It’s the Food Inflation, Stupid!

Friday, November 09, 2007 | 06:59 AM

The weak dollar has fueled U.S. exporters, almost without regard to sector. GM is selling plenty of automobiles overseas, edging out Toyota for worldwide sales. Caterpillar (CAT) is selling tons of earthmoving and construction machinery, mostly unaffected by the US Housing slowdown; Their fastest growth is overseas. Microsoft (MSFT), Cisco (CSCO), Intel (INTC) have all seen their overseas sales spike upwards.

The list goes on and on.

Domestically, however, things are less cheery. Automobiles have been in a recession, suffering contractions for several Qs. Housing is in a deep recession, if not a depression.

And now, the next domino is falling: Retail Sales. Unless we see a notable uptick, Retail sales are in danger of slipping into a recession in Q4 2007 and Q1 2008.

In the US, Retail has clearly softened. And, if we actually look beneath the headline numbers, we see what little growth that was reported yesterday for October was primarily the result of inflation -- and in particular, FOOD INFLATION.

Consider the October US retail sales we mentioned yesterday. The big winners were the warehouse sales, whose month over month gains were  boosted by hefty increases in Food prices.

Wal-Mart (WMT) sales increased a disappointing 0.4% -- +1.1% was expected. This was surprising, as Wal-Mart engaged in very early, very heavy holiday/promotional discounting. 

What was he impact of inflation on Wal-Mart's sales?  All of the growth was in Sam’s Club, which was +4.2% thanks to food sales.  October sales at Wal-Mart were flat ex-Sam’s Club; Back out gasoline sales, and sales were actually a negative 0.3% (ex-gasoline).

Target (TGT) same-store sales increased 4.1% (+2.4% consensus). 

Costco (COST) same-store sales jumped 7%

Again, nearly all of these gains were food cost increases. 

How is the holiday season shaping up? The Int’l Council of Shopping Centers said October sales increased 1.6%, the worst October in 12 years. And the National Retail Federation and TNS Retail both forecast the smallest holiday sales growth in five years.

It’s the food inflation, stupid!


Chart courtesy of WSJ

See also:

Retailers Report Tepid Sales   
WSJ, November 9, 2007; Page A4

Stores See Shoppers in Retreat   
November 9, 2007

'Affordable Luxury' Stores Feel Economy's Pinch
WSJ, November 9, 2007; Page B1

Why Fed Expects Growth to Slow
Bernanke Says Credit Fears Are Growing as Oil, Dollar Threaten to Fuel Inflation
WSJ, November 9, 2007; Page A2

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Tracked on Nov 9, 2007 7:03:25 PM


Half points for this one. Your ill-supported obsession with inflation may have led you into error. WalMart explicitly attributed sales gains to grocery and drug sales. That is not true in every other case. In addition, big box discounters have moved increasingly into food sales. There is no grocery category in the chain store data, so we cannot tell how much of the food sales gain in price and how much is a shift in market share from stores not included in the report to those that are included. We may very well be seeing a shirt in market share.

Your eagerness to see inflation under every rock has led to a(nother) conclusion before the case is proven.

Posted by: kharris | Nov 9, 2007 8:16:36 AM

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