More Pain To Come For Grocers, As Amazon's Push Grows: Mushkin

and perhaps your children or your other relatives. It's the fight between grocery stores to deliver the food that would actually end up on your table. Here to tell us more about the grocery store wars is Scott Mushkin's senior retail and staples analysts for Wolf Research. Scott, always a pleasure give us your sort of thoughts on the cost that is being borne by companies like Amazon to actually get the food and products to the table of their

consumers and customers. Because that's not cheap. They say, it's free if you're a prime customer, but somehow, somewhere someone's paying for it. Yeah, it's great point, Pam, and thanks again for having me on. Highly says so, yeah, I mean, I think the challenge with consumables, and particularly those every day reordable items like go with toothbrush or toothpaste, high and deodorant. I we as consumers would like them delivered to our our house. Our our research shows the challenges.

It's it's not that economical to get us to get us those products. And so I think there's this push and pull and trying to understand how the economics will work, what the model will be like as we go forward over the next five to ten years. UM and Amazon's you know, obviously bought Whole Foods. It's in what we consider the driver's seat of trying to put an omni channel spin on consumables. UM and we had just the head the announcement at of Walmart it's gonna be delivering

from a lot of its stores. So the grocery wars are definitely taking place. We think they favor Amazon significantly, UM as they don't have and they haven't built out their assets there in the process of doing that, And for other bricks and mortar companies, it's it's tough. I mean, they're having to follow Amazon, who's now setting the strategic vision for the for the industry. All right, So I'm

just wondering. So Amazon might have the upper hand, but they've tried to get into this industry before and failed, and this is notoriously hard hard nut to crack as far as food delivery and replacing brick and mortar. Do you think that the stock reaction which has been fierce with with grocers like Kroger and bankruptcy is of an increasing number of such companies. Do you think it's overdone at this point? You know, Actually I don't, uh, And

I think the challenges we go. We look to China, we look to China and what Ali Bob is doing with Hima, and we think the purchase of Amazon of Whole Foods is a watershed event where what we're going to see, I think is a blend of an omni channel blend developed um And it's a darn shame because the stores had a huge home field advantage We've talked about before where people still buy almost all their fresh at the store um, and what we're seeing is that

home field advantage being surrendered to the vision of Amazon. And I think it's going to be a like it's an omni channel blend and will incorporate some bricks and mortar stores as you've seen them by by Whole Foods UM. But so I think they you know, they have some of their best people working on this. We think they're going to combine Amazon Now, Amazon Fresh, and Whole Foods

into one offering. UM. But the the idea is to really bring omni channel, the omni channel experience and incorporate stores uh into into that offering to make it a little bit more economical. Alright, So so far this year, Kroger and Walmart have lost more than thirty billion dollars in market value combined. Other grocers have also seen their shares plunge. Is there a specific company you're looking at that has more pain to go? So we've been pretty bullish on the U S economy and what's going on

with the tax the tax cuts. We think nominal growth in the US has got to pick up UM. But that's really a short term call, short term relief for an industry that's under extraordinary pain and change. UM. So our long term vision of staples retailing, as we call

it is is someone is very negative. And the reason is we think Amazon is gonna grab twenty share, up from less than three percent share right now, and that twenty share has got to come from someone well but but but very negative meaning how many bankruptcy is or how much devastation with respect to specific grocers. Well, we've already seen some announcements. We had wind Dixie which was a private company but had public debt. They did they're doing a pre pack UH bankruptcy tops up in UH

in the northern part of the US. I think it's gonna be, you know, part of what we see. One of the things that we're we're we've been thinking about a lot is contents. You know, who has content that people may pay for another majority of one subscription to Primes you're paying a month and when that's going to get you as a lot, it's going to get you access to Whole Food now Fresh obviously all the video content that Amazon has. So what other retailers are set

up with content specific to them. We actually think there's actually favors they're not public companies, but we think its favors some of the smaller private supermarkets. UH. Someone like h eb Down in Texas, very good grosser, a very good merchant and probably able to charge for delivery. The other company that we like is Sprouts. UH. Sprouts Farmers Market square footstore right and called the best pure foods pure play, um Natural Organic Fresh. So we like we

like Sprouts. All the other companies public, and some of them are private by private equity. You know, we get really nervous because a lot of share is going to have to move in our opinion, and when that share moves, it's a lot of pressure. The other thing is it's just costing more to do business. So you know, Walmart, they're gonna have two thousand stores that have clicking, you know,

clicking collect They're gonna have another eight stores delivering. That's all added costs and unless you're able to charge um, it's going to really hurt the economics of the business as we move forward. Thing for Kroger, you know, Scott, I'm surprised that that you that I'm talking to you.

I think you're in Mississippi. I thought you'd be you'd be at the Shop Talk Uh trade show, because that's you know where a lot of the Amazon and eBay, Alphabet, Facebook and all these companies are given presentations about the future of retail. And one of the points I was reading about earlier is that Google is integrating the retail product categories like you know from Walmart or Target. With

what they describe as the Universal Shopping Cart. They're gonna share the checkout page and the online payments with a commission pricing model. Any thoughts on it? Yeah, I mean, so you know, Google is basically going to start charging some of these retailers for their search um and again somewhat Amazon has an advantage here. A lot of searches start right on Amazon for product um and so they

have an ecosystem that includes all of this. And so if you're using Google, and Google has a lot of power, they're going to start charging you as a retailer. UM. I actually think that's an advantage to Amazon UM. And another. The reason to fear the retailer's economics not that they're necessary going to go away and go bankrupt all of these guys, but the retailer's economics are going to be

under pressure UM. And of course we saw today with an Amazon announcement that pressure tends to roll downhill to some of these manufacturers. So manufacturers are gonna be under pressure to particularly again if you don't have good content, if you're not you don't have things that people are willing to pay pay for Scott Mushkin, Thank you so much for joining us. Scott Mushkin, managing director and senior Staples retail analyst with Wolf Research normally in New York,

but today in Mississippi. Right now the share is of Facebook. They are lower by five percent, the company grappling with backlash over its role in spreading disinformation. Here to tell us a little bit more about the story and what the reaction and congress might be is our own technology reporter Sarah Friar joining us from San Francisco. Sarah, thanks

very much for being with us. Any updates in terms of the Facebook reaction to this and also reaction to the news that Alex Stamos, the chief information security officer, is set to leave the company in August. Well, I have a story today that explains how Facebook made this into a crisis almost by the way it responded to it. Uh, they smically by pre empting the news reports with its own blog posts on Friday explaining that it was suspending

Cambridge Analytica. It made it seem like they had their own information on Cambridge Analytica obtaining the data they didn't. So now Facebook has as they're spiraling into crisis. They have to show people that they don't actually know if the reports are true on their end, so they can't take stronger action or have Mark Zuckerberg or Cheryl Sandberg

speak until they have completed an internal audit. So they really put themselves in this really difficult position that they didn't need to be in, where they're sort of trying to undo some of the weight that they gave to the reports by pre empting them. So, Sarah, is this why the shares are down so much? Because the botched response suggects to suggests a vacuum of either leadership or

appropriate response thought in the c suite? Or is it sort of a game change, or now that the FTC, the Federal Trade Commission is getting involved and President Trump also commenting and saying just this morning that all Americans should expect privacy of data. I think that there's a number of factors. I think Facebook made this a big story,

in part by taking action before the story happened. Um, But I do think that this is a moment in in all of Facebook news where people look at it the way things have worked in they're starting to say, wait, this is not good, this is not helpful for our users of these products that are so dominant around the world, So we need to start asking questions about the way

it's always worked. Facebook's um stands here is that this is this is a problem that's sort of been resolved by an update they made, uh that they have you know, they have to degraize this is actually true audited. Nobody trusts them anymore. We have people calling for Zuckerberg or Sandberg to testify in front of lawmakers on both sides

of the Atlantic. The sec is down falls. This is a point where people are saying that they don't expect that Facebook will have usn best interest in heart when they when they go and try to solve these problems on their own and then reassure the public that they've

done so. Sarah, maybe you could just also speak to the perhaps confrontation or the constant back and forth between those people at Facebook who are more eager to look at ways to make money than those who are fighting for the protection of data and information that has been

voluntarily entered into the Facebook system by users. So basically saying that the information that was accessed by Alexander Cogan, the creator of this personality app, he that he didn't in a way that was valid per Facebook policies at the time, which allowed people to give information not to some themselves but on their friends. So two and seventy thousand people using the app resulted in information on fifty million people. Facetoos doesn't allow that anymore, but further policies

at the time that was routine. And um, what people are saying now is is okay, we understand that you change those policies Facebook, but did you ever look into, you know, once these third parties received data on white floss of people, did you ever look into whether they were doing right by it? Didn't protecting it? Of course, in this case, Alexander Cogan gave that data to Cambridge Analytic,

to which the users had not agreed to. And there's a big question here about like, how how does Facebook audit these relationships with third parties and the company you know, I don't know. Sincesarily think it's an odds with their business model. I mean, their business model is all about making sure that the information that people give Facebook, uh their demographic information, their interests, their groups that they've joined, all that information can be used with marketers to target them.

Add that's like, that's like the promise of the free Internet, right, you get the internet for free. These companies get your data and they get to target you add based on that data. Um, advertisers, I spoke to one last night. They actually want Facebook to show users that they are good with their data privacy. Advertisers don't want to be advertising on a service that users have a bad feeling about. Um, it's not going to be good for their business. And

I would, well, you tell me. I mean, with the revelation that Alex Stamos is gonna be leaving the company in August, Uh, didn't he lead a group of engineers that found out in June of that and that was the month of Democratic National Committee announced that it has been attacked by Russian hackers. They said, yeah, there's a lot of Russian activity and that they actually had people

paying for these fake accounts. Yeah. I actually I was speaking with the head of news Feed in August of that year and he said, oh, yeah, we've been starting to look into misinformation on Facebook and the spread of it. I mean, the company was starting to see the signs. Just remember Facebook's position at that time. The company was responding to a controversy over its its news curation, that it may be silencing conservative viewpoints. So the the company,

the company's reaction to crises is very, very reactionary. They don't want any bad news out there. They want everyone to feel like they are this unbiased rap for anything, seraphire, We're gonna have to leave it there. Thank you so much, and thank you for all of your fantastic reporting. Sarah Fryar is a technology reporter for Bloomberg News trade tariffs and China. I'm here to help us understand the current situation and what is likely to unfold this week. Is

Andrew Mayetta. He is our global economy reporter for Bloomberg News. He can be followed on Twitter at a Mayeta and he joins us from our nine one studios into Washington, d C. Andrew, thanks for being with us. Maybe just bring everyone up to date on what is going on between the United States and China as it relates to

trade in tariff wars. Sure, so, the US Administration has been investigating whether China basically disregards US intellectual property and forces American companies to transfer technological know how to the Chinese, and that investigation is nearing a close. Report has been submitted to the president, and he's considering a number of different options, including UH sixty billion dollars in tariffs on

Chinese products. All Right, Andrew, I was struck by a top headline today on the Bloomberg Terminal about how China is pledging not to interfere or violate intellectual property rules with any foreign companies coming to the nation, basically saying, guys, let's just work this out. We're not going to do anything bad. Please trust us. Does that Does that work? Does that fly? I think Larry Cudlow, who just replaced Gary Cohen, is going to say this is positive, this

is encouraging. We should work with this. We should sit down at the negotiating table where the world's two biggest economies. You know that global recovery is actually going pretty well. Let's not mess this up. I think Peter Navarro is going to say, these guys have made promises before, they haven't lived up to them. They've been making promises since two thousand one, since they joined a w t O

and talk is cheap. Well, Andrew, can you give us some specific examples of products that might be hit with these kinds of tariffs. I mean I was looking at things like textiles, and the details there are really astounding because it, you know, it really goes everything from the kind of fabrics that you might use in uh, clothing, to the kinds of products that boy I mean, uh, you'd never you know, whisk brooms, ethel alcohol, milk and cream, olives, tuna.

I mean, it is a dizzying array of products. Yeah. My understanding is they're looking at everything from shoes, apparel, travel goods, so we're talking luggage to you know, higher end consumer electronics. I understand that one way USCR is looking at it is they're taking China's own economic plan, the made in China Plan, and they're looking at areas of technology that China is trying to lead in and

they're trying to target those areas for tariffs. All right, So one thing, as we are watched the headlines coming out of the G twenty meeting in Buenos Aires, uh, in Argentina that's ongoing right now, there actually is a greater call for trade, free trade and trade tariffs loosening or any other restrictions being sort of released among countries

other than the US. Can you talk a little bit about that and how much that could potentially offset talk of a trade war, tariffs or other rhetoric that we're hearing out of the White House. Yeah, I think that overall, actually the situation for the global economy and trade volumes is pretty positive. UM. For the first year in a long time, trade growth and trade volumes actually outpaced growth in in overall outputs. In other words, trade resumed being

an engine of global growth. So so things are actually going well, and I think that most countries in the world don't want a trade war. What's unusual about the situation is you have the US, which has been kind of at the vanguard of creating the current global training system, basically trying to blow it up from within UM and pushing for major changes. And you have China, which for years has kind of been seen as a pariah, pushing

for the status quo. So how exactly that equilibrium works out at a place like the G twenty, It'll be interesting to see how it works out. Andrew any any word or any any inkling of how does it work out between the United States and let's say, Canada and Mexico in terms of exemptions on some of the already announced tariffs. Well, Canada and Mexico have been excluded from the steel tariffs that President Trump announced earlier this month. Um, but President Trump, as kind of is his want, has

added um a condition to it. He's basically said, look, your exclude for now. I'm recognizing your important security partners, but I want a good NAFTA. And if you don't give me a good NAFTA, then you know that that exclusion could go away. So that it's kind of creating a bit of a storm hanging over the NAFTA talks. Well, we're gonna have to wait and see what happens. But boy, Andrew, I think you're gonna end up in the nitty gritty.

I mean, I've been looking at things like the commissioned voting on things like rubber bands from China, Sri Lanka, and Thailand, as well as digital video receivers. So it really just covers the you know, an entire encyclopedia of products and services, encyclopedia of agencies that have to weigh in on this, which is going to be a part of the issue getting all of them to agree on on rubber bands. And you know, I'm gonna follow you know what I'm gonna do. I'm gonna follow Andrew Mayetta

on Twitter. Follow you back. Okay, Andrew Mayetta, our global economy reporter for Bloomberg News, joining us from our ninety nine one studios in Washington, D C. And uh, well, we'll have to see what happens to the rest of the week. Sixty billion dollars potential hit to two trades. We do have a Federal Reserve meeting that is underway in Washington, D C. And will conclude tomorrow, most likely

with an additional rate hike. Here to talk about what we can expect and what we ought to be paying attention to, is Ira Jersey, chief US interest rate strategist for Bloomberg Intelligence. Ira, let's start by taking a temperature of debt markets. What are they expecting j Powell to do tomorrow in his first press conference as chairman of the Federal Reserve. Yeah so so a like you mentioned, Lisa, a hike is all but baked in the cake here. Um,

the shock would be if they didn't hike. Actually, we're now a price for hike tomorrow. Um. The other was saying that the market's going to be looking for is will some of the hawk is comments that J Pale made during the Humphrey Hawk and testimony, and a number of others have have hinted at will that UM show up in the summary of Economic projections that are also be released with the statement tomorrow, and uh, and then J. Powell will have to kind of describe them in more

detail during his press conference. Because the market is now pricing for five hikes by the end of ten and I think that that's pretty Uh, that's pretty interesting because when we talked just a couple of weeks ago, the market was only pricing for four, so we were pricing in a full other hike now over the next year

and a half or so. Alright, what if you could bring into this conversation the global issues having to do with the reduction and quantitative easing Because European Central Bike President Mario drag announcing that he's going to phase out those monthly asset purchases by the end of yeah. So so I think the ECB action is is kind of realistic, but they're trying to temper that with UM, you know, saying look, we're gonna we're gonna stop our asset purchases.

We're gonna try to avoid a taper tantrum, and so far they kind of have. Um. I think we had our taper tantrum for for that last June UM. But but by saying that, hey, we're still not going to hike for a very long time, I think that that's tempered the expectations of of how steep the yield curve can get in Europe. And and that is the one thing that could probably significantly steep in the U S yield curve is um is if if European rates back

up quite a lot. So he's still very low interest rates in Germany and a lot of developed Europe, and if those were to move forty sixty basis points, those would have significant, uh knock on effects to US rates. But so far it's been um pretty orderly at least, you know, you've seen a little modestly higher rates, but they haven't really spiked higher like they did last June when he first suggested that that that quantitative easing might

be coming to an end. Okay, now take that possibility of the effects of reduction in asset purchases by the European Central Bank, and how do you factor in the risk that Shinzo abe prime Minister of Japan. He's got a political scandal that he's dealing with, and that could also affect what the Governor of the Bank of Japan Kuroda, is forced to do. They may be thinking about unwinding

their stimulus stimulus package. Yeah, so I think, you know, Japan is an interesting case because it's it's been a long time since the since the actions within domestically within Japan have really played out on a global horizon. Um, you know, it's certainly affected the yen and versus the euro and the dollar. It's affected um, you know, Japanese rates obviously keeping uh with the Bank of Japan saying hey, we're going to keep our tenure rates near zero and

we're going to buy whatever we need to do that. Um. It's it's it's very unclear what would happen if they let their tenure rates they go up from you know, ten twelve basis points up to uh yeah, well right now is at four, but up to say fifty or sixty basis points. Would that have a knock on effect globally?

And it's it's less clear what the what the relationship of the Japanese market is to the rest of the world, and I suspect it will be less men um some people fear so I I want to focus on something that is happening. It's not a potential, and it's actually raising a lot of eyebrows. We've talked about this before, the gapping outspread between libr and o I S translation, the cost of borrowing dollars has surged even related even when compared with the Overnight Index swap rate, which is

basically the FEDS rate. This is generating a lot of eyebrows being raised and questions. We've talked about it. You don't think it's banking stress, you don't think it's much to worry about. But City Group came out with a report that said that there are real world negative consequences from this increase in libor, which really is a mark for trillions of dollars of us. It's do you agree, yeah, Well, for sure, it's raising the borrowing costs for anyone who

borrows at a floating rate. In particular, UM, this is raising the cost. So this could be raising the cost for people who have mortgages that are going to reset soon, for example, and if those reset the librar, it's certainly affecting people who have credit card debt that's based on on live war and and anyone who issues floating rate

notes that are again live war based. Now what's interesting is that a lot of live a lot of floating rate note issuance UM is so so companies that issue these floating rate notes, a lot of them swap those back into fix So what they do is, especially when interest rates were lower, So anyone who issued, say a year or two ago, when interest rates are very low, they might have issued a floating rate note because it was cheap financing, because investors said, I don't want to

buy fixed rate debt when treasury yields are at one and a half percent, so but I'm happy to buy a floating rate note because that protects me when the FED starts to hike. But then um, but then those companies then do an interest rates up that flots it back in the six So it's probably not it's it's not like there's a systemic risk here, but for some borrowers, certainly, it's increasing um their cost of borrowing a little bit more. It's kind of like another two Fed hikes have happened

for borrowers who who tend to borrow against lieboard. Thanks very much for being with us. Ira Jersey is always an expert when it comes to interest rates. He's our chief US interest rates strategist for Bloomberg Intelligence. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.

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