Retail Focus 1/30/23 - Sam’s Club Reveals Expansion Plans; Retail Executives’ Outlook for 2023

Speaker A: I cashed out my entire 401k thinking someone stole my identity. A fake email cost me my dream home. After I sent my personal information to

Speaker B: a scammer, my AI agent wired thousands to an account I'd never seen.

Speaker C: When billions of people feel unsafe, that's no longer a security problem. It's an economic one. At Jenn, we're building the trust layer for a more fearless planet with products and technologies from our global brands, Norton, Lifelock, Avast and Money Lion. See it in action@gendigital.com Foreign welcome to the Retail Focus Podcast, a weekly collection of news, interviews and information from the world of retail.

Speaker B: We welcome you to this edition of the Retail Focus Podcast. I'm Trent Kling. I want to say a, uh, big thank you to Leighton, working behind the scenes as always. Coming up on this week's episode will be joined by Lupin Skelly. Lupin is Deloitte's retail wholesale and distribution research leader. She will be discussing their 2023 retail outlook, but more importantly, they canvassed many retail executives. And so she'll talk a little bit as to what these retail executives are looking forward to over the next year. And we'll also talk about the fact that retailers say that supply chain isn't quite as big of an issue in 2023, yet seven of 10 retail leaders may be not as confident handling supply chain challenges in the coming year Ahead in news, we'll discuss Sam's Club's recent release of future plans. We'll talk a little bit later on about Sherwin Williams earnings and how they're getting on top of supply chain issues themselves. And we'll talk about eggs as well and how the dynamics of eggs may impact the grocery industry over the next six months. A quick reminder that you can check us out on social media retail podcast on both Instagram and Twitter. So let's jump right back into it as Sam's Club finally shifts back into expansion mode, or at least reveals plans to shift back into expansion mode as they announce plans for new locations throughout the United States. Of late, their comps and overall sales have been expanding. As with sales at their main competitors Costco and BJ's overall wholesale retail has been doing very well really since the pandemic. And some of these expansion plans from Sam's Club and some of these overall sales increases, no doubt heavily influenced by the pandemic. Especially the early days of the pandemic in 2020, when bulk buying and stockpiling were all the rage, clubs generally saw membership numbers increase along with increasing their own membership fees, Sam's sales numbers, for their part, have continued to tick upwards in the years following 2020, as well as with Costco and BJ's. And as an example, in Sam's most recent quarter, which would be their third quarter of fiscal year 2023, they boasted 10% comp increases on top of 13.9% comp increases in the year prior. Both of these figures not only outpaced inflation, but also outpaced the flagship Walmart branded stores as a whole. And it wasn't that long ago where Sam's Club comps consistently trailed those at Walmart. And that led to closures in the late 2000 teens, which kind of brings us into this cycle of expansion. But in order to look at the expansion, I wanted to take a further look at some of these closures. Some of you may not have been aware of these wholesale closures. Some of you might have forgotten just how big of a deal these closures were. And Sam's had been whittling down locations over time. But the largest slew of closures happened fairly suddenly. In 2018. The company announced closures of 63 stores. Some stores were closed fairly immediately. Some stores were closed over a few weeks. Area customers that were affected by the closures were actually refunded their membership fees, as Sam's Club found it applicable. The closures saw Sam's Club pull out of some pretty significant markets. You'll recall they kind of waved the white flag versus Costco in Seattle. That's a pretty good example of them pulling out of some bigger markets. They pulled out of certain locations in the Chicago suburbs, certain locations in Indianapolis as well. Leighton and I discussed this on the show at the time. But there were closures in growing areas too. And looking back, it's interesting to see how they shut down stores in particular markets in Arizona, just as an example, like Casa Grande and Prescott Valley. Those areas since those Sam's Club closures have seen large growth since. And the Casa Grande store, by the way, I just went by there, oh, about three weeks ago. That store is still vacant. The real estate is still vacant. Sam's was able to repurpose some of the stores to E Commerce fulfillment centers. For Walmart as a whole, there were about 12 stores and that were repurposed in such a way. Others remain vacant even today. And although it closed just prior to the 2018 slew of closures, there was a location nearest me on the highest traffic street in the city where I live. They couldn't find a retail tenant and it was eventually turned into a warehouse over the last year, so vacant for several years. And this is all important because keep in mind Walmart and Sam's Club, they, they own and operate a lot of their own real estate. So very important to note that ultimately having these locations empty was a, uh, bit of a money pit for the company. It's easy of course, to look back and be critical because we know now that closing these stores was likely an aggregate loss for Walmart, not only because of the real estate implications, but also because at the time of the closures, the pandemic was right around the corner. And you could see that these locations, had they stayed open through the pandemic, at least some of them would have provided an ultimate benefit to the bottom line of Walmart as a company. But Sam's Club, when you look at the business at the time through the lens of 2018, they were fairly stagnant. Walmart wanted to focus on a trimmed down core of stores and there were some leadership changes at Sam's Club as well. So all of that brings us to today. They've got a remaining 600 or so stores and Sam's in the interim has focused on renovations to change in store layout and appearance, most notably making the stores brighter and more open. If we're being fair to Walmart, this was likely a slight contributing factor in their rising sales over the past two years. It would be easy to just look at the pandemic and say, well, it's because of the pandemic that they saw rising sales. But Walmart and Sam's Club have invested heavily into their existing locations and some renovations to make it feel a little bit more friendly to customers. If you were in a Sam's club prior to 2018 versus being in a Sam's Club, uh, let's say this month, you'll notice that most locations look fairly different. There's a bit of a rebrand going on, not only with their logo, but also with the store look as well. And now that Walmart and Sam's Club feel as though they've gotten on top of the situation and in their existing store base, this past week they announced their store opening plan. Starting in 2024, Sam's Club will open 30 new stores in the US throughout the next few years. The timeline wasn't specific, but in a press release the company said specifically that these openings are motivated by historic comparable sales growth and a record rise in membership over the last two years. This is where you might have a bit of a division between The Cynic and the Optimist. The cynic might cite this as an example of a retailer being overly reactionary to short term trends, Both in the late 2010s as they closed those stores and now as they plan to open the stores as a result of high sales due to in part a pandemic. Now the optimist might instead see a retailer simply adjusting to rapidly changing circumstances and then circling back into growth mode to keep up with competition. Too often people criticize retailers for not keeping up with rapidly changing times. Usually this pertains to technology. But in terms of brick and mortar growth, you can certainly see where Sam's Club maybe views the writing on the wall, sees increased sales throughout the country in their clubs and and sees white space, legitimate white space for these 30 additional locations. It's worth noting also that in the span from 2018 to 2023, the likes of Costco and BJ's both grew at a steady rate. BJ's in particular used proceeds from their IPO to shift into more physical expansion than what they had seen in prior years. And Sam's during this time they stuck right around that 600 store mark. So again, a definite change in plan for them versus the prior five years. And, and one of the reasons why it's important to note it on the podcast. And the new stores, Sam's Club said, will be around 160,000 square feet on average. This would put them about 20,000 square feet larger than the existing Sam's Club location. And it continues an overall macro trend of retail stores being built larger after we saw a retail wide pullback on this trend, uh, a few years ago. And you know, it's not just Sam's Club that cycles in and out of closings and openings. Other retailers do the same thing and do the same thing with other concepts. We use Hy Vee as a big example of the larger versus smaller stores. Hy Vee said several years ago that they would cut down on their larger new builds and then they launched back into that with gusto over the last few years. And Target also is another company that's building bigger than ever. After a short burst of 20 to 30,000 square foot urban and college locations, Target now building stores that are on average 10 to 20,000 square feet greater than the average Target stores were prior to that. And Kroger is doing likewise with new marketplace builds. Much of this, according to the retailers themselves, at the very least, have to do with stores now serving a crucial step in the fulfillment of digital orders. Of course Target well known for doing that. But you have grocery retailers also seeking to give fulfillment more space, especially as in some of the smaller store footprints, customers begin to run into the pickers on the stores and store aisles become a little bit more crowded. However, Sam's mentioned this as only part of the reason for the larger stores. They did note, of course, a planned expansion in fulfillment footprint in each new location. Part of this includes walk in coolers and larger doors for delivery vehicles. But some of the space will go towards seafood and sushi as well as fresh floral. They're going to have walk in dairy sections and most intriguingly, a larger health care space. They expect healthcare buildouts in these new stores to include larger waiting areas as well as suites, private consultation rooms and more of the hearing and optical centers. We already see to a certain extent in Sam's Club. And something Loup and Skelly will discuss in a moment is the ever changing demographics of US consumers, particularly as it pertains to their age and their health. And here you have a retailer in Sam's Club that seems to be taking note. They're devoting this extra square footage to these services. Retail pharmacies also have been taking note lately. They've been increasing their square footage focused on in store care versus the front store sales, convenience items if you will. CVS and Walgreens of course chief among them. But Rite Aid has also been doing this to an extent. Now when you look at Sam's Club's retail warehouses, the expansion will start in Florida, but it wasn't specified in their release or in any of their comments after the release if a particular region in the United States will be focused upon and as time moves forward. One thing that was mentioned was the desire to build out their fulfillment and distribution network in part to accommodate the new openings of the new stores and in part to accommodate increasing sales at existing locations. And also on the fulfillment side of course, those E commerce sales. They'll be adding five new supply chain facilities to help manage this goal and and that begins with a Georgia location opening up this coming fall. So fall of 2023. These locations will ultimately shorten the distance from Sam's Club existing retail warehouses to fulfillment and distribution centers. But they'll also help to service some of the new stores in the new store footprints. Sam's Club will also embark in earnest on a program to update their existing supply chain facilities to incorporate more automation aspects. Something that has been talked about in retail a lot over the past, well, 12 months to really three years. But it's Certainly something that's been brought up in the recent past on the show by some of our interviewees in terms of robotics, in terms of automation, and in terms of digitization of the supply chain. Now, as we look at the overall landscape of warehouse club retail in the U.S. it's important to note that all three of the major players are now fully in expansion mode. You don't have anyone now shuttering stores. They're all planning for expansion going forward. Costco currently has 583 U.S. locations, up from 533 in 2018, which is, uh, again back when the Sam's closures began, or the main slew of those SAM's closures. And they continue to gradually expand by around a dozen new US locations each year. BJ's lags behind both in terms of locations, but in terms of percentage square footage added each year. They've been leading the way lately. They currently have 235 US locations. That's up from 215 in 2018. But the bulk of that growth has been more recent and again a little bit more recent after their IPO. Anyway you slice it, Costco and BJ's both boasted around 9% footprint growth during the past five years, where Sam's actually saw a 9% decrease in footprint during that time. So it'll be intriguing to see what the next five years have in store. And if we find out that the Sam's expansion came too late or was basically reactionary to these increased sales or is a maybe a crucial first step in a larger market share grab will remain to be seen. But I think it's certainly a space that's featured expansion of sales, if not expansion of square footprint. And we should remember that Sam's at least leads the way in terms of numbers of stores, even if Costco is said to have the greater warehouse club market share. Well, that'll do it. For our news segment coming up, once again, we'll be joined by Lupin Skelly for her first appearance on the podcast. She is Deloitte's retail wholesale and distribution research leader. She'll be discussing their 2023 retail outlook, but more importantly, discussing findings from interviews with many retail executives about what these retail executives expect to see over the next 12 months.

Speaker A: I, uh, cashed out my entire 401k thinking someone stole my identity. A fake email cost me my dream home. After I sent my personal information to

Speaker B: a scammer, my AI agent wired thousands to an account I'd never seen.

Speaker C: When billions of people feel unsafe, that's no longer a security problem, it's an economic one. At Gen, we're building the trust layer for a more fearless planet with products and technologies from our global brands, Norton, Lifelock, Avast and Money Lion. See it in action@gendigital.com.

Speaker B: While we've looked at trends on a micro basis for 2023, things like shifting consumer habits and changing spend by retailers as regards marketing, we wanted to take a step back today and look at the big picture for the year ahead. Deloitte recently released their 2023 Retail Outlook, which takes a comprehensive look at expectations for the next 12 months through the lens of retail executives and also existing Deloitte consumer data. And here to discuss the report, we welcome Lupin Skelly, Deloitte's retail, wholesale and distribution research leader. Lupin, welcome to the show.

Speaker A: Hi. Thanks for having me on today.

Speaker B: So first, as we always do when we talk about a study, just curious, how is the data for this retail outlook collected?

Speaker A: Sure. So we do a survey of 50 retail executives and we target larger companies. So we're shooting for $10 billion or more. We conduct the surveys at the end of October and kind of into November. And really what we're focusing on is just getting their, you know, ideas about how they're preparing for the year, where they're planning to make the biggest investments and how they're thinking about the consumer.

Speaker B: So we'll talk in detail a little bit later on about a number of the interesting findings. But at a high level view, what does Deloitte expect to see regarding overall retail sales in 2023? And what are retail executives expecting to see in the year ahead?

Speaker A: Yeah, we're certainly expecting a challenging environment. I think that came through loud and clear in the data that we collected. But retail executives are concerned about the year ahead just given the cost, inflation, the supply chain disruptions, labor issues. And then many are facing difficult year over year sales comparisons. And then on top of that, they're also really concerned about this changing consumer and how they've evolved coming out of the pandemic. So we only had one third expressing confidence about maintaining or improving profit margins. So again, I think it paints a clear picture that they're expecting a difficult year. The other thing I do when this paper is we speak to our Deloitte US Economists and they pointed out that they expect the slowing economy will keep retail sales in check this year. Obviously, inflation has lowered consumers purchasing power. And then after stocking up on durable goods the past couple of years, we're really seeing the consumer Shift from goods into services. So all of those are headwinds for the industry for the year.

Speaker B: I'm curious because you mention a few different things there, especially inflation, supply chain issues continuing potentially. What were some of the differences this year versus maybe last year? Because a lot of these things, inflation, supply chain, they were things that we were also hearing about last year. What are some, maybe new things that popped up or maybe things that went away over the last year.

Speaker A: It's interesting because I think a lot of the issues we saw last year and that we wrote about in the paper are, uh, lingering. So obviously supply chain, we're still seeing a lot of disruption there. Labor issues are lingering. And we talked about that last year. But it was sort of the number one concern for retailers when we talked about issues this year. And then I think the bigger factor is just, you know, this changing consumer. And we go into a lot about that. Obviously there's some bigger demographic changes going on just with rising obesity, falling birth rates, you know, increasing diversity and, you know, increased bifurcation. But we're also seeing a consumer that is really pressing for experiences and all these different services, and they want it at the absolute rock bottom price. So that's a big concern for retailers going into 2023.

Speaker B: You mentioned the changing consumer. I want to dive a little bit deeper on that because as you talked about, there are certainly some demographic trends that are changing out there. Obviously, consumers are price sensitive, as you mentioned. They're wanting experiences and great experiences, but they're wanting it at a really low price. What else can we expect from maybe the 2023 version of the consumer?

Speaker A: Yeah, so I think those demographic changes obviously aren't just appearing for 2023. I think they're important considerations for retailers as they're thinking about the changing needs of consumers, just kind of how they'll market and merchandise to those demographics. But I think for, you know, what's really pressing for retailers right now is just how that consumer has evolved out of the pandemic. So the high expectations for seamless services, those aren't going away. And people want personalized experiences and content, and they want it delivered to their car or their doorstep, and they want it as fast as possible. So now with inflation, you've got this demand for these conveniences still holding up. But consumers are extremely price conscious right now. They are looking across the web for the best prices. They're going to multiple stores. That is really playing into loyalty. Right. Something that retailers have focused a lot on. We know that customer acquisition costs have been increasing Dramatically the last several years. So that is the big change this year is sort of that loyalty is up for grabs because people are so focused on price.

Speaker B: Interesting stuff there. I want to turn our attention to certain categories, at least from a sales perspective. Durables are a category that has garnered a lot of attention. We've talked about it over the last year. We expected to see maybe some negative comps because during the pandemic, of course, the category grew back half of 2022. There was some pullback in durables. What can we expect from durable goods in 2023 as far as sales are concerned?

Speaker A: Yeah, I mean, I think you said it perfectly. We're lapping some difficult comparisons. We obviously, uh, were living some very home centric lives during the pandemic. Our nesting tendencies and the strong housing market aided durable goods sales during that time. But, you know, consumers aren't needing to replace their washer already, so we've got that going on. Plus, high interest rates are kind of dampening home sales. So we've also have, like I mentioned, this shift out of goods and into services. So people are kind of shifting their share of wallet towards travel and events and concerts, away from durable goods. So I think we're expecting, you know, a continued pullback for that category in 2023.

Speaker B: So looking at the retail landscape itself, Deloitte often separates retailers and companies into categories of leaders and laggards. This is something that's been pretty consistent over the course of Deloitte's retail reports over the last several years. This year, what categorizes or characterizes retailers in each one of those sections? What characterizes the retailers that are leaders, and what characterizes those retailers that might be laggards?

Speaker A: We do an analysis. Every year we look at how analysts are looking at various retailers, what their financial performance is, and then we also look at our survey results and we do this analysis on Leaders are those that are expecting top line and operating margin growth. Laggards are those that were struggling in those areas, are expecting to struggle for 2023. What stood out this year is that leaders tend to be extremely oriented and tied into that changing consum. They're very data driven and they can swiftly respond to changing behaviors. And where we're seeing them prioritize investments this year is in marketing and merchandising. And they're also making significant investments in omnichannel capabilities, digital transformation and supply chain.

Speaker B: That's interesting. And you know, with these investments and with the differences between the categories you mentioned a little bit of bifurcation as far as the consumer is concerned, and certainly something that we've seen in the inflationary environment, is that something also that we might see in the retail environment with certain retailers continuing to fall behind because they maybe aren't making these investments or aren't as focused on these investments?

Speaker A: Yeah, I think that's a great question. And you know, at the beginning of the pandemic, we lost a lot of retailers. Right. A lot went under. And we have seen that kind of the have and the have nots and this ability to kind of deal with the digitization of this environment. It's very difficult. It's rapidly changing. I think it's been an extremely condensed business cycle of rapid change, and not everyone is sort of situated to deal with that. So I think it's something that we'll keep an eye on this bifurcation and, you know, we might lose more retailers going forward that can't keep up there.

Speaker B: So I want to track back to something you talked about when we kind of asked about the overall macro view and the macro outlook from these retail executives. And it's interesting, the last couple of quarters of 2022, we didn't see as much talk from retail executives about supply chain about how that was impacting their business. But then in this outlook, only 3 of 10 retail leaders you surveyed were confident in handling upcoming supply chain disruptions. So not a lot of confidence out there regarding supply chain. I'm curious around. What topics could we expect to see this supply chain conversation continue into the year? And what are retailers most worried about when it comes to supply chain?

Speaker A: So, you know, I think what we found is this. There's a lot of lingering issues, and I agree you're not hearing about it as much, but they're still in the background. Um, we had eight in 10 executives say they plan to make moderate or major investments in supply chain. So I think that's very telling. We expect a lot of conversations around continued disruptions from the pandemic, but also geopolitical conflicts, climate change, all of those are kind of reigniting that conversation around diversifying suppliers and near shoring supply change. We discussed that last year in our outlook, but I think these topics are still really top of mind. The second topic I think you'll hear a lot about is just how to make last mile profitable. This isn't a new topic, but I think what you're seeing is in this inflationary environment, it's becoming a lot more critical to kind of address these last mile issues. We talked about, you know, just the digital Preferences accelerating during the pandemic, these preferences are sticking. So retailers really have to address this in the coming year. And I think you can tie some of this back to the pandemic. Right? A lot of the retailers were having to offer free shipping. Retailers stood up, you know, curbside and same day delivery seemingly overnight. And now they're in this situation where they have these very high touch, unprofitable transactions going on, but they're in this situation now where you can't really claw back those offerings. So it's kind of proving to be difficult to kind of navigate that. We know that more than half of consumers will bail on their basket when they realize there are shipping fees. So, you know, it just shows how difficult it is for retailers to kind of take back some of these offerings. So we talked a little bit too about, you know, it might be time to actually consider enticing these nonprofitable customers to shop in store while reserving kind of the best services for their loyal shoppers with the larger cart values. And then we also talk about how retailers should be considering creating more profitable last mile delivery solutions through automated micro fulfillment centers, just to kind of help with storage capacity, throughput rates, and creating efficiencies by freeing up employees who otherwise would be picking orders.

Speaker B: And once you set that expectation with customers, it's very, very difficult to break those expectations and kind of break some of those consumer habits. As we talk about supply chain, a lot of this discussion might revolve around reverse logistics. We know obviously with an increasing piece of the pie going to E commerce, E commerce sales historically have had greater return rates. What are some recommendations Deloitte has for handling an increasing number of, um, returns, at least as far as this report is concerned.

Speaker A: So I think as consumers, we've kind of all experienced just the massive hassle of having to do a return. So this was definitely a fun section to research and write about and I think we can kind of all relate to. But what we know is that merchandise returns are a massive issue and accounted for $761 billion in lost sales for U.S. retailers in 2021. So it's sort of surprising that this is just kind of coming up on the radar. But I think this environment is creating a need to really address some of these issues. So a couple recommendations we call out is just understanding why the products are being returned in the first place. So they need to have the right analytics in place and then from there just making sure product descriptions and representations are correct. So for example, we know that when products are visualized in 3D, returns drop around 40%. So that can have a huge impact. The other points we call out are just making returns frictionless. So we're in this environment where loyalty can be thrown out just for a better price. So why not make returns as easy as possible and kind of create another layer of loyalty? For example, a lot of times when you, uh, return an online order, you're waiting almost up to two weeks to get your money back. So is there an opportunity to give these loyal, trustworthy customers conditional credit for the returns and create a more frictionless experience? And, um, the other thing we highlight is just this idea that every return can be an opportunity for retailers to save a sale. So whether that's by suggesting comparable products online or using in store returns as an opportunity to kind of engage that customer, it's sort of surprising that a lot of retailers don't offer online exchanges. So you have to send your product back in, you have to place a new order, and now your credit card's kind of tied up in two transactions. So building out these capabilities to suggest and offer a different size color, that, uh, potential for conditional credit gives a retailer an opportunity to avoid a lost sale. And then the final thing we looked at were return bars. And these are stores that pack and ship returns for partnering retailers. And there is an opportunity to kind of drive additional store traffic and expand the footprint of their client base, which is ideal situation during inflationary times. Recent data is suggesting that retailers that participate in return bars save more than 20% in processing costs. So again, some interesting ways for retailers to kind of address these issues.

Speaker B: And then as we close out here, something that we've heard about for a very long time is social media and social media's role in retail, especially as regards selling directly through social media. And it's something that's come up through our interviews to this point in the year, and it came up in Deloitte's report as well. It seems like retail executives see opportunities this year despite the fact that there hasn't really been explosive growth to this point. What has the talk been surrounding social media sales? Rather than just using social media to simply inform or persuade, because we know a lot of customers are using it in that regard too.

Speaker A: Yeah, and I think retailers are really cued into the fact that these younger generations are spending more time on these platforms. They're using them in different ways. So it's not just inspiration anymore. Customers are using it for research and to make purchases. But to your point about not having explosive growth yet, you know I think retailers aren't just looking at this from a social media perspective. They're kind of making these investments as a much broader digital social selling play, preparing for that future. So they're just seeing a lot of opportunities with gaming, shoppable content and even like social secondhand marketplaces. We do know the cost of acquiring a new customer can be up to six to seven times more than retaining old customers. Social commerce can kind of help reinforce existing customer loyalty. So we're seeing retailers kind of invest in technologies to kind of improve the seamless purchasing experiences within those social channels. I think a lot of them are pretty clunky right now, so I think this idea of making that more seamless and frictionless could go a long way.

Speaker B: Well, lots of great information in this report and Lupin, I don't want to commandeer your entire day to talk about it, but I will put the report's URL in the show Notes for our listeners. Thank you so much for taking the time and joining us today to talk about this report.

Speaker A: Thanks so much for having me on.

Speaker C: As always, we may have a position in or against companies we discuss on the podcast do not invest in stocks solely on the input of the podcast hosts.

Speaker B: We thank Lupin for joining us and we're looking forward to having her on the show more in the near future. Again, we love data from Deloitte, and each year it seems like Deloitte's forecasts seem to be pretty well on the money. And again, they interview a large amount of retail leaders but a massive amount of consumers in the US and so you can see how their conclusions that they come to are very valid and tend to be as accurate as anyone else on the market. A quick note before we get to the real looking ahead story here. Sherwin Williams did release earnings information Thursday, and while they posted a slight beat on analyst expectations, our attention actually went towards how they're managing product shortages in their US Retail stores. And one of the reasons we wanted to bring this up on the podcast is because they've been having issues with raw material shortages, manufacturing shortages, supply chain issues overall. Well, it appears as though these shortages are at least abating somewhat for Sherwin Williams, as their US and Canada store comps rose by 15.5% in the fourth quarter. Granted, that's against a rise of just 1% in the prior year's quarter, but their stores enjoyed higher sales volumes in the fourth quarter despite an increase in selling prices due to increased raw material costs. So what we're seeing at many retailers is the Volume is remaining roughly the same or even decreasing as they're having to increase prices due to basically macro level inflation. And with Sherwin Williams, that's not the case. They're actually moving more paint, more supplies, more of everything out of their retail stores despite increasing those selling prices. And as a whole, their Americas division set a full year sales record for Sherwin Williams. That certainly seems to indicate that the shortages in product have at least been abated somewhat. They were coming off a splendid third quarter, but came through with absolutely stellar numbers in the fourth quarter. And all of that comes against a backdrop where you see a lot of bearishness surrounding the US housing market. And while Sherwin Williams was bullish themselves as far as stock level increases and happy that they were able to get on top of supply chain issues in the latter half of this past year, they themselves were a bit more measured in their own outlook. They do expect sales growth in the first quarter of 2023, partially because they're lapping not so great comps. But they do see potentially some pullback as the year progresses and as the US housing market softens, they see both new builds and purchases in terms of homes reducing as a result of rate hikes. For their full year, they project sales to be flat to down mid single digits. But not all is bad news for Sherwin Williams and the home improvement sector as a whole. One of the most notable takeaways from this earnings call is that Sherwin Williams actually expects raw material costs and input costs to decrease by a single digit percentage. So while there will be pressure from a reduced housing market on the macro level, and of course that's something that they and other home improvement retailers serve, this news that raw material costs and input costs will be going down, that's going to be welcome news not only for Sherwin Williams, but other segment retailers who still expect to see staffing costs and occupancy costs to rise somewhat in the year ahead. But the fact that they might get a bit of a break in terms of materials costs could mean everything if the sector is expecting to see any kind of a drop in sales for this coming year. All right, now our actual looking ahead story. We're going to be looking ahead to eggs. And this story comes courtesy the website Morning Ag Clips, which is by the way a website I would recommend if you're interested at all in terms of commodities pricing or in terms of grocery, depending on where you're at in the us you've experienced at least some impact on egg prices. Where I'm at for example, a typical 12 pack of large white grade A eggs retails for $7 to $8. And this is significantly lower in other markets throughout the country. I understand, for example, in the Midwest recently, when I was traveling through for various occupational reasons, this price was closer to three to four dollars a dozen, to the point where I actually smuggled some eggs back to my home state because of the cost difference. But via Rodney Holcomb, who's a food economist at Oklahoma State, egg prices have more than doubled in a span of a few months. They now average $4 per dozen nationwide. He said. Basically, the curve goes straight up. There's been some question as to how quickly, though, egg prices will decline after they spiked during massive demand during the holiday season. A lot was made of the fact that typically there's more demand for eggs during the holiday season and also a case of avian influenza. Holcomb said that this is only part of the issue. Rising prices for other protein in the past two years led to a glut of consumers seeking out eggs for their protein. And as a result, habits kind of stuck. So it was, in essence, a perfect storm between holiday demand, between avian influenza, and between developed consumer habits where they were relying on eggs for a significant amount of their protein intake. But this is a looking ahead story. We're not looking at the past few months. Where are egg prices going for supermarkets? Well, Holcomb noted that despite ongoing recovery from avian flu outbreaks, there are other macro factors that might mean egg prices may be slow to abate. Uh, for one, he said that hens obviously can take up to several months to reach laying age. Anyone that's familiar with chickens or hens know that a lot of the time you can raise a broiler chicken for, say, meat within the span of six weeks or so. But if you're looking for egg layers, they can take several months, at least as far as to produce the appropriate size egg for grocers and not just pullet eggs. Also, there was another recent fuel price spike and feed costs are going up. So those two factors also might mean that it will take some time for egg prices to reduce. And as such, his belief, as well as the belief of other ag economists, is that elevated egg prices will actually stick around through at least the second quarter of 2023. The big question going forward is how will grocers handle this? We've seen continued increases in prices to the consumer, of course, but at some point demand will wane and customers will shift to other proteins or protein alternatives. Additionally, we know that retailers sometimes use eggs as a loss leader around Easter, which is right around the corner. If prices are indeed to remain higher by this time, will grocers make a move maybe and continue to use eggs as a loss leader? Or will they keep prices elevated, potentially capitalizing on greater year over year margins in the process, even as supply increases? Everyone we've talked to has said customers are extremely price conscious in 2023. So the egg landscape in particular is going to be a tricky one for retailers to navigate as they attempt to compete on price for what is basically a commodity and what is similarly priced everywhere. And obviously the bigger retailers, the major retailers, have algorithms. They've got AI in place to kind of dictate what their pricing should be. So it'll be interesting to see if the algori effectively get it right and if a retailer decides to step out of line, how that impacts them either positively or negatively. As far as traffic, because we know brand loyalty is going to be very fluid and it's going to be based largely on price for many consumers, especially in grocery for the next few months. Well, that'll do it for us here on the Retail Focus Podcast. Next week we'll be joined by Shash Anand of, uh, Soti. He'll join us to discuss the year ahead as far as retail marketing and as far as retail discounts. So we're looking forward to that interview and we'll be back with you approximately seven days from now.

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