What can we learn from companies shutting down online stores?

Starbucks has recently shut down its online stores. As a pioneer in sales and marketing strategy, Starbucks may be telling us something about the way businesses will have to operate soon. Since jumping onto the Central Perk culture from hit TV-series – Friends, they have revolutionized food and beverage in the last few years by making customers pay and pre-order using their smartphones. Their culture of fast coffee purchases using smartphones was influential enough to inspire credit card companies to produce cards the contactless cards we all have today. Starbucks are always ahead of the game.

 

Starbucks has been a innovator of trends for the last decade
Starbucks has been a innovator of trends for the last decade

 

In the last few years, companies have shifted from high-street retailers to online websites, selling their goods using only their web-client as a means to interact. It is easier for the client, it is cheaper for the company, and it means that people have better access to goods and services. So why have Starbucks shut down their site and discontinued online selling?

Starbucks’ new campaign strives to get people to leave their houses and come into their stores as opposed to surfing their products at home. Their CEO stated that he wants Starbucks to be an “experiential destination.” Customers can surf the net and check out their products using the app, but cannot buy anything without entering a store. This means you can order a coffee on the app and pop in and grab it, but you cannot have anything sent to your house. There must always be some physical interaction with the brand.

This is an interesting move. Why is it that we are seeing this shift back to high street retailers? What is it that companies value in such strategic shifts? Firstly, it allows companies to compete with giants like Amazon, who have a large market share, and sell the products of others. When we think about it, Starbucks would be extinct if Amazon found a way to sell their coffee online. This revolution would hit Amazon hard if Starbucks managed to make a trend of “experiential destinations,” as Amazon do not have a place where customers can come in. If this becomes a trend, it will make companies with a physical presence shine.

Secondly, it makes their product more valuable. Nike and other fashion companies have saturated the market with their goods, they are no longer seen as special. The consumer engagement is lower and people care less and less about high-quality Nike products. They are also available on Amazon. It is more than likely that Nike will swiftly follow suit, and emulate the synthesis of internet marketing and in-store experience. This could be the future for all big companies that sell goods online.

If successful, this business model will have a significant impact any company whose business model is focused in online sales. It will give power back to retailers, and will hinder “middle men” like Amazon. But before all this, they are going to have to convince the world that experiential destinations are successful.

 

 

Starbucks is a place we can work in or relax
Starbucks is a place we can work in or relax

(Please note: James O’Leary does not currently hold a position in: Amazon, Nike, or Starbucks. Henry James International does not currently own a position in: Amazon, Nike, or Starbucks)

 

The Rise and Fall of Big Names in Sportswear

Constant changes in consumers’ shopping habits and the development of e-commerce has left marks on sports brands, with several growing in popularity and others dropping in sales and buyer interest.

Going public in 1980 sportswear brand Nike rapidly grew in popularity. An investment of £1,000 in 1980 would have grown to over $700,000 in 2015. However, recent developments in the markets have impacted negatively on the company with shares dropping 16% to $52 since 2015. This fall has been attributed, partially, to a rise in e-commerce shopping as the brand’s major distributors, such as Foot Locker, have been negatively impacted by growing preferences for online shopping. Another contributing factor has been the growing success of rival company’s such as Adidas, whose currency neutral sales increased at a rate between 17% and 19% and gross margins increased 0.8pp to 50.0% while Nike’s sales remained flat. Market analysts have forecast that Nike stock prices could decline by a further 10% to $2.41 per share with a possible drop of 6.6% in earnings to $3.96 billion in 2017.

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Another company that has responded to a recent lag in customer activity is clothing company Under Armour. Shares have dropped by 8% and as a result plans have been put underway to reduce the company’s workforce by 2% to cut costs. In this quarter revenue grew by only 8%, compared to the same period in 2016 when revenue grew by 28%. In an attempt to increase consumer traffic Under Armour will be directing more of it’s efforts towards direct-to-consumer channels.

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While several well-established brands have been impacted by changes in consumer attitudes and the rise of multiple competitors, one company that has rallied is the athletic apparel company Lululemon. In 2014 the business experienced a dramatic drop in share prices, from $81 to $39 following a recall of 17% of stock due to faults. However, in following years stocks have begun to appreciate again, increasing by 33.4%, currently valuing at $61 per share.

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As buying habits change, moving towards e-commerce and certain brands, companies will need to innovate to remain relevant in the market. Although Nike has recently declined in value the introduction of their new shoe line, VaporMax has been met with positive results, implying that the company could rally. As the market becomes saturated with more companies some will rise in popularity, leading to higher profits, while others will fall behind and command a smaller portion of the industry.

(Please note: James O’Leary does not currently hold a position in Nike, Foot Locker, Under Armour, or Lululemon. Henry James International does not currently own a position Nike, Foot Locker, Under Armour, or Lululemon).

(Please note: James O’Leary currently holds a position in Adidas. Henry James International currently holds a position in Adidas). 

Market Overview: Asia

This week we are focusing on activity in Asian markets. We will be highlighting changes in Singapore, and China, as well as looking at the impact of the recent missile strike in Syria on Asian markets, and stock prices further afield. The attack had some immediate effects on markets, however, most stocks seem to have re-stabilized.

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Singapore

It has been announced that the Singaporean government will increase spending on public infrastructure from SGD18.3 million to SGD30 million by 2020. This comes as they fell in the rankings of the World Economic Forum’s Global Competitiveness Report from number 2 (2012-2013) to number 5 (2014-2015). Projects will be carried out in the areas of land transport, air and sea transport, utilities, and healthcare with planned building of four new state hospitals between 2020 and 2030.

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China

In the week ending April 2nd property prices rose 27% from the same time last year in 26 major Chinese cities. Leading this increase were Shanghai, with a rise of 72%, and Guangzhou with a rise of 77%. Moreover, 17 major property developers saw sales growth of 82% in March, similar to that of 91% in the January-February period (Source: Barrons).

The Effect of Air Strikes on the Markets

Last week saw the US fire dozens of missiles at a Syrian airfield, damaging infrastructure including the runway. The strike was carried out in retaliation to a chemical attack that occurred in a rebel-held area of Syria earlier. Several stocks have experienced increases and decreases as a result of the strike. US futures fell, with S&P 500 futures off 5 points and Dow Jones futures down by 44 points. Asian shares also experienced an initial drop before re-stabilizing.

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However, not all markets saw drops. The Yen saw an increase against the Dollar, and commodities such as gold and oil saw a rise in prices. London spot gold prices were 1.3% higher recently while Brent crude futures rose more than 2% before levelling to a gain of 1.42% at $55.67 per barrel. US crude increased by 1.61% taking it to $52.53. The reason for increases in the prices of these goods is because investors switched over to them, moving out of riskier investments. In the case of oil the price rose due to investors’ concerns that supply might be disrupted by the military in the region. However, despite these fears, CNBC says that it is unlikely that oil supplies will be restricted by Syrian military forces as it would be equally disadvantageous for them.

The International Equity Portfolio

The big story in the news this week was the extraordinary loss reported by BHP Billiton. The Anglo-Australian mining giant recorded the worst loss in its history to the tune of around $6.4 billion annually. Along with an unavoidable dam collapse in Brazil, the company has suffered due to the continued slump in commodities prices.

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Also in the news, further stories keep trickling in detailing post-Brexit fall-out. Although the UK economy appears to be dealing with the situation far better than had been predicted by some, many sectors – such as IT, Finance, and Corporate Property – have been feeling the heat, with the pound still on shaky ground, international deals being pulled out of, and jobs being cut.

 

Last week, RBS announced that a large IT project originally due to be undertaken by Indian tech firm Infosys would no longer be going ahead triggering an “orderly ramp-down” of around 3000 employees. Banks and Finance firms are creating significantly fewer jobs too, moving roles to outside of the UK, according to recruiters Morgan McKinley.

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Despite this, our International Equity Portfolio performed reasonably well last quarter, returning 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Although stock selection and country weightings in India and Australia hindered performance, weightings in Spain, Germany and Japan boosted it, as well as selections in the communications, health technology and consumer durables sectors.

 

The Henry James International Portfolio is a large capitalization international portfolio; it takes advantage of the international economy while seeking long-term capital appreciation. As with all our Emerging Markets Portfolio  The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently-priced international stocks with superior return-versus-risk characteristics. This is combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the management team over weights highly-ranked countries and under weights lower-ranked countries. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria. The primary performance benchmark is the MSCI-EAFE.

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To learn more about this, or any of our portfolios, please get in touch via email at info@hj-intl.com, by telephone on 917-951-5170 or by heading to our website.

 

(Please note: Henry James International does not currently holds a position in RBS.  Henry James International does currently own BHP and INFY for client portfolios).

Brexit – What Now, Part 1

Just over two weeks since the Brexit results and the UK remains in a political limbo. Financially-speaking, however, things are beginning to calm down. After the initial shock, the markets have quietened, with the FTSE100 even moving ahead of where it was before the referendum in GPBs. It looks like Europe has survived the immediate, violent reaction and the focus now shifts to what continued uncertainty, and a withdrawal from the EU, will mean for the UK, and the rest of the world.

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The main industries affected

One of the most recent industries to take a hit was the property industry. House prices have fallen and property funds have suffered. Standard Life have suspended redemptions in its UK Retail property fund and has £2.9bn of assets under management. With London no longer seeming an attractive investment destination, Real Estate Investment Trusts have been hit too, with some dropping by as much as 20%.

Other industries hit include the Automotive, Airline, and Pharmaceutical. Of the 1.6 million cars manufactured in the UK, 77% are exported abroad, and over half of these to EU countries. UK-based airlines now have to rethink European routes and must recalculate fares, taking the new cost of visas into account. This is particularly hard for low-cost airlines like EasyJet, whose share price dropped 20%. It is not uncommon for UK pharmaceutical companies to carry out research and business overseas which will no doubt cause logistical issues but, more importantly, leaving the EU means the European Medicines Agency is no longer responsible for authorising UK pharmaceuticals which could mean slower approval for UK-manufactured drugs.

Brexit for Businesses

With just three days to go until the UK referendum on whether to remain in the European Union, the opinion polls are still returning no decisive idea of which way Thursday’s vote will go and we are asking the question – what would Brexit mean for global businesses?

Wall Street growth investor Louis Navellier believes one of the sectors which will most likely be affected is the energy and commodity sector. With the Energy and Basic Materials sectors currently down by 2%, it is clear that investors are beginning to feel the uncertainty and this is being reflected in the market. Navellier believes that, after a rise in commodity prices at the end of the first quarter, a UK vote to leave would help the US dollar to rally causing energy and commodity-related stocks to suffer.

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Increasing strength in the US is also worrying many UK businesses, including engineering giant Rolls-Royce. Last week the company’s chief executive Warren East spoke out saying that a Brexit would put investments at risk and give Rolls-Royce’s American rivals, such as General Electric and Pratt & Whitney, a competitive advantage.

The main factor in all of these worries is uncertainty. East claiming that the uncertainty about the outcome of the referendum, and the knock-on effect it will have, causing the company to put a lot of important decisions on hold for the moment. This uncertainty, coupled with that surrounding the run-up to the US presidential elections, is taking its toll on investment banking as well. Banking analyst Chirantan Barua recently predicted that a leave vote could cause investment banking fees to plummet by more than 30% globally, bringing deal-making to a halt, and meaning disastrous things for anyone working in Mergers and Acquisitions in London or New York.

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But not everyone is worried, Invesco Perpetual’s Head of UK Equities, Mark Barnett, has said in Investment Week that the UK’s dynamic economy will enable it to adapt to any change resulting from a Brexit. Although the initial effects would be negative, he says, in the long term it is unlikely that there would be any real impact on the stock markets outside of the UK and the best businesses will have planned for both outcomes.

This is an opinion echoed by many global companies who have operations in the EU and the UK. Ingeborg Oie of medical technology company Smith and Nephew, says that, although the company believes the unified EU regime is advantageous – with overarching regulations across national borders allowing new innovations to be shared more quickly and cost-effectively – they do not believe that the referendum will have a significant impact on their ability to do business.

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Amidst the widespread disagreement of what to expect financially from the referendum, there seem to be a few generally-agreed predictions. Whether or not it would be an economic disaster for the UK, Brexit may well give US an advantage over the UK in a time when the dollar is already strong, but this advantage could come at the cost of commodity prices. Secondly, Brexit probably would not impact huge multi-nationals decisively, but would certainly cause some damage if a lot of their work is done in the UK or EU. When it comes down to it, however, it would appear that the only thing that is certain is that the referendum is causing uncertainty.