Strategic Movements: December 2019

Elon Musk Delivers Pleasant Surprise

Tesla Inc. had record deliveries in Q3 2019 resulting in overall profits. Anticipated 2019 production is currently at 360,000 – 400,000 units.  Profits had previously been suppressed at Tesla due to low production volumes (incapable of hitting targets) and the lowering of prices. Elon’s price targets for Tesla only work if unit volumes are high enough. Based on Tesla’s track record, the business plan appeared untenable. Tesla has overcome its past challenges and is now delivering. Well done Elon Musk.  Now, keep it up and do more, if you can find time between your rocket ships, hyperloop transport systems, and boring holes in the ground.

Price Increase on Streaming at Hulu

Hulu is raising prices on its Hulu + Live TV offering from $44.99 to $54.99 per month. Executives attribute the price increase to the rising cost of the content associated with Hulu + Live TV, but this is not the only driving factor.  AT&T’s Direct TV announced it will be raising its price from $50 to $65 per month, and Sony Corp announced it was exiting the streaming TV market. It appears that Hulu’s price changes are keeping its prices aligned with the market competition. Amazon, Disney, and many others are all adjusting to the rapidly evolving streaming entertainment market.

Ralph Lauren Demonstrates a Modicum of Pricing Power

Ralph Lauren Corp. posted higher Q3 2019 profits related to price increases in Asia and Europe and an overall reduction of promotions. In the U.S., they are looking at targeted price increases. Once again, strong brands are demonstrating that pricing power can translate into profits.

Inflation in Household Goods

Proctor & Gamble drove price increases across many business lines and achieved revenue increases as well in Q3 2019. Better yet, revenue increases at P&G were higher than their Unilever and Kimberly-Clark industry cohorts. This performance borders on demonstrating a real competitive advantage that yields economic rents, but CFO John Moeller shouldn’t be satisfied yet. A revenue increase due to price increase implies that the profit optimizing prices are higher still. Do it again P&G, and make sure you have something near the bottom of the product line for the frugal households.

Kellogg’s Works Through Mixed Bag

The secular trend in prepared food is towards less traditional breakfast cereal and more wholesome high-protein foods, with salty snacks continuing to grow slowly. Matching these secular trends, Kellogg’s reports that in Q3 2019 cereal sales fell 4.8% in North America while snacks increased 5.2%. Pringles, Rice Krispies Treats, Nutri-Grain Bites, Morning Star, and Eggo were specifically named as doing well. Sorry Tony, you’re not the star anymore, but you’re still a backbone to the enterprise.

Mondelez Has an Opportunity for More

Mondelez raised prices and increased sales volumes in Q3 2019. Clearly they are underpriced in some markets.

Food Delivery looks Overprescribed

We should have all heard the myth by now: visionary launches a platform that will disrupt a multi-billion-dollar industry. All the visionary needs is investment capital to drive scale. Fortunately, there is enough money slushing around the global economy between billionaires and sovereign capital funds.  Visionary gets funds, buys customers, and then goes public. Challenge: profits remain elusive and valuations eventually drop. After playing this story in pet websites (90s), ride sharing, scooters, and office sharing, this story is unfortunately foretelling the food delivery industry. Initially, there was Grubhub, a sensibly run Chicago food delivery business. Seeing its success, DoorDash, Uber Eats, Postmates, Caviar, and few others entered the market, each flush with investor cash and each willing to spend to capture customers. The problem is that customers don’t really care who delivers their food as long as it is delivered warm and on time (I am talking about your shortcomings Caviar). Without a sticky customer base, why would a restaurant choose one delivery service over another? Price becomes the main differentiator. When that happens, everyone suffers losses. Now, even sensibly run GrubHub is awakening to the need to offer greater discounts. This won’t end happily for all industry cohorts. Best wishes to Matt Maloney, CEO of GrubHub, as he navigates these tricky waters.

Target Had to Get a Lot Right to Deliver One Result Right

25 years ago, Jeff Bezos told us that Amazon would overtake the retail world. The result? Borders bookstore is bankrupt. Barnes & Noble bookstore is a fraction of its prior self. Sears is bankrupt. It looks like he might have been right. But Walmart still holds significant market share, and despite the challenges of department stores like Macy’s, Kohls, and J.C. Penney, Target is a bright spot in the industry. Sales at Target rose 4.5% in 2019, marking two consecutive years of growth. What did Target do right that others got wrong? Target offers in-store pick-up and some same-day delivery for online purchases. They report gains in apparel, home, and beauty. Target is strategically launching store brands in these categories and, as is continual in retail, Target is conducting some store remodeling. In retail, details matter. CEO Brian Cornell, you are demonstrating that there is no single magic bullet, but a lot of detailed moves that deliver outperformance. Well done and keep your team together.