The Pomp Podcast - #1004 Julia La Roche Consumer Trends During Economic Downturn

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Julia LaRoche joins us today to talk about consumer spending and many of the large box retailers. We get into inventory, sales growth, consumer sentiment shift, airlines, travel, and much more. I really enjoyed this conversation with Julia, and I hope that you guys enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. First up is LMAX Digital, the number one institutional crypto exchange. They offer clients the deepest pool of crypto liquidity on the planet, underscored by 100% uptime track

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Starting point is 00:02:49 Go to their website at defi.tech today. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment

Starting point is 00:03:08 or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Our next guest, I'm very excited about. It's the first time she's ever been on the show. Julia LaRoche is joining us, and she's going to break down all sorts of differences in consumer spending, big box retailers, etc. How are you? I'm really excited.

Starting point is 00:03:31 I'm excited, too. I've wanted this to happen for a long time, especially living here in Miami. This is going to be fun. What's going on with consumers right now? Obviously, we are entering into bad times, economic downturns, some sort of recessionary period, potentially. How do you think about like what they're doing differently? Well, I mean, there's a lot going on. You can talk about consumer confidence.

Starting point is 00:03:57 Inflation is probably the biggest story right now. And then also when you just kind of look at the retail landscape, a lot has changed in the last two years. And we can start to dive in a bit more there of how, you know, these consumer trends are really shifting away from the goods that we were all buying during the pandemic, more toward allocating that wallet share, more toward services, folks starting to travel again. So what you're seeing in the retail world is a lot of excess inventory. And we can also dig into like how we got there.

Starting point is 00:04:26 But yeah. What are the biggest changes? Like what were people buying and now what are they buying? Um, so going back to the pandemic, um, when you had the stimulus checks, a lot of folks were buying things to kind of fix up their home or, you know, at home workout equipment, those sorts of things. Athleisure was huge. And now remember again, like we had all of the supply chain bottlenecks. Um, and I just want to kind of preface this at inventory planning for inventory takes months. So like when you're making those orders, the consumer behavior can shift very quickly.

Starting point is 00:04:57 And then suddenly you have bloated inventory, which that messes with your margins. You have to find ways to get rid of that inventory, a lot of markdowns. So I guess what you're looking at is people aren't doing the whole athleisure thing. Like when they're buying clothes, you can look at like Macy's, for example, they pointed this out on their earnings call is that people are buying more occasion based clothes. They're buying like a dress or they're buying some men's wear. They went back to the office. Like I'm not, I'm personally like, I'm probably not buying as much athletic wear as I was

Starting point is 00:05:25 maybe two years ago. but then, um, yeah, you can just think of like tick through the categories. Maybe you already bought your patio furniture, but there was so much demand at the time that, you know, when you go back to the beginning of the pandemic, I think a lot of retailers were thinking, wow, this is going to be like a full on recession, but then found that, you know, people had these, this extra money, they were putting it to work. They weren't, they weren't really going out to eat. They weren't traveling. So they're buying a bunch of stuff. And then that sudden little shift combined with the backlog we saw at the ports, it kind of creates this effect of, wow, now you have

Starting point is 00:05:56 too much. Yep. Well, we were talking yesterday and the thing that I was blown away, I didn't realize this until I actually saw the numbers. Um, uh, who did this? Uh, Ryan Peterson from, um, Flexport. Flexport. Yeah. He tweeted this out and it said things like, I'll just use two examples. So Walmart, their inventory from Q1 2021 to Q1 2022, a year later is up 32%. Sales are only up 4%. Yeah. And then if you look at something like, I don't know, if we go to a Best Buy, their inventory's up 9.3%, sales are down 8%. And so it seems like across the entire retail space, this is a common trend where inventories have exploded in anticipation of further spending. And we can also talk about what that means. So you're just referencing

Starting point is 00:06:42 Ryan Peterson from Flexport, the CEO there. He was at the All In Summit here in Miami. And it's like, that guy is so interesting to me. The way he breaks down what's happening in supply chain. One of the things he did mention was like, and I had to look it up later, was the bullwhip effect, which was, I guess it came out in maybe the 60s. Jay Forrester was, I guess, a PhD, came up with this. Again, I mentioned like the little fluctuations in consumers that goes down the supply chain. And just like when you crack a whip, it goes up and down. And so it has these kind of, I guess, outsized effects and it can go the other way as well. But yeah, you're just referencing Walmart, that 32% increase in inventories.

Starting point is 00:07:24 they had their um annual meeting recently in bentonville so the ceo um uh doug mcmillan also the u.s ceo john ferner they did address this and i do want to bring up a couple things they said if they could like snap their fingers they would want 20 of that overage to just go away and so i think what you're gonna see at walmart is they're gonna do tons of markdowns this summer a lot of like a lot of rollbacks so i guess if you just offloaded just whatever the price is as long as we don't lose money just get rid of it target pointed this out too um it's expensive when it comes to like storage for this like excess capacity i guess especially when you're talking about i mean maybe some bigger things i'm just thinking like off the top of my head but i'd imagine like patio

Starting point is 00:08:01 furniture i bought patio furniture from target last fall those are things that take up a lot of space so you'll probably find some deals um and even like target came out recently um with their own kind of plan they said they're going to do more markdowns they're going to remove excess inventory they're going to cancel some orders they even had to change they cut their profit outlook as well um because i was mentioned just like the margins they cut their profit outlook to about two percent of sales so what basically happens is there was a resurgence of consumer demand people are buying stuff like crazy like oh shit we don't have enough inventory order double order and you didn't know how long it was going to take because like on the costco call

Starting point is 00:08:43 um they said like the christmas stuff from last year came in too late and if you miss the season It's a huge loss. So like what you kind of heard on the Costco calls, they're going to have like deals this fall on like what would have been like last year's Christmas inventory. Because I mentioned it takes months of planning. And you remember like with the whole port issue last year, you probably just didn't know.

Starting point is 00:09:03 And these are very sophisticated retailers. And like people might sit there, well, how did Target, how did Walmart, how did these others like miss it? But it's like hard to criticize because I can only imagine the forecasting, how detailed that is. and look we also the inflation story is back um gas price i filled up my gas tank this morning 579 a gallon just like it's insane because you're starting to think like even i'm starting to think where am i going to be allocating my own wallet share and when they inventory sitting there your

Starting point is 00:09:34 point is basically they want to get rid of it and the only thing they really can do is use price as a incentive for people to come buy it and so that's where you start to cut the price if you cut the price then obviously you're not making as much money on it as you thought you had forecasted and so it has this chain reaction throughout the business as well where you're going to make less profit on the same inventory but you've got to get rid of the inventory because it's actually screwing you up yeah i guess it's like the fine balance when it comes to retail is you don't want to be understocked when there's that demand it's like the supply demand you you don't want to be understocked on anything and then you don't want to have so much where suddenly you have to

Starting point is 00:10:09 to cut it it's all about um getting your margins just right on this stuff and i also i mentioned earlier but it is important to just like the storage um for this stuff yeah when you think about the shifting consumer confidence what are you seeing there well i think this is still something to watch um because you had um the latest like sentiment data come out and i know your prior guest had referenced that he had a really good chart recently um on this exact thing but U.S. consumer sentiment like plunging to the lowest record. I guess like if I had to think about it, I'm just thinking about from my own perspective. When you're filling up at the tank 579, that definitely starts to bite.

Starting point is 00:10:56 I think when you look at the retailers, what they're already saying is a move away from discretionary things. You'll start you're starting to see the grocery prices. So like Walmart has seen more folks turn to their private label when it comes to like groceries, because you're talking about lower prices. And then Walmart CEO was also just kind of talking about during their annual meeting that, yeah, they're, they're focused on inflation. They want to keep prices low. And he was talking about keeping a basket of goods like low for shoppers, like things

Starting point is 00:11:26 like macaroni and cheese, beans, tuna, like things like trying to get gross. This is definitely a concern for American consumers. I mean, I'm sure you probably think about this as well. I think the good shift, I also think people, one of the things that the CPI metric that they're trying to get at. So up until 1980, they literally looked and said, you know, I don't know, mozzarella cheese, the grocery store. They went and they found the exact type and every single month or every single

Starting point is 00:11:52 quarter they would go and look and what's the price change. And that's how they measured inflation. But eventually they came up with a couple of different nuances to it. And one of them that is hilarious, but also understandable as to what they're trying to get at is this idea of people swapping high priced goods for low priced goods. So in this example, maybe if the mozzarella cheese doubles in price, I'm going to stop buying mozzarella cheese and maybe I will buy a quote unquote substitute of either lower quality or something that is similar.

Starting point is 00:12:23 Now, I don't think that means, Hey, I'm not going to buy mozzarella cheese and buy cheddar cheese. Like when you get into that stuff, like it feels like they're more so just like manipulating it. Then if people just say, hey, look, I'm not going to make that dish anymore or I'm not going to cook that food. I mean, it's then going to go buy something else. And that is obviously a more complex calculation for them.

Starting point is 00:12:42 And so they, whether you agree or not, they think that occurs. People change their consumer behaviors based on price of individual goods. And they're trying to get at it in the CPI metric. I think the question just becomes like, does everyone do that? and then also like how do you predict what somebody shifts to so if the mozzarella cheese is two i just need to rethink how they do the whole cpi to begin with like yeah i mean i listen they're trying their best they're working hard uh but it does beg the question of like do people do that and i absolutely think it now what they don't do is your gas goes up right and it's you know

Starting point is 00:13:17 five dollars 80 cents whatever it was a gallon you don't all of a sudden like oh uh let me go buy diesel right like no like you like you just buy regular right to be clear my 579 is diesel because i have a diesel engine okay all right okay but but like if you have a diesel engine you also it's not like oh i have 10 options let me just switch to something else at the pump right and so there's certain goods where there isn't going to be the switching back and forth uh but there are goods where there are substitutes yeah and i think that's where people say you know do people really actually change i think in downturns they do change at times yeah and i think um again I would say it's the private label brands that are probably going to benefit.

Starting point is 00:13:55 Like Target gave a shout out to Good & Gather, which is their in-store brand. I mentioned Walmart. I mean, when you think of Costco, like I always think of Kirkland as like their private label brand. These are, they're great brands. They'll have a lower price than what you'd get from the, yeah, your typical CPGs. And when you think about Wall Street's response to this, do we have any data points or like any insights into like does wall street give them a pass for having so much inventory or is this part

Starting point is 00:14:24 of why so many of the stocks are down uh and they're kind of getting punished for it probably explain why they're down but um you're starting to get a bit more color as to like how it's being dealt with so like um walmart ceo the u.s ceo john ferner said you know over the next two quarters they'll basically i think it was two quarters i do want to check but um that'll get like worked out over like two quarters. I guess you'll start to get more color as to how long is this going to be an issue? Like how big of an issue is it? Um, those sorts of things. Yeah. Um, what's the biggest surprise to you in all of this? Um, well, I guess for me, it's like, I think it's easy to say like, how did you guys get this so wrong? But what I'm realizing is like how complex these

Starting point is 00:15:09 things are. Um, it's, you know, you're talking about these, these are people's jobs that they have to like forecast and plan months in ahead and like how fast things change. I think that was what I think most people probably expected, you know, consumer behavior isn't just going to be focused on buying goods. It is going to go back to services, travel, those sorts of things. I think it was just the speed at which it all happened is probably like the biggest surprise here. And when you think about, um, how this is playing out, uh, is, are they preparing for this to be like a 12 month 18 24 month type thing or are they more so taking just quarter by quarter let's see how this uh how this goes my impression is like the next probably couple of quarters um you i mean

Starting point is 00:15:52 the holiday season will be here before we know it that's important um to get that right maybe it's probably i imagine like it's probably just making people really um that much more focused on uh the supply chain because i think it's definitely shed a lot of light on it as to just how critical this It's like the lifeblood of retail and just how small little fluctuations can have, you know, pretty huge impact. Yeah. It also feels like, yes, the retailers are experts at this. Yes, the supply chain, you know, companies are experts at this. But investors may not actually understand a lot of these nuances.

Starting point is 00:16:28 Like one of the things, a young person, I was talking to him recently and he was like, hey, I don't know, maybe 23, 24 years old. He just got out of school. uh and he's like what should i be doing right now and one of the things i said to him was like pay attention learn like one of the greatest things you can do right now is literally every single day take notes pay attention learn try to keep track of what's happening because similar to our generation in the 2008-2009 crisis like we learned some things yeah it wasn't the same exact type of issue but there was a hell of a lot of people learned a lot about the housing market yeah they learned a lot about quantitative easing they learned a lot about interest rate

Starting point is 00:17:07 uh um kind of as a central bank tool and so it's like you almost kind of have to get the education um by paying attention and the osmosis and sure you could hear about it from a professor or watch a youtube video or whatever but like it's more so as you live through it trying to document what's happening so that when you face this opportunity or crisis in the future you're like hey i remember Exactly. And just to that point, like just remaining super curious. Learning does not end when you get a degree. Actually, that's it starts probably even after because you just have to maintain that lifelong learning mindset, ask people questions. there are a lot of people in this space. Like I've actually, when I mentioned Walmart, I spent time down there a couple of years ago and just got to meet so many different folks there. But I was like, just asking them questions, like, how does this work? Like walking through like the,

Starting point is 00:18:00 the warehouses and just getting a better understanding into the inner workings. And I mean, things are, there's a lot of complexity out there. You can certainly dive in and learn. Yeah. The, the, the last thing I would say is when it comes to the retailers, like they're fighting on multiple fronts right so like you've got like the whole e-commerce thing i think walmart's actually probably done a pretty good job of fighting off amazon uh you've got the physical stores you then had uh inflation so you're trying to figure out like how should we price these goods given that inflation's rising you've got employees who are asking you for raises and you're dealing with all kind of the wage growth stuff and then oh by the way like let's throw another curveball

Starting point is 00:18:39 with supply chains and inventory growth the ultimate like microcosm is to everything that's happening in our world right now because you hit like basically every big business story right there yeah um yeah and you're basically trying to figure out like what is the relationship between our inventory our supply chain operations and like the fed's interest rate decisions all interconnected yeah i think it's nearly impossible for them to figure it out perfectly i mean we can't even figure it out i mean i don't know no one can figure it out right no i mean no But, but I also think that that's part of, uh, part of where you're going to see value created is we'll look back five years from now and it won't be obvious right now, but

Starting point is 00:19:19 we will identify one or two retailers that like were better and better could be there are 5%, 10% better than other retailers, but that will end up playing out in value creation for the next, you know, half decade, decade and it's decisions being made right now that lead to that value creation. It's actually a much more interesting space than you might imagine. I think that it is this – if you had to ask me what is the single greatest indicator for economic environment today, I do think that it's these major retailers. And it's because there are exact same household decisions that are playing out and small business decisions that are playing out. They're just playing out on a grander scale.

Starting point is 00:20:04 and because they're publicly traded companies they have to release the data and so we get to see well what was your inventory growth first your sales growth right and like best buy to me it's one thing for walmart to have like i don't know 30 plus percent you know inventory growth and nine or ten percent sales growth like okay you just grew at different rates best buy is like hey we actually grew inventory 10 and we contracted we're down eight percent in sales yeah and so you almost get this like complete divergence which uh that is like a whole different problem right because basically you were planning for growth but you got contraction it's very similar to q1 uh economic data economists thought it was going to be q1 growth in gdp and ended up being a contraction

Starting point is 00:20:45 and so there's been some surprises and the question is now looking forward what's going to happen it's a great question yeah no one i don't have the answer all right where can we send people to, uh, to find you on Twitter or anywhere on the internet? Yeah, you can find me on Twitter. My handle is Julia LaRoche. Um, that's probably the best place to find me on the internet. There you go. Look at that. You and Buffett right there, huh? Oh, that's like, yeah, I got in that scrum. That was actually a good story. How I got in there. Do you have a, uh, a good Buffett story, Buffett or Munger? Um, like what's your, what's your best Buffett or Munger story? I can tell a couple. Can I just tell you how I got in that scrum right there? That was a good

Starting point is 00:21:23 story. So, um, if you've been to the Berkshire meeting, uh, Buffett walks around the kind of exhibition hall, like the day before, and he's like surrounded by reporters. And then there's obviously security around him. And then like, people are like, Oh, Mr. Buffett, Mr. Buffett. Um, so then my first year there was 2018 and I did not get in that scrum, even though I was like a press person, I was kind of like really bummed out. But the year after 2019, um, I saw his security guard the day before. So the day before the meeting, I saw a security guard and I like went up to him and like started, you know, very nice, friendly conversation, introduced myself. And the next morning the scrum had begun and I was thinking, okay, I'm going to try to get in

Starting point is 00:22:00 here, but there's probably, I'm probably not getting in here. It'll be the same thing as the year before. But the security guard looked at me, he goes like this. And he's like, as long as you don't block Mr. Buffett's backside, you can be in the scrum. And it was awesome. And I'm actually going to give a person a shout out because they, um, there's someone like that I find to be a role model in this business. And that is CNN's Poppy Harlow. So I'll never forget like being in that scrum and i'm a little nervous because i'm like oh my gosh i'm here and i have my microphone and your microphone's not even plugged anything it's more for the pictures no way the microphones aren't even plugged in for the pictures but i had my cell phone so i was like live streaming on

Starting point is 00:22:31 instagram or something and i get this like nudge and she's like get your question it and because like you're going up against a lot of like really high profile anchors and she just like nudged me get my question so i like asked him a question about the economy but i'll never forget that because that really meant a lot to me another woman like encouraging me um in that business um the microphones aren't plugged in we got mine wasn't plugged in i don't know if anybody else's are plugged in but i don't know mine definitely was because what they have the sound they had the sound mine had the um i don't know about theirs i'm just telling you mine wasn't plugged in yeah but how do they get the sound because they have like a thing over the top for the

Starting point is 00:23:06 pictures you know i was just recording on my phone for it wasn't broadcast anywhere it was more like my social media at that point because you're like you're not really broadcasting that part of the meeting yeah you just kind of recap like why ask them about this in the scrum you think buffett knows that some of the microphones aren't plugged well i mean theirs might be plugged in i don't want to speak for anyone but it's all about the pictures and i'm probably giving away secrets well but it's kind of like a billboard like a lot of companies advertise on a billboard for a day and the reason they do it for one day is because they just want the photos and try to make them go viral online yeah all right so at julia laroche on twitter is where people can find

Starting point is 00:23:43 you. We're going to be doing a lot more. Julia is going to be joining us on a more consistent basis. I'm very excited about this. I'm really excited. And I think people will learn a ton. So thanks so much for coming on. Thanks for having me. Of course. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to palmscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that

Starting point is 00:24:19 three-week time period. Go to palmscryptocourse.com to learn more and I'll meet you guys for the next episode.

The Pomp Podcast - #1004 Julia La Roche Consumer Trends During Economic Downturn

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