrinkflation being a tool some (but not all) companies can employ - Net expansion being a key metric to watch (14:45) Sanmeet Deo joins Jason to talk about the potential applications for VR in the healthcare industry and a mid-cap company that may have advantages over the tech giants in the space. Stocks discussed: KR, ZM, CRM, MSFT, OKTA, META AAPL, PEN Host: Chris Hill Guests: Jason Moser, Sanmeet Deo Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. Lately, we've been asking about pricing power. Today, it looks like we may need to start asking a new question.

Motley Fool Money starts now. I'm Chris Hillen joining me today for the second time this week. Motley Fool Senior analyst, Jason Moser. Thanks for being here. Hey, thanks for having me. Well, yesterday was fun while it lasted. And today, the market continues its grim slide. So I wanted to get your thoughts on what appears to be a true.

trend. If it's not a trend, it's certainly a growing amount of data, and it has to do with consumer prices. But I say consumer prices, it may even be on the business side as well. But this morning, we got two bits of consumer data. One was that for the first time this year, airfare prices have dropped. So for anyone still looking to book some summer travel, That's welcome news. And more specifically, Kroger came out and said that their customers are starting to drop more expensive name brand products in favor of lower price generics. And you and I have talked plenty of times in the past about pricing power, what businesses

have it, what are the limits that they can push it? Earlier this year, you and I talked specifically with regards to Chipotle and their ability to raise prices. And you had made that point. They're doing a pretty good job right now. I don't know how much more they can push it. And I'm wondering if we are now moving into a new phase where the question for businesses is not, do they have pricing power? But instead, the question is, how strong is their balance sheet? Can they withstand individual customers or other businesses spending less. Yeah, I mean, I think that's a good, that's a good question.

I mean, we sort of hit that phase of this cycle where consumers starting to trade down. I mean, clearly, inflation is hitting us from all sides. And I mean, you look at some of the data out there. I mean, in regard to the store brands versus national brands in the first quarter of this year, sales of store brand, store owner. brands rose 6.5%. That was compared, that compares with 5.2% increase in national brand sales. And so we have seen, you know, that move already really from all the way back to the beginning of the year, where folks have started to trade down, so to speak, a little bit.

And that makes sense. Another interesting concept, and it's a funny word, it always kind of makes me chuckle when I see it, but shrinkflation where... I'm sorry. What? I've never heard that. Shrinkflation. It's a word. It's a word. But it's basically, you know, companies are very clever, right? These national brands, right? They're very clever in how they exercise pricing power. It doesn't necessarily always come in the form of higher prices. It can come in the form of shrinking the actual product size and maintaining the same price, right? So that box of cereal, it was 14 ounces, maybe now it's 12. And customers are on the lookout

for that kind of stuff, right? It does matter. So pricing power is a very strong quality to have. We love to see it, but it's always worth the memory. It doesn't go to the moon, right? There is a cap. There is a ceiling where you kind of have to stop. But I mean, it's really sensitive on the food side right now. I think, you know, within food products, you see the prices up 11.9% for food stuff that we're eating at home versus stuff that we're eating at restaurants. seating away from home, those prices rising just 7.4%. So it's really, it's hitting consumers in the house. And so when you see the way these businesses start trying to cope with this, absolutely. Looking at balance sheets, I think, is a wonderful way to get a grip on a company's

financial stability, right? Because if you think about it, well, in this rising interest rate environment, in this inflationary environment, of course, we as consumers are getting hit by it. It makes perfect sense that businesses would get hit by it too, but it's not every business, right? I mean, for businesses that generate free cash flow, for businesses that are profitable, for businesses that have excellent balance sheets, they're able to more or less sell fund. They're not going to be necessarily beholden to the same inflationary pressures that consumers might be feeling.

It's a very good reminder, though, to always pay attention to a company's fiscal fitness, so to speak, because they all are not equal. So I've experienced shrinkflation. I just didn't know there was a word for it. And the example I always think of in this case was years ago talking with our colleague Charlie Travers and he made a comment about ice cream in a grocery store, sort of packages of ice cream. And he was referring to this happening. And I said, what are you talking about?

He said, do you ever buy ice cream at the grocery store? I was like, yeah, of course I do. And he said, what size is it? He said, what size do you buy? I said, I buy the two quarts size. He said, no, it's no longer two quarts. It's now one and a half quarts. They adjusted the packaging, and that's how they managed it.

And you can do that with a package of ice cream. But if you're in the business of, say, software, like that seems like a a tough thing to pull off. If you, you know, and I'm wondering if you think we're going to start seeing more stories. Like, the two stories I mentioned, those are consumer facing prices that we're talking about here. Do you think we're going to start seeing this on the business side as well? I think we will to an extent. I mean, I think the message is clear. I mean, we're seeing businesses more and more headlines coming out every day. Businesses are focused on maintaining, you know, a strong

hold on the expense line, hiring. I think what Uber said, for example, they will treat hiring as a privilege. So I think now more than ever businesses are looking at the costs of doing business and looking at ways that they can simplify, become more efficient. It's interesting to think about it. So software, like you think about the way that the workforce has changed over. the last few years. And there are certain things that companies now are more dependent on than before. Like, you look at your Zooms and your slacks of the world and how pivotal they are to just

our everyday work, right? I mean, most people are using some form of those platforms in order to be able to get work done. And so it all speaks to, well, if a company, really kind of is reliant on it, well, then they don't necessarily have that freedom to be able to say, you know what, we're going to cut this cost, we're going to cut that. They're not going to say, well, we're just going to get rid of Slack, for example, because then what's the alternative? Now, interestingly, there is an alternative, right? I mean, Microsoft, I think, stands out as a shining example here.

But you look at Zoom and Slack, both provide services that a lot of businesses are using. Well, Microsoft obviously provide services that most businesses use. And furthermore, now having developed the Teams platform, which could certainly be seen as a substitute for Zoom and Slack, right? And Microsoft having that Fortress balance sheet, having that size, having the financial resources, they can package that differently. They can price that more effectively. And so it does seem like this would be a stretch where Microsoft could get out there and

say, hey, we're going to help businesses save a little bit more effectively. bit on those expenses by offering something like Microsoft Teams as a competitor to what you're doing on Slack in Zoom today. Some companies maybe will make the shift and some won't. It just really, I think, ultimately depends on what leadership of the companies want and really what the employees prefer to use. But I do think it does speak to the value and having something where substitutes are rare. And so I think when you're looking at the software that companies are I mean, there are probably a million payment providers, right? I mean, there are a million payroll software providers?

And I feel like that might be a little bit different than something like a communication tool. And so it does matter exactly the purpose that the software serves. Well, and it's one more question we can ask ourselves as investors when we are looking at any business. And it's, you know, it's of course related to the pricing. power question. And it's basically, how big are the switching costs for this business? It's pretty easy for anyone going into a grocery store to just switch to a lower priced

product when faced with that choice. And as more people are sort of tightening their belts, their fiscal belts, I think we're going to see more of that. It's a little bit harder when the switching costs for what is the communications platform that our company uses and the bigger the company, arguably, the higher the switching costs, because it's, as you indicated, you've got to get your employees on board with it. Yeah, I think that's really the key is. Ultimately, the employees need to be on board with it. And so it's never just that cut and dry, right?

And the longer that you use these particular platforms, the more that you get used to using them, and the more functionality they build in. And there's things that you do probably, without, you know, you're, you do probably, without, without even thinking twice with these platforms now and then to switch over. Yeah, you really do have to weigh that. I mean, it is going to be a short-term versus a long-term perspective there, right? I mean, are you, is it worth the financial savings for something that could potentially be an inferior product or maybe it's a superior one?

I mean, like, I look at Microsoft Teams as an interesting example, because having used Microsoft Teams before, I mean, I've. I found it really good. I mean, Zoom and Slack are helpful too. Like, for me, I don't know. I really guess I would be more or less indifferent, but others would probably feel very strongly one way or the other. So, yeah, you do have to figure, you have to figure that out.

It's a balancing act for sure. The bigger the company, the more employees. That's just more opinions that you have to take into consideration. It's really going to be interesting the next six months, what we see out of these types of businesses because, again, the switching costs are higher. But if some businesses, you know, and you sort of spoke to this, that it's not really an option to not have them. Like if you're, you know, so many more businesses look at things like Zoom and Slack and

sort of their, you know, whether they're a hybrid setup or fully remote, like whatever is you've got to have some version of Zoom or Slack to exist as a business. And so then the question becomes, all right, well, do we want to switch? It's going to be really interesting to see over the next couple of earnings seasons if we start seeing some of these businesses lose customers as a result, or if they are less in the driver's seat and they have to basically make some concessions so that they can keep their customers. I mean, this is something you and other analysts bring up when we're talking about software

companies, a business like OCT, that sort of thing, where it's, hey, they've got their customer base, and then they've got their, essentially, the customers who spend over $1,000 or over a million dollars or over a million dollars per year. And it's going to be interesting to see what those numbers continue to look like. Yeah. It does seem like an opportunity for some of those providers to, really earn a little goodwill from their customers, right? In a trying time, such as this, you can either be the provider that is going to try to capitalize on that and raise prices, or you could be a provider that says, hey, listen, we're kind of all in the same boat here

dealing with a difficult economic environment. I mean, I think you probably were looking at these Q2 numbers coming out, and they will indicate that we're in a recession now. I mean, it certainly feels like one. It feels like the longer term opportunity is for a company to hold back on pushing that pricing up, right? Saying, listen, we're not going to try to put the screws to you right now because we know everybody's dealing with it from all angles. That goodwill certainly can breathe longer lasting relationships where you ultimately grow the relationship with that provider, right? You go back to those net expansion numbers, right? I mean, those, you look at for those, how are they growing the relationship?

relationship and that's always a good metric to pay attention to. So yeah, it'll be interesting to see how companies approach this because there are a couple of different perspectives there. Appreciate the time, Jason. Thanks. Yeah, thank you. When we think about the applications for virtual reality, we often go to gaming as an example. But one of the more promising use cases for VR is in healthcare.

Among other things, virtual worlds can make something like physical therapy a lot more engaging. Sanmeet Deo joins Jason Moser to talk about the possibilities for VR and healthcare and one midcap company that has an important leg up over the tech giants in this space. Hey, San Mate, it's great to catch up with you again. This week we're talking about immersive technology. In immersive technology, it's all around us. But you and I are actually both really excited about one particular market where it has significant potential, and that is in the health and wellness space. So this week, we're really excited about one particular market where it has significant potential, and that is in the health and wellness space. So this week, we're going to talk a little bit about some of the companies in this space,

what they're doing. When we talk about immersive technology, it's kind of a broad term, right? I mean, it includes things like augmented reality and virtual reality. And now you hear a lot of talk about mixed reality. Real quickly, for our listeners, let's remind our listeners the differences between the two in augmented reality and virtual reality. What is augmented reality, and how is that different from virtual reality? Yeah, Jason, and thanks for having me.

It's excited to talk about this. So just to lay the groundwork here, augmented reality kind of enhances your surroundings by adding digital elements to a live view or real-world setting. It's usually done through your camera on your smartphone or augmented reality device. Think Iron Man's glasses. You know, how he puts those glasses on, and then he sees the real world, but then he sees digital either images or information kind of laid on top of the real-world setting, and gets information that he needs.

Virtual reality is a completely immersive experience. It basically replaces the real-life environment with a simulator of virtual one. So think of the holodeck on Star Trek when they walk onto the holodeck, and you can simulate a whole different environment from what you're in already. So that's kind of how I think of the difference between augmented and virtual reality. Yeah, yeah, I think that's spot on there. And I think for our discussion today, we're really talking a bit more about virtual reality. the impact that it's having in the health and wellness space.

And there are some obvious suspects that are doing a lot of work in this space. And then there are some smaller companies that maybe folks might not be as familiar with. So let's just kind of start from the top here and talk about some of those companies that are making waves in this market, the companies that people are probably more familiar with. And there are, I think, four in particular that you've kept your eye on, right? Yeah, yeah. So in the, one of the biggest ones that you think of is meta. I mean, meta has their Oculus Quest, where now I believe it's called the Meta Quest 2. So it's the big goggles that you put on. And then you can, they have a whole bunch of apps related to gaming and health and fitness and all those things.

So the MetaQuest 2 is kind of like a virtual reality platform where you put on the glasses and some of the apps that they have that are great, for fitness or things like the FitXR, which they titled, which has been titled the most intense workout amongst VR apps. There's an app called Supernatural, which won the VR, the best VR workout app overall. So you have workouts like boxing, meditation, hit, stretching. And it kind of can gamify fitness with leaderboards and creating goals for yourself and interacting with coaches. So, and it's a great device. I've never used it myself. I've definitely been, wanting to use that. So Meta has that, which is their main device, which is a big consumer device that we think of primarily. Microsoft has the HoloLens, which is what they call a mixed reality

head say, which can kind of work augmented and virtuality, so like what we talked about earlier. So allows the person to put on these glasses, work hands-free, collaborate with remote colleagues in real-time. Some of the use cases for those are, of course, healthcare, seeing a patient, and seeing, like, as you're working with the patient, you could see their patient records, their charts, their data, kind of like in an image right next to you as you're working with the patient. So it makes it a lot easier than fumbling around with a chart or data or pulling up any information you need as you're working with the patient.

So that's an exciting device. And even Intuitive Surgical is a company that has a SimNow simulation system where it's guide surgeons through realistic exercises, kind of master complex procedures. So think of medical training and education for doctors and nurses and medical professionals, being able to perform procedures and surgeries and all the work that they do on a virtual body versus a physical body, so that way they don't mess it up on someone in real life, which I, for one, would be totally, totally for. So they also received an FDA approval for the IRISA augmenting.

reality system, which is replay, it displays like 3D renderings of patients' anatomy for physicians on their iPads and their iPhones. They can view, manipulate the 3D model as part of their pre-op surgical planning and referencing it during operations. So in the healthcare space, a lot of the use cases are digital twinning, which is kind of simulating the patient for the doctor to kind of observe and practice on or work on telemedicine where you're remotely treating patients through an ARV your headset or your smartphone, and then medical training education, like we kind of talked about a little bit with training

the doctors and nurses on a virtual patient versus an actual patient. So when they get to the actual patient, they can actually perform very well. Yeah, it feels to me like, I mean, one of the things that technology has is doing in the healthcare space, in a particular immersive technology, virtual reality, things like that. It's helping scale healthcare, right? I mean, it's giving us the ability to get more health care out there to the folks that need it most. It feels like we're kind of in this environment where we have a growing number of patients, right? The population continues to grow, and yet if you look at the actual data, we have a shrinking number of physicians, right?

I mean, the actual professionals, the providers in the healthcare space, I mean, the barriers to entry there are high, right? It's a lot of money, a lot of education, and you really need to be committed and passionate about doing that. So it is a limited supply of providers and a growing base of really demand there. In virtual reality, immersive technology in general, is helping us scale healthcare, which I think is one of the bigger challenges that we've been trying to solve for. So it's really encouraging to see this happening. I mean, it is sort of slowly but surely, but you really see a lot of these companies making a lot of investments.

They're making great strides and doing this. Now, we talk about the big, companies like your Googles and Metas and Microsofts of the world that are doing all sorts of neat things when it comes to immersive technology, but they're not limited to healthcare space, right? I mean, they're doing all sorts of things. Gaming, healthcare, entertainment, all of that neat stuff. There are some smaller companies out there, perhaps a little bit lesser known to some investors, but they're making great strides and focus specifically on health care. And Pernumbra is a company that stands out to me, and you and I have talked about Pernumbra a little bit,

And I know that you recently had an interview with Penumbra leadership. Let's talk a little bit about Penumbra, what the company does and how Penumbra is using virtual reality to advance the healthcare space. Yeah. So, you know, Penumbra actually bought a company that they were able to incorporate and create what they're calling the real immersive system, which is an advanced rehab technology that uses virtual reality for therapeutic activities developed with input from rehab experts. So it's basically they have a device similar to the to meta where it's big goggles and it's actually received initial FDA clearance in 2019.

So using the device along with a physical therapist or physical therapist professionals or doctors, they can help patients recover from things such as. as chronic back and neck pain or stroke rehab or Parkinson's. They can support the rehab of upper body with focus on strengthening range of motion and postural control. And it can even do things like addressing cognitive functions like visual, spatial awareness and command response. So basically, I find this interesting. My wife is a physical medicine and rehab doctor. She works with physical therapist and patients who are experiencing a lot of these things.

Mostly like weekend warriors, so fitness-related stuff. But being able to kind of use a virtual reality device and to kind of enhance the rehab process is, especially for things like stroke rehab or patients that really can't feel or use their arms or legs or whatever they're facing their challenges in, using a virtual reality device, actually, it's almost like tricking the mind to be able to do. what they thought they couldn't do, and it actually enhances the process of rehab. And so it's a very exciting field, and, you know, the interview I did with the CEO was great. I definitely recommend listeners to check that out. But it's very young, it's very new, but it's a lot of practical, great use case that I feel like could really help these patients kind of get to another level in their rehab quicker because of virtual reality. So that's definitely an exciting company, doing some exciting things. How important do you feel like, Penumbra, small cap, by I think virtually every definition,

how important do you feel like it is for a company like Penumbra in going up against the beheavits in tech, right? Apple, Google, Microsoft. I mean, those are formidable companies with vast, virtually limitless resources. How important do you think FDA clearance is for something like that? Pena, is that a competitive advantage, you think? With Penumbra, having that FDA clearance, is that something that really separates them from the company? Oh, absolutely. Because while the device may look like a regular consumer device, there's kind of being a,

there's becoming kind of a divide between the consumer devices and the more medical-oriented devices where you need a medical professional to kind of help you use that device to achieve the goals that you're trying to achieve when it comes to your rehab or your health or medical goals. So you could, while somebody looking to help themselves with crank back or neck pain can pick up the device and just start doing stuff, you may not necessarily know how to use it in the proper way to get the gains and the goals that you have. So I think it's a real competitive advantage and something they can use to their benefit. All right. Well, we'll leave it there. Sendmate. It's been great catching up.

Thanks so much for taking the time to come on the show today. Thank you, Jason. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.