The Other View: Q3 Consumer "Revenge Spending," The "Strong Growth " of the Food Retail Industry and Non-Food Retail Industries?

 Inflation thereby encourages a mentality of immediate gratification that is plainly at variance with the discipline and eternal perspective required to exercise principles of biblical stewardship—such as long-term investment for the benefit of future generations—Jörg Guido Hülsmann 

 

In this issue: 

  

The Other View: Q3 Consumer "Revenge Spending," The "Strong Growth " of the Food Retail Industry and Non-Food Retail Industries? 

I. Food Retailers: A Boom in Sales or Inflation? 

II. Which CPI Component Suffers the Most Defect: The Food or Restaurant Estimates? 

III. "Revenge Spending" in Non-Food Retail Industry; Slowing Q3 Sales of SM, Puregold and Robinsons Retail 

IV. Aggregate Revenues of Publicly Listed (Non-Food) Retailers Diverge from the Retail NGDP; From Revenge Spending to Revenge Saving? 

 

The Other View: Q3 Consumer "Revenge Spending," The "Strong Growth " of the Food Retail Industry and Non-Food Retail Industries?  

Inquirer.net, November 21: Max’s Group Inc., which owns the iconic Max’s Restaurant chain and Yellow Cab pizza, said earnings in the first nine months of the year eclipsed prepandemic profits. Net income from January to September jumped 82 percent to P427 million while revenues reached P7.77 billion, up 46 percent. Fruitas Holdings, the country’s leading operator of mall-based food kiosks, is seeing a similar resurgence following the winding down of pandemic restrictions early this year. Its nine-month net income hit P43 million, reversing losses of P16 million in the same period last year. Revenues were also up nearly 63 percent to P1.26 billion while margins were kept stable despite the high inflation environment….From January to September this year, the operator of Shakey’s Pizza, Peri Peri Charcoal Chicken, and Potato Corner reported a profit of P454 million, which reverses a P35-million loss in 2021. Its systemwide sales in the first three quarters of the year nearly doubled to P9.6 billion. 

Sanguine media stories like this give the public what they want to hear (confirmation bias): the hope of a brighter tomorrow.  

 

While we would like to be a part of it, the economic perspective presents an alternative insight. 

I. Food Retailers: A Boom in Sales or Inflation? 

 

Let us deal with them from financial data presented by the different publicly listed food firms.  Please observe the nominal revenue and income trends. (all data in Php 000s) 

 

Figure 1 

 

First, the peso sales and revenue data of Max's Group paint a contrasting picture of the news narrative.  Sure, revenues and income trends have been higher than the lows of the pandemic, but revenues remained below 2019 levels while income has drifted sideways.  In Q3, sales plateaued compared to the previous quarter, while net income slid. (Figure 1, topmost pane) 

 

Next, Max's background somehow resonated with Fruit.  The sales and net income trends were higher than the pandemic collapse but remained below the 2019 levels.  But Q3 sales of Fruit climbed at a slower rate, net income fell from Q2. (Figure 1, middle pane) 

 

Then, Pizza's Q2 sales and income spike was the story of its acquisition of Potato Corner.   

 

While Pizza sales hit a record in Q2 in response to the acquisition, its sales increase in Q3 slowed.  While almost reaching the high of 2019 in Q2, the net income of Pizza dipped in Q3.   Briefly, Pizza's top and bottom-line data have started to normalize following the sizeable adjustments from its acquisition. (Figure 1, lowest window) 

 

Figure 2 

 

As a bonus, (Golden Archers) McDonald's sales, which remain in an uptrend, have nearly hit the Q4 2019 record in Q3.   The holiday season and credit-financed consumer spending of Q4 will likely surpass the top of Q4 2019.  But even with a momentum upswing in sales, profit declined in Q3, quarter on quarter.  (Figure 2, upmost window) 

 

Finally, as previously noted, international sales pushed Jollibee's revenues to "historic" highs.  But while domestic sales momentum remains up, Q3 sales stalled.  As such, domestic sales remained slightly below 2019s.  But like McDonald's, Q4 sales should soon eclipse the previous record. (Figure 2, middle and lowest windows) 

 

Yes, "strong growth" signified mainly an apple-to-oranges comparison: an economy restricted by pandemic policies against a relatively open one.  

 

Statistically, this represents the "base effects." 

 

But such growth momentum appears to be running out of steam despite the record credit financing of consumers and unprecedented public investments. 

 

The crux of which: In our latest discussion, the stalling revenues of JFC and Max's Group dispute the supposed boom in the Q3 Food GDP.  The Q3 sales of Fruit, McDonald's, and Pizza challenge further the official interpretation of the economy.  

 

The GDP is not the economy. 

 

II. Which CPI Component Suffers the Most Defect: The Food or Restaurant Estimates? 

Figure 3 

Based on the PSA's CPI data, though both have an ascending trend, the average Food CPI for Q3 was 6.9%, while the average Restaurant & Miscellaneous goods CPI was 4.1%. (Figure 3, upper window)  

 

But the spread between the two factors has been negative, suggesting higher input prices. (Figure 3, lowest window) 

 

For the retail food industry, higher input prices than output prices imply a margin squeeze.   

 

So, where is the margin squeeze? 

 

In Q3, profit margins fell for all the listed firms above.  However, margins have dropped substantially for issues like McDonald's, Fruit, and Pizza, but the declines have barely reached a point where the industry or several firms suffers from a deficit.   

 

Which statistical estimates have been farther from actual conditions, the food or the restaurant CPI? 

 

So, how much of the "growth" in the restaurant business was about inflation? 

 

III. "Revenge Spending" in Non-Food Retail Industry; Slowing Q3 Sales of SM, Puregold and Robinsons Retail 

 

And this dynamic has not been limited to the food retailing industry.  

 

Domestic consumers don't just go to dine out but also to shop.  From this perspective, food retailing should correlate tightly with non-food retail trade.   

 

Income, savings, and credit expansion are the natural ingredients of such spending conditions.  Payment platforms are merely means of facilitating transactions.  

 

Hence, from the GDP perspective, the obverse side of consumer spending is spending registered by related (supply side) industries.  

 

Even then, the non-food and food retail segment represents contributions to a broader array of the household spending basket. 

 

So, did the non-food retailers blossom as their food counterparts in Q3? 

 

Sure, the credit-fueled consumer spending had spillover effects, but "growth" dimensions were less spectacular.  

Figure 4 

Let us look at the nominal trends of the three largest retailers, SM, Puregold, and Robinsons Retail.  Their sales dominate with an 80% share of the eight listed retailers, including Philippine Seven, SSI Group, Metro Retail, All-Home, and Wilcon Depot.  

 

Because of the insufficiency, the data excludes other newly-listed retailers such as Metro Mart and AllDay Marts. 

 

Again, kindly please observe their sales trends based on the peso.  

 

Yes, sales of all three rebounded from the lows of 2020.   

 

Except for PGOLD, which reported a fresh high in Q4 2021, SM and RRHI sales remained below the peak in Q4 2019. (Figure 4) 

 

On a quarterly basis, these firms reported a slower rate of increases.  SM's quarterly rate even contracted by .5%.  

 

In aggregate, revenues of the six publicly listed non-construction retailers and the eight retailers, including construction firms, diverged relative to the (nominal) NGDP of the retail sector.  

 

IV. Aggregate Revenues of Publicly Listed (Non-Food) Retailers Diverge from the Retail NGDP; From Revenge Spending to Revenge Saving? 

 

But there’s more.  

 Figure 5 

 

In contrast to the retail NGDP, which reached a record in Q3 2022, aggregate revenues of the non-construction and (with) construction retailers remained 9.6% and 8.6% lower, respectively, than the historic levels attained in Q4 2019. (Figure 5, topmost and middle pane) 

 

This trend deviation exhibits the incongruence between official GDP estimates and the reported financial performances of the said firms. 

  

Will the sustained credit-fired spending momentum lead to new highs in Q4 for the sector (as well as the food retailers)? Most likely. But the impact of rate increases might start to surface too. 

 

Strikingly, the sales of these retailers as a % of the retail NGDP continue to drop.  It was 24.75% in Q3. (Figure 5, lowest window) 

 

Would you believe this data tell us that the broader non-publicly listed retail outlets (including sari-sari stores) nationwide continue to outperform the retail titans?! 

 

Considering the massive number of store closures during the pandemic, how could this be valid? And importantly, it has been a trend since 2019.   

 

But a survey suggested that indeed the recent spike in inflation has been driving this dynamic. The study assumes that people travel less to shop but spend more to buy from the 'sari-sari' stores, where the latter sources their inventories from mainstream retailers.  But have the public been traveling less? Google's Philippine mobility data debunks it. 

 

Circling back to the inflation-induced non-food retail performance. 

 

To this point, the lower CPI rate of the non-food sector has led to slower sales "growth" of the non-food retails. 

 

Nevertheless, even with the boost in food CPI, supermarket sales were less spirited, perhaps attributable to price controls. 

 

That non-food retails generated less "growth" demonstrates the intertemporal and asymmetrical effects of monetary inflation on street prices. 

 

In any case, it should be interesting to see how the spike in the BSP’s policy rates affects the overall credit conditions despite the retention of the interest cap on credit cards.   

 

And things should turn out even more fascinating once (or should) the BSP decides to lift those caps. 

 

In the meantime, Q4 results, again, are likely to still manifest the combined effects of the extension of the credit card interest cap, the upside momentum of consumer lending, the near-record public spending, the diminishing impact of the 2020 BSP liquidity injections, and belated impact of election spending, despite rising rates.  

  

Authorities have been throwing anything but the kitchen sink to buoy the GDP and tax collections. 

 

In conclusion, the mainstream alludes to the current consumer binges as "revenge spending."  They also use "revenge" as an adjective for any social activities that enhance political signaling, such as "revenge travel." 

 

But they never even bother to add it to the financing mechanics of such activities.  Thus, how about "revenge borrowing?"  

 

Because revenge spending signifies the "money illusion," what comes next?   Revenge defaults?  Revenge savings?