The consumer wobbles, a bit

Good morning. We are going to learn some things about the American consumer in the next three days. Home Depot reports first-quarter earnings this morning, followed by Target tomorrow and then Walmart on Thursday. With that in mind, some further thoughts below on who is buying what and why. Anecdotally, I can report that my Brooklyn florist was doing standing-room-only business on Mother’s Day. Send your own observations to: [email protected] and [email protected]. 

The US consumer redux

We have been waiting around for the inflation-besieged consumer to start spending less and the consumer has so far refused to act besieged. But maybe things are starting to change.

Bank of America customers spent $872bn on their credit and debit cards in the past 12 months, which gives the bank a pretty good window into what consumers are up to. Late last week, it released its report on card activity for April. The top line was that total spending per household was down 1.2 per cent in April, compared with a year ago, the first decline since February of 2021. Is this the first sign that the final, stubborn economic shoe is dropping?

As is the pattern in recent months, looking past the headline number revealed a mixed picture rather than an outright ugly one. Seasonally adjusted, spending was actually up a bit compared with March. Here are the month-to-month trends by category:

The weakness in airlines is interesting and makes me wonder if the great post-pandemic services spending splurge is ending. But BofA’s Aditya Bhave and his team sum it up well:

[I]t is important to distinguish between a relatively benign slowdown and a period of stress. So far, the BAC card data point to the former, not the latter. We are monitoring the spending patterns of lower-income households, who would likely be most impacted by an economic shock. [But] lower-income households continue to outperform higher-income households in terms of y/y spending growth.

This theme was echoed in our conversation with Rahul Sharma of Neev Capital. He follows retail earnings closely, and sees very few signs of consumer pushback against higher prices. In grocery,

the gains in private label are pretty low relative to what they should be, given what we’re seeing [in the economy more broadly]. And on the margin, supermarkets are losing share, but again not much given how much they usually lose [to big discounters] in downturns. When even Kraft Heinz is oozing confidence, it’s a pretty good signal [that consumers are not pushing back] . . . Pretty shocking to me is what I’m seeing on airfares/lodging. Virtually no resistance. Likewise on eating out. Both areas folks are prioritising, with very strong volume . . . 

Sharma is watching margins on discretionary goods (electronics and so forth) particularly closely, as there is excess inventory in the supply chain and, if consumers do push back, they will get discounts. But it’s not happening yet.

Scot Ciccarelli, who covers retail for Truist, sees some signs of consumer pushback from the most important of sources: Walmart. He writes that last month, Walmart management told him that . . . 

[Supplier price] inflation seems to be broadly running higher than initially expected for 1Q (especially in dry goods grocery), BUT the company has seen a reduction in price increase requests from suppliers in just the last 6-8 weeks. The view is that many branded suppliers are increasingly seeing unit degradation after multiple years of price increases and growing consumer pressures and are becoming more sensitive to volume trends.

Walmart also said that the shift in its sales mix from discretionary goods to groceries had continued in the first quarter. Walmart might be the leading edge of a consumer slowdown. We’ll find out more when they report on Thursday.

Uber vs Airbnb revisited

Last week I compared the structurally similar business models of Uber and Airbnb, and considered why Airbnb is profitable while Uber is not.

One crucial difference, I argued, might be that insurance costs are much heavier at Uber — people crash cars but not houses. I have since talked this through with Uber, and it seems to be true. The company confirmed that insurance costs are, in most markets, the largest component of cost of revenues (and cost of revenue is currently running at almost 70 per cent of revenues, versus less than 20 per cent at Airbnb).

So insurance is a bigger deal for Uber than for Airbnb. But the deeper question is not about the costs themselves, but the supply and demand dynamics that determine the returns, after costs, that these two companies can earn. Unhedged readers, as it turns out, have a lot to say about this. One reader from London laid out the contrast like this:

Uber: local markets in which competitors can easily replicate a taxi and a (localised) app. The telephone can still be used to order a local taxi . . . Uber carries a very complicated IT and communications superstructure which simply adds cost in markets where prices . . . are ultimately locally determined.

Airbnb: much simpler IT and communication (no need to track the location of a room). The market is not local — so there are some advantages from a widespread network, with less likelihood of the advantages being offset by rocketing IT and communications costs.

The point about higher tech costs at Uber is borne out by its higher capital expenditures, but again the primary issue is on competitive position — why does Uber struggle to earn back those higher tech costs?

The point about Uber and Airbnb’s different relationships with local competition is right on point. Most of the time I use Uber, I use it in the city where I live and where I know the local options, and what they cost. I almost always use Airbnb in faraway places, where I know nothing of whatever cheap local options may be. It’s Airbnb or Expedia, basically.

An American reader, Micah, writes:

Price elasticity for rides was always high (one reason why the taxi industry itself was so fragmented); implication: raising prices across the board will cost Uber lots of demand, and they must be careful to raise prices only in geographies or ride occasions where that elasticity is low. These geos/occasions are a small part of the overall demand structure that Uber serves.

This brings up another relative advantage of Airbnb: a car ride is for the most part a commodity whose main feature in the eyes of customers is price. Houses and apartments have lots of variable features. This is why Uber sets prices and Airbnb does not. Airbnb customers might pay up for something special, or go for the cheapest option. The company takes its fee (about 13 per cent, incidentally, less than half of what Uber clips from each ride) either way.

Darren, from South Africa, wondered if . . .

Another material difference . . . could come from the cost of acquiring and servicing the merchants (ie drivers/vehicles and properties). I imagine that the lifetime economic value of a driver/vehicle in the Uber network is much less than a property (and probably more inconsistent for Uber than Airbnb — cars need to be functioning, drivers decide driving activity levels etc).

This is another crucial point. One reason that Uber made large losses immediately following the pandemic is that a lot of drivers had left to do other things, and Uber had to offer incentives to get them to come back. Now they are doing less of that and the losses are getting smaller quite quickly. That, plus general discipline around costs, helps explain the Wall Street consensus expectation that the free cash flow after subtracting stock compensation at Uber will be $2.3bn in 2024, up from a $900mn cash loss last year.

Consensus may be right that Uber is on the cusp of breaking though to profitability. But it is not a profitable company now, and Airbnb is. This makes it all the more interesting that of these two notably similar companies, Uber is valued much more highly — its enterprise value is $85bn to Airbnb’s $59bn, a gap that has opened up only in the past month or two. Tech investors still prefer profit growth to proven profitability, even as the economic cycle turns down and rates peak.

One bad read

Greg Becker, former chief executive of Silicon Valley Bank, testifies before the Senate Banking Committee today. Here is his prepared testimony. In it, he tries to spread the blame for the bank’s collapse on the Federal Reserve, for saying that rates would stay low and then raising them, and on social media, for “fuelling” a run on the bank. He takes a shot at the Financial Times, as well. But the ultimate cause of the failure of SVB, beyond any doubt, was that under Becker’s leadership the bank foolishly matched uninsured deposits to long-term, low-yielding assets in a way no other bank would dare attempt. This fact has been pointed out in dozens of articles, reports, charts, tables and infographics. Here is my favourite recent one, from The Economist:

Becker points out that he was not a member of SVB’s asset liability management committee. But in banking the fish rots from the head.