Odd Lots - 40: Why Summer Has Just Gone on Sale

Episode Date: August 8, 2016

This week is the summer edition of Odd Lots and we're talking about the market forces shaping the price of two essential ingredients for any pool party: inflatable toys and barbecue meat. Bloomberg Reporter Polly Mosendz walks us through the $4 million dollar battle blowing up over the inflatable pool toys popularized on Instagram and now the subject of a major dispute between retailers vying for the top sales spot on Amazon Inc. Then Bloomberg's Lydia Mulvany tells us why meat prices are cheaper than ever and the cost of grilling staples including burgers, ribs and pork chops could go even lower. So grab your inflatable donut, pick up your BBQ tongs, and join the Odd Lots fun.See omnystudio.com/listener for privacy information.

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vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal, managing editor at Bloomberg Markets. And I'm Tracy Allaway, executive editor of Bloomberg Markets. So Tracy, it's the middle of August, and it's about time for a fun summer episode, don't you think? Yes, I think it is. You know, everyone's on holiday. People are thinking about going to nice places with beaches and pools. Let's give the people what they want. Exactly right. You know, obviously, Obviously, summer is characterized by pools, hanging out by the pool, barbecuing, grilling, stuff like that.

And of course, there's always a market and economic angle to every story. And so today we're going to talk about these things that we take for granted in the summer and talk about some of the underlying fundamentals behind them. So this is essentially the market edition of the pool party or the pool party edition of the Markets Fawthwk podcast, I should say. We're here with Polly Mossens, who wrote a great story for Bloomberg recently about pool toys. And before we get into it, I think pretty much anyone who goes on Instagram regularly sees lots of pictures of people floating in pools in these gigantic inflatable donuts or inflatable swans

or inflatable flamingos. You certainly see them if you follow Taylor Swift on Instagram. And of course, there is a huge business behind that and a lot of money. And we're going to talk to Polly about that business. So Polly Masons of Bloomberg, thank you very much for joining us. Thanks for having me, guys. I would love to talk about pool toys. Great.

Let's get right into it. So why is this, how did this become such a huge thing? How big is this business? It is huge. When I was at the New York Toy Fair earlier this year, which was the dead of winter, it was snowing outside. Inside the Javitt Center, they had a huge pool toy disqual day. It was the first thing you saw when you walked into toy fair.

There was a flamingo that was 10 feet high. Oh, wow. It was beautiful and cost, I believe, $400, which is quite the investment for an inflatable pool toy that can pop at any moment. Hey, but think of all the likes on Instagram if you have a 10-foot inflatable flamengo. That's exactly right. So about two summers ago, you started seeing them come up on Instagram, but it really became the thing to have when Taylor Swift, when she was still with Calvin Harris, RIP, that relationship,

She posted a picture of her on a really beautiful gigantic swan slash Pegasus. It was very regal looking. It had golden wings. People were obsessed with it. And that's really where a lot of these things took off. And you had a couple companies that really became like the main go-to companies. The biggest one among them is Big Mouth Inc. They make about $20,000 a day on Amazon just off their inflatable donut.

One style, $20,000 a day. Wait, this is the pink donut. It looks kind of like the ones that Homer Simpson used to eat in the TV series, right? And everyone's probably seen it at one point or another. That is the exact donut. $20,000 a day. $20,000 a day. That's a lot of money.

Yeah, and that's just off the donut. They have some other really popular items. Their giant pineapple has been huge for them this year. They have a flamingo whose design they've actually copyrighted. It's different from other flamingo floaties. So you can imagine how much money they're pulling in off of these floaties during the summer. Okay. So with large amounts of money often comes controversy and conflict and competition as other people try to get in on the act.

And the donut in particular seems to have attracted some degree of conflict. Walk us through that. Yeah. So Big Mathink, which is the big Kahuna of Floodies, they have found people infringing on their copyright, specifically on the donut. And they found this on Amazon. They started ordering competitors' donuts that they were trying to sell off as big mouth products. And when they arrived, they were flimsier material and perhaps most offensively. Instead of having 12 colors of sprinkles, they only had four.

Oh, my God. That's terrible. It is. I'd be embarrassed to Instagram myself with a donut without 12 colors of sprinkles. And the sprinkles weren't even shaded in, so they didn't look three-d-old. Oh, my God. Shock. Yeah.

So what did they do when they discover this? Well, this was part of two lawsuits that they filed, one against an Amazon seller called Floating Panda and another against Amazon seller solo fleet. They didn't have their real identities, so they just filed two suits in Connecticut against these Amazon identities. And the lawsuits that Big Mouth brought basically focused on copyright infringement and a version of fraud. They were claiming that these Amazon sellers were selling Big Mouth counterfeit products under the Big Mouth serial code on Amazon. So they were trying to just slip them in as very much. real products after they actually infringed on their copyrighted designs. Now, does Amazon have any responsibility here?

I mean, it's one thing if the donut looks like another donut, but if a competitor, as Big Mouth claims, is using their serial code, is Amazon a totally neutral party here? Well, Amazon does have fraud protection in place, but they have to have really stringent fraud protections that kind of are a process. Because otherwise, you'd have a bunch of people that are just filing complaints against their competitors because they didn't want them selling a legitimate product that was vaguely similar. So they have to have the product ordered. They have to prove that it's counterfeit. And then they can file a valid complaint with Amazon and Amazon can take away those products. And Big Mouth did do that, but they finally were very fed up after these two

competitors had taken their buy box on Amazon. The buy box is when you go to checkout on Amazon. You press buy now. And there's always a default seller. So there can be, you know, 10 different companies that sell the same floaty. That's vaguely similar. But whoever has that buy box is the one who's getting all the sales. And if floating panda started undercutting BigMouth by just one penny on the price instead of a $20 floater, $1999, they would take over that buybox. And that's what happened. And that's when Big Mouth started losing $20,000 a day on the donut. So this is where I think it gets really interesting because we talk a lot about the importance of Amazon right now, the dominance of Amazon in markets and in business. And the idea that people's business is built around what goes into the buy box and they can win or lose so much money just based on one Amazon algorithm is pretty significant.

Is cost the only thing that Amazon looks at when it comes to the buy box? It's more elaborate than just costs. There's ratings that go in there, and there's kind of a secret Amazon formula that they're never going to disclose in full. But it is also based on what kind of seller you are. If you had all one star but you're selling 99-cent products, you're probably not going to make it into the buy box. But if you look like a fairly legitimate seller and you're selling a less expensive product that Amazon believes to be the exact same thing, you might find yourself in the buy box, and then you're getting a ton of sales all at once. So what's happening now?

They filed these complaints. Has Amazon done anything yet? Or are the competitors to BigMouth still right there? Well, in this particular suit, they didn't file it against Amazon. So Amazon did definitely help them with taking out pictures that they thought were being used to sell products that weren't actually Big Mouth products. Amazon has replied to the complaints, but legally they don't have to do anything here. What did happen is that one of these Amazon sellers came back to Big Mouth after receiving the lawsuit and said, give me a week to sell through my product and you'll never hear from me again.

And Big Mouth said, you know, that's not a bad deal. Because their whole goal here is to make this problem go away. They don't want to fight every single person who's selling floaties on Amazon. And they understand that competition is out there. And they certainly don't want to bring these lawsuits. I mean, they've had to actually put two people on staff out of a 22-person office just to police Amazon. So for them, they just want this to go away. and that's really the next legal step here.

So what happened with the other company? They've not replied to the lawsuit, which isn't surprising. They don't believe that these sellers are in the United States, so it's a little harder to track them down. And from there, a judge can make a ruling on the case, but you never know if there's actually going to be any money collected, especially when this is a $4 million collection of lawsuits. I kind of love that response from the one company,

which is basically like, yeah, you're right. We're kind of ripping you off. But let us just be in business one more week so we can clear out our inventory and make back our costs and we'll leave. It's like a very sort of a free market kosian response to dealing with a legal problem. And it is kind of win-win. Seems much better than a long-protracted legal fight. Absolutely.

And you don't really want to be left with a warehouse full of floaties. Right. Can't blame them. But think of the Instagram potential. That's true. In your warehouse full of flamingos and donuts. Before we go, there's a fascinating story. What's the big floatie this year?

I think the big floaty is the swan. The swan is a really big deal. It's beautiful. I personally enjoy laying on my swan. I have like five floaties. I feel somewhat biased writing this story because I'm really into floaties. Are they all the Big Mouth brand floaties? They're not.

They're a variety of floaties, including I bought one on Amazon. That was kind of crappy, but it was like $7. So, you know, you have to have a weird one in there. Polly Muslins from Bloomberg. Thank you very much. That's fascinating. I don't think I'm ever going to be able to look at it. an Instagram pool floating picture ever again the same way.

Thank you guys for having me. Well, Tracy, so that was half the summer. Half the summer is about spending time in pools. And as we said in the beginning, the other half of the summer is about grilling and barbecuing. Of course. Of course it is. So what's essential to grilling?

Well, obviously meat. And the good news is that at least in the U.S. this year, there is a meat, mountain. There is so much meat out there that the price of ribs and beef and pork and everything else has plunged making it really cheap to do barbecue this summer. Okay, so summer has essentially gone on sale because we have inflatable pool toy makers trying to undercut each other and then we have super cheap meat prices. I love that. Summer on sale. I think that should be the title of this episode. All right. So with us now to discuss the meat mountain and super cheap meat products is Lydia Mulvaney. She's a reporter here at Bloomberg who covers

agriculture. Lydia, thank you very much for joining us. Hi, thanks. So Lydia, why is there a mountain of meat? Oh, there's so much meat. It's because there's been a kind of a perfect storm where by chicken producers and hog producers and cattle producers, they're all expanding their herds at the same time. And there were some record prices for those for meat a couple of years ago, even last year for beef. And those high prices just made everyone go crazy and expand their and expand their flocks and herds. And so now we have like all three important meats, you know, a lot of it at the same time. And so they're all kind of competing. with each other at the store, and the result is just really big discounts compared to previous

years, and actually a lot of them are at, like, multi-year lows for the prices. I love it. I mean, you know, it's the cliche in commodities, right, that high prices are the cure for high prices. We saw it, obviously, with the multi-year oil boom, and then there was so much expansion of drilling and exploration, and then the price of oil cream. crashed. So it sounds like essentially the same thing happened here except with the meat market. Yeah. And I don't think that they necessarily all happen at the same time where it's like chicken

pork and meat doing this at the same, or chicken pork and beef doing this at the same time of it. At this point, you know, it's all three markets. And so the total meat supplies are going to be a record for sure this year. And then so there's really cheap grain prices right. now too. So it's even cheaper for producers to produce meat. So there's a lot of people out there saying that this isn't going to stop. It's going to go for a couple of years. There's going to be this expansion. And so should have pretty good barbecue prices next summer too and maybe even the next one. I remember just a couple years ago we were talking about global demand for meat really taking off, especially in places like China. And it's kind of surprising to see that supply

has been raised so much that it's offsetting what was supposed to be a big increase in demand. Yeah. So because of the prices in the U.S., meat consumption grew the most in 40 years, or some very large number in 2015. So Americans are pretty close to, like, peak meat eating. So we can't actually eat all the meat that's going to be produced in this country. So it really needs to go to these other countries. And, yes, there is, like, rising meat consumption. But, you know, there's other producers that are competing with the U.S.

So I think it remains to be seen. what happens. Basically, if China and other emerging countries aren't going to absorb, you know, the overflow from the U.S., that's just going to mean it's going to back up here and be even cheaper. So Joe mentioned a potential parallel with the U.S. shale boom in terms of supply rising really quickly to take advantage of higher prices a couple years ago. Was there any technology involved in the supply growth in meat? I don't think it's a specific technology, but producers are always working on, you know, breeding more efficiently and getting the genetics right. I think for pigs, like pigs have way more piglets today than they used to.

So Joe's a very keen barbecue. Can you recommend one specific meat that's the best bargain at the moment that you should be grilling next weekend? That's a great question. Ooh, best bargain. Well, hmm, so in terms of things that were expensive last year, but cheap this year. Right, like what's really, I should take it? That would be beef. Beef is really what's cheaper?

What are we talking about? Well, it's still expensive compared to, like, pork, but it's way cheaper than it was last year. So if you're looking for that discount, that would be it. But I guess, you know, chicken and pork are just really, they're really down there. Maybe ribs. Oh, yeah. I've been smoking a lot of ribs this summer. I need to actually take a ribs break.

Actually, you know, like pulled pork because every, that's not a barbecue item, never mind. No, no, no, no, no, definitely. But maybe you can put like pulled pork on your burger. I don't know. I don't know what people do these days. Before we go, how much of a, just I realize we haven't hit it. How much of a price crash are we talking about specifically from the wholesale perspective? How much have prices gone down?

Okay. So for beef, it's about 15% from last year, and pork is about the same. Chicken's about 20% cheaper on the wholesale, like chicken breasts. So, you know, and that's from last year, and there's, you know, for pork and chicken and chicken, like, they've been going down for like a couple years. So this is actually after some pretty significant discount. So those are like multi-year lows. There are like five, six-year lows for the price. Well, it seems pretty clear that this is a good summer to have gotten into doing barbecuing.

And with any luck, perhaps not for the farmers, the summers ahead will be inexpensive as well. Yeah. Well, Lydia Mulvaney of Bloomberg News, thank you very much for joining us and telling us the good news. about meat prices. Thanks so much. So, Tracy, you know, obviously the theme of that episode was summer, but as you pointed out, another one of the themes was falling prices. And we sort of explored multiple ways in which the Fed is being challenged in trying to hit

its inflation target. One is about technology and how new markets make price competition extremely easy and liquid. And the other is just about falling core commodity prices and these gluts that we're seeing all over the world that don't seem to be going away anytime soon. Well, you're taking this episode very seriously. No, I didn't expect to. I thought it was just going to be to some. I was just going to talk about the floats and which one I was going to buy. You can talk about that.

No, no, no. Well, the thing I was very interested in was, well, the inflation aspect of it is a big, big question. especially in light of technology. And actually, here we go. Okay, just to link the two, I wonder a lot about the role of a company like Amazon in inflation, because it seems in some respects, like Amazon is really a benevolent monopoly for consumers, right? It's super cheap, it's very efficient. We can buy cheap inflatable pool toys.

We can even buy groceries and meat nowadays off of Amazon. And that's great for consumers, but it means low prices. obviously low inflation, and I wonder about the, I suppose, challenges for businesses in that environment. Totally. I mean, if you could theoretically gain a quasi-monopoly by dominating the buy box with a one-cent decrease in price. Now, obviously, as Pauly pointed out, it's not quite that simple, but if just this minor price cut can create this radical competition dynamic, the likes of which you wouldn't, you know, if you're talking about physical retail, one cent price cut isn't enough to make you go to a different store.

It's hardly... It never would have existed 10 or 20 years ago. So it is really fascinating the dynamics there. And I'm also fascinated by the extent to which something like Instagram can drive a whole new category of industry, which people would have never imagined. Absolutely. I would go long Instagram props at this moment in time, right? Yeah. I'll keep watching out on Taylor Swift's Instagram to see what. what the next big thing that she posted with. Okay. All right.

Are you barbecuing this weekend? I am. And I don't know what I'm going to do yet, but I'm thinking pulled pork, actually. So next episode, I'll talk about how that goes. Excellent. All right. Well, this has been another edition of the Odd Lots podcast. Thanks everyone for listening.

I'm Joe Wisenthall. You can follow me on Twitter at The Stallwart. And I'm Tracy Allaway. I'm on Twitter at Tracy Allaway. Thanks for listening. The news doesn't stop. on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend.

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