The persistence of inflation is a bit of a mystery to economists. Many of the shocks of the last few years have faded. And the Fed has raised rates aggressively, with seemingly only a modest impact. So why are companies still raising prices? If you listen, they actually explain a lot of their reasoning on corporate conference calls. On this episode of the podcast, we speak with Samuel Rines, managing director at Corbu, who has gone through numerous transcripts and come to the conclusion that management teams are still being rewarded for "price over volume" strategies. Companies in this environment are happy to sacrifice a bit of volume sales in order to keep moving through large price increases. He walks us through what he's learned from companies like Wingstop, Tractor Supply, and PepsiCo. And he talks about what you should expect to see when the inflationary urge finally starts to crest. This transcript has been lightly edited for clarity.
Key insights from the pod:
What’s ‘price over volume’ ? — 03:21
Wingstop and chicken prices — 6:37
How much of this is food versus other goods and services? — 9:33
The Covid experience and consumer demand — 13:18
PepsiCo and Coca-Cola — 15:31
Questions are analysts asking on earnings calls — 16:40
Outliers in a POV world — 18:24
Walmart and prices — 20:25
Higher prices and wages — 23:26
What are the signs prices are starting to decline? — 26:41
What price over volume means for the Fed — 29:12
Is it all Odd Lots’ fault? — 33:43
What are companies doing with the profits? — 35:45
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Tracy Alloway: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:16)
Joe, it always feels to me like it's earning season, isn't that right? I feel like every month it's earning season, it just goes on forever.
Joe: (00:24)
I know, it's always earning season. It's always about to be Mardi Gras in New Orleans. There's certain things that it was like, ‘oh, that's this time of year again, certain things, it's always like Carnival in Brazil and it's like, ‘oh, that's happening again.’ And yes, earning season is always right around the corner. These things that just seem, I think that they feel like they're supposed to be rarer than they seem to be.
Tracy: (00:44)
Yeah, they happen four times a year, but it seems like it's constant. Maybe this is one reason why we historically haven't done a lot of earnings episodes, but I think now is a good moment to actually stop and reflect on what we've been seeing from companies, because of course, all of this feeds into the big macro inflation discussion.
Joe: (01:04)
Well, two things about this is. One, is economists should listen to what companies say more, I feel like. There's so many economists -- and I love them -- but there are so many economists out there who, you know, like they’ll have some chart about the money supply or the Fed or like the dot plot and all this stuff, and all that's great and I love it and everything, but often companies are just telling you what's going on. And a lot of my favorite sort of economics analysis comes from someone who's just like, ‘let's listen to the conference call and hear what management has to say.’
Tracy: (01:36)
Right, there is a tendency for economists to talk about inflation expectations in the sort of abstract sense, but you could just read an earnings transcript and look at a big food company, for instance, and see that they're saying, ‘oh yeah, we're going to push through some more price increases.’ And that would be a pretty big clue.
Joe: (01:54)
And why, and this also gets to, and the nice thing about conference calls too is, you know, the analysts represent the interests of investors, right? And so they're asking the questions that investors want to know about. And one of the things that we've explored for years on this show is the degree to which companies care about investors. And we talked about it a lot with oil, specifically oil companies for years maximizing drilling output versus price, then switching post pandemic and so forth. So these conference calls give a clue on both sides and that help drive corporate behavior.
Tracy: (02:26)
Totally. So on this episode, we are going to be trying to, I guess, draw that line between the micro and the macro, talk about earnings and what it means for the wider economy. And I am very happy to say that we do have the perfect guest.
We are going to be speaking with Samuel Rines. He is a managing director over at Corbu. You might recognize his name if you've been subscribed to the Odd Lots newsletter. I've written a little bit about his work recently, but he's been writing some very good analysis of earnings and specifically the pricing strategies that companies are undertaking in the current environment. So Sam, thank you so much for coming on Odd Lots.
Samuel Rines: (03:06)
Hey, thank you for having me.
Tracy: (03:08)
So you know, I first started reading your work, I guess it was last year, and you've developed this idea that you call POV -- price over volume. Can you walk us through exactly what that is?
Sam: (03:21)
Sure. So basically going back to, let me call it early 2022, it was kind of this realization that something was going on underneath the surface with corporations that was pretty interesting. And that was, they were making the decision that they didn't really care about losing a little bit of volume and they really cared about kind of finding how much price they could push and how much the consumer would react to it.
And the first really interesting example of that that we pulled out was Pepsi. And Pepsi -- we called it the new PPP. It was what was going to bail investors out after the Russia invasion. And it was the Pepsi pricing power.
Pepsi found that even though they had about 4% of their revenue exposure to Russia, they could push price everywhere else and make up for that volume without any problem. So it's this really interesting kind of first tidbit, right? Corbu, we tend to really focus on what's going on with the geopolitics and try to drive down into that and figure out how to kind of play around it. And it was really a revelation, at least to me, when Pepsi was pushing double digit pricing.
Joe: (04:32)
This is so fascinating. I'm already blown away because to me, this opens up a whole new way of thinking about some of the questions and tying things together. But let's stick with Pepsi for a second, because when the invasion of Ukraine happened, there were certainly a lot of people who understood some pretty straightforward ways that that could be inflationary, right? Energy, grain costs, etc.
But what you're saying is there's this other mechanism that happened that you only would understand by sort of looking at the micro where a company felt pressure to raise prices elsewhere to compensate for the loss of sales in one market so that they can continue to deliver steady results for the investors?
Sam: (05:15)
Yes. And it certainly wasn't just Ukraine. It certainly wasn't just that. They also had, you know, they have, Frito said there was some …
Joe: (05:23)
Yeah, sure. But that was a factor. Everyone around the world to some extent, who are the consumer of PepsiCo products was to some extent paying more to compensate for the lack of revenue and earnings that they were getting from the Russian market.
Sam: (05:37)
Oh, exactly. And it was pretty immediate. It was not something that was just a subtle pause. It was something that was very, very quick.
Joe: (05:47)
Well, just real quickly on this, did they say like ‘we raised prices in these markets?’ How do you know that that's the reason?
Sam: (05:55)
Oh, it wasn't, they never explicitly stated it. It was they had an excuse to begin raising prices.
Tracy: (06:02)
This is exactly what I wanted to bring up because it does feel like in the environment of the past three years, you've had a lot of supply chain disruptions. It feels like there has been a peg for companies to go out and say ‘well, because of this, we need to raise prices.’ And this is something, Joe, that actually came up on our episode with the baker, right? He said explicitly that if something is going on with, for instance, the price of eggs, if there's an avian flu outbreak and it's national news, it's an opportunity to increase prices without getting a whole bunch of pushback.
Sam: (06:37)
And, and that is exactly it, right? A lot of companies had these one-off or very, very rare excuses to raise prices and begin to find how much the consumer would take.
And one of my favorite examples of this is Wingstop. It was national news that chicken wings pricing was going through the roof, it was something like 125% year-over-year at one point. And Wingstop began to push price, push price, push price. And they had zero pushback from the consumer, right? The consumer just continued to buy chicken wings and it's not as though there are a limited number of places to go buy a spicy chicken wing. Right?
They pushed it and pushed it and pushed it. And now chicken wing prices have fallen somewhere around 50% from their peak. And Wingstop is not exactly stopping pushing their price. In fact, they're saying and guiding towards a typical 2% to 3% type price increase.
So it's a really interesting... Once you get that price push, once you figure out that the consumer's willing to pay it, that is margin expansive over time, as you begin to have a normalization in your input cost.
Joe: (07:46)
So are there any examples, what other publicly traded companies also sell a lot of wings? I'm trying to think...
Tracy: (07:55)
Buffalo Wild Wings, isn’t that one?
Sam: (07:56)
They went private.
Joe: (07:58)
Oh. But I guess, the reason I ask is because, you know, intuitively, one would think that if Wingstop is raising prices, some other company could use that as an opportunity to gain share. And so in your reading of these transcripts, why don't we see that effect at play? I get it, Wingstop, they're a company. Why wouldn't they want to push price to see where that breaking point is? Maximize returns. Why do you not see other companies then say, ‘okay, well we're going to try to take a lower margin for higher volume.’
Sam: (08:31)
Because they can raise price right alongside of them and have those have those larger margins. I mean, it's one of those things with Pepsi, right? Pepsi, Coca-Cola. You shouldn't have Pepsi being able to push price, in theory, right? It should be Pepsi and Coca-Cola battle it out and you have very minimal price increases and they don't have the ability to really play catch up with inflation. And that's simply not the case right now. They're just willing to take it.
Joe: (08:57)
So what did Coca-Cola do when Pepsi was raising prices all around?
Sam: (09:01)
Raised prices right alongside of them. And took a little volume hit.
Tracy: (09:05)
So this actually leads nicely to something else I wanted to ask, which is how much of this is a sort of food consumer good story versus other types of manufactured goods? Because certainly reading your research, you know, there's a lot of talk about Pepsi, Wingstops, Smuckers, Texas Roadhouse, which is one of my favorites…
Joe: (09:24)
This episode is making me hungry, I haven't eaten yet today,
Tracy: (09:26)
I'm sorry. I'm sorry, actually neither have I for once. Okay, so how much of this is about food versus other sectors?
Sam: (09:33)
Oh, it's really interesting. So I kind of divide it into three categories: goods, services and leisure, just to kind of break it up into kind of a framework to work around it. And so if you look at services like Texas Roadhouse, again, that's kind of food. But you know, they're raising menu prices. They're also guiding to higher wages. Same with Cracker Barrel, kind of the Middle America businesses are raising their menu prices and they're guiding to 5% to 6% wage gains. I mean, they're pretty explicit about it. So it's kind of price over volume with a side of wages.
Joe: (10:10)
In the interest of journalistic integrity, Tracy just IBed me during this conversation and reminded me I did have some turkey jerky.
Tracy: (10:18)
Joe is literally sitting there surrounded by empty jerky wrappers saying that he hasn’t eaten.
Joe: (10:22)
So when I said that, I haven't like eaten like a proper meal today, I am not on a completely empty stomach. I do not want to deceive the listeners. And so I want to issue a correction right there. Where were we?
Sam: (10:35)
On the goods side, just really quickly, because it's interesting. So there's this smaller company, Donaldson, that does filtration systems and they guided to a 2% to 6% revenue gain in the coming year, and then in the fine print said with 6% effective pricing. So, you know, you can kind of do the math there and figure out that that's 0% volume, at the top end of the guide.
Tracy: (11:00)
I love the flow of this conversation, because again, it leads very naturally into my next question. But why aren't consumers pushing back?
Sam: (11:08)
Well, for Donaldson, I mean, for Donaldson it's not just consumers, right? It's the corporations that buy their filtration, customers that buy their filtration and stuff. Why aren't they pushing back? It's a combination of wage gains and that you're feeling a little bit wealthier. This is a world where inflation doesn't feel necessarily as forced on the consumer.
And the consumer, you know, there's not a whole lot of options when you're trying to figure out whether you're buying Pepsi or Coke or Fritos or Lays. I mean, it's a strange thing, but you look at the wage gains coming through the system right now, and the wage gains make people feel a lot wealthier, particularly, you know, social security benefits rocketed in January. You know, people are feeling much wealthier, particularly in the lower deciles of income.
Joe: (11:59)
I mean, I fully admit to being in a total, you know, a certain economic bubble here living in New York City. But it is a very frequent conversation where people complain that it’s like, ‘oh, restaurant prices are crazy these days,’ etc. Yet also people are still going out to eat and people complain about how hard it is to get a meal or get a table or reservation or restaurant or order delivery. It's like, ‘oh, I gotta stop ordering, you know, Uber Eats or GrubHub or whatever. Just insane that I'm paying $55 all in fees for two dozen chicken wings,’ and then people keep doing it.
Tracy: (12:38)
This makes me think also, how much of this -- this is a speculative question that's hard to answer -- but how much of it is just people are traumatized by a year of lockdowns. We all want to get out and live our lives. Maybe we don't save a lot for the next couple of years, but we finally get to go out, we get to book travel, go on cruises, eat nice meals at restaurants.
Joe: (13:00)
Wait, Tracy, can I tell you some bad news? We're like coming on three years of this…
Tracy: (13:05)
Yeah, okay. But I was in Hong Kong.
Joe: (13:07)
Yeah. Yeah. No, I know. And the lockdown are finally over, but this has been a very long year.
Tracy: (13:12)
All right, fine. But I do think there is a sort of psychological explanation here as well.
Sam: (13:18)
Yeah. I mean this is speculation, but what Covid did for a lot of people, including myself, was it shortened the time horizon of spent, right? You know, the life cycle model began to put some volatility into that. And you began to put some volatility into whether or not you were going to be able to do the things you loved.
And kind of going back to this, you know, services question. When you look at RevPAR for the major hotels, occupancy really isn't back to 2019 levels yet, but the average amount of money that they're making off the room has skyrocketed back well above 2019 levels. So again, price over volume, there's a certain level of price push on the consumer and the consumer, you know, yes, occupancy levels are going higher, but the average room rate is going much higher.
Same with cruises, right? Cruise capacities aren't back to 2019 levels, but pricing is well above. Norwegian came out with a really interesting earnings report recently where they said, ‘Hey, you know, bookings are really, really good and they're well above 2019 pricing levels.’ It's just across the board on the pricing front.
Joe: (14:28)
So from a cost perspective, a typical major national hotel chain or a Norwegian at this point, are they seeing much cost inflation?
Sam: (14:38)
Hotels somewhat on the labor front. That's really where they're seeing their cost begin to move higher. On the cruise front, bunker fuel.
Joe: (14:47)
But overall, they're expanding margins when they push through these prices, despite the fact that they haven't even gotten back to volume levels. These are beyond what their costs are rising?
Sam: (15:00)
Correct, yes.
Joe: (15:01)
And that's just math.
Sam: (15:03)
And over time it's going to be very, very good for them.
Tracy: (15:07)
Sam, you mentioned something about customers having limited choices, for instance, Coke versus Pepsi, which is not exactly true, but, you know, point taken. And this is an issue that has come up a lot, this idea of corporate concentration and that as the marketplace is dominated by bigger companies, bigger and fewer companies, they have more pricing power. Is that something else that's playing a role?
Sam: (15:31)
It's certainly playing a role to a degree. It's because, you know, if you see Pepsi raising price, you have call it ‘permission’ to go raise price. And it wasn't just Coca-Cola that raised price, it was Dr. Pepper, Snapple. They took price over volume and, you know, and now Keurig, it was in there as well, but, you know, Keurig took price and Smuckers and Folgers took price. And those are the kind of, you know, you can kind of think of that as coffee at home.
Joe: (16:15)
Can you talk a little bit about the questions that are being asked on these calls? Because presumably an analyst wants to be able to go back and, you know, the information that they're trying to extract is the information that the holders of stock in these companies want. What are analysts asking and/or sort of implicitly telling management about what investors demand these days?
Sam: (16:40)
Sure. So there was an interesting question, this was a couple of quarters ago on a Wingstop call where one of the analysts asked if wing prices fall, what are you going to do? Are you going to go after volume? Are you going to go back after volume and market share? And, I believe it was the CEO responded with, ‘no, you can think of this as a level set on pricing, and we believe that our brand can dictate that type of pricing going forward.’
That to me, was very indicative of what was going to happen. And they followed through with it. Wing prices fell and they said, no, we're still going to creep prices a little bit higher here. Margins are going to go higher.
Another interesting comment, and this kind of goes to where I think a lot of things are going to flow on the price over volume front in the coming quarters. There was a very interesting call with a shipping company that for some reason, I'm spacing on at the moment, but management had said, ‘listen, Q1, Q2, it's going to be a pretty difficult time for us. But looking at the end of Q2 and into Q3, we see an inventory cycle beginning to emerge again.’ And so when you're raising prices, if you are Pepsi that said, ‘we're going to raise a little bit of price,’ if you're Coca-Cola, if you are any of these companies that have seen -- Kimberly Clarke -- that have seen those inventory levels at the end retailer creep lower, you are looking at the potential for not only higher pricing going into the back half of the year, but also a restock on the volume front. So it's a really interesting one.
Tracy: (18:17)
So the big inventory glut that a lot of people were predicting, you don't see evidence of that in the current earnings results?
Sam: (18:24)
So there's some inventory glut, particularly with companies like Target. Target. It's a POV world. I don't know where they're living right now. I mean, when Walmart is pushing price over on their tickets and having lower foot traffic, that to me is indicative of something being very wrong with Target. And then you go to something, you know…
Tracy: (18:49)
Just to be clear, because Target is not raising prices, right?
Sam: (18:52)
Target's not raising prices, and they're not getting the mix shift that Walmart might be seeing in a meaningful way. They don't have traffic and they don't have pricing. But this is interesting. Because then you get Kontoor, which owns Lee and Wrangler. If you think it's something to do with clothing, if you think it's something to do with merchandising, I mean, Wrangler and Lee put up a 7% revenue gain for the quarter. It's really interesting kind of, and then there's Dollar Tree. I mean, Dollar Tree had lower number of transactions at a higher price.
Joe: (19:23)
I'm wearing Wranglers right now, by the way. I, sorry, I need to actually, two things. I feel like this is the point to interject and point out that an Odd Lots regular guest, Isabella Weber, is out with a new paper on inflation, and she talks a lot about some of these exact same things. Everyone should go read it. Including also, there was a Pepsi Co called that she cites the same thing where the analysts were like, ‘but you're not going to go back to cutting prices, right?’ Like, at the end of all this, are prices going to mellow out or are you going to go low?’ And the management, you know, the way they phrased it according to her is like, ‘because we are a very innovative company, we do not feel like we're going to have to compete on price.’
On Walmart/Target specifically, can you talk about, you know, Walmart is probably a pretty great proxy for... What is Walmart doing specifically, what is their strategy and how much does it deviate from the everyday low prices, which I sort of thought of as Walmart's calling card for the last 30 years or whatever.
Sam: (20:25)
What is Walmart's strategy? Walmart's strategy is being at a lower price point than, call it, Target. And the interesting part there is that they have a significant grocery business. Which is also meaningful, and they've done a very good job on that front. And that's where a significant amount of their call it price gains are happening.
They don't have a significant amount of traffic going up, but they do have a significant amount of pricing coming through the system. And a lot of that is food inflation and Target, it does have grocery, at least some of them do. But they simply haven't seen the consumer going there to shop for groceries. And, you know, Kroger came out, you know, they're doing well on the grocery front. And so it's very much a grocery and a higher turnover type world, which Walmart dominates over Target.
Tracy: (21:18)
So broadly, POV is intact. Consumers are not yet really pushing back against it, but maybe on the margins we've seen some adaptation. So I think in the recent Fed minutes, they were talking a little bit about consumers maybe changing their preferences. And then we also have this explosion of private label goods -- so companies like Walmart selling their own brand of groceries at lower price points than say, I don't know, Smuckers or Kraft or whatever. To what degree could that start to impact the POV strategy?
Sam: (21:54)
Private label is to a significant degree, part of POV, right? It gives the consumer the second option. And you know, when you begin to see Kroger, I think their own brand, the ‘Our Brands’ was +10% in the latest quarter. You are beginning to see private label take some share, but it's not taking enough share to matter against the pricing power. Kind of to your point on Smuckers, I mean they guided to 6% net sales, 8% organic. And then in the fine print said, ‘listen, we understand that there's going to be some volume down, so that's going to be all price.’ And that was for 2023.
Joe: (22:45)
Wait, sorry, explain that last part again.
Sam: (22:48)
So this was Smuckers. Okay. So it's like Jif peanut butter. That type of deal, you know, and what's interesting about them is they said 6% net sales growth, 8% organic, all of that's going to be pricing. And we understand that there will be an elasticity on the volume front. So if you get to…
Joe: (23:05)
But they're willing to take that because if they could push 8% price increase and only a 2% volume decrease, then that's a good trade?
Sam: (23:13)
It's a great trade.
Tracy: (23:14)
How does that feed into wages? Because I imagine if POV is a dominant strategy and you're maybe producing less but selling it for more, then maybe you start to cut back on labor expenses. Or maybe, you know, you have a slightly smaller workforce and you're paying them slightly more. I don't know, it seems like there's a lot of moving parts there.
Sam: (23:36)
There’s a lot of moving parts. I would point to Walmart going to $14. That's basically the minimum wage of the US being raised to $14. I mean, the starting wage is now $14 and there'll be some catch up there. I mean, Lowe's had to invest in their frontline workers heavily. Home Depot did as well. Places like, there's Tractor Supply, which is one of the most interesting retailers on the planet.
Joe: (24:04)
Tell us why. You know what, I've actually, in my mind, the backlog, we should do a Tractor Supply episode because that's one of those names that probably a lot of people don't know that company, but I think the long term stock chart on that is like insane. It's like one of the big secular winners of the last decade or something.
Sam: (24:20)
It's been a phenomenal secular winner.
Joe: (24:22)
Can we take a minute to just have like a little one minute discussion? What is Tractor Supply?
Tracy: (24:26)
You know, they sell live chickens there, or at least the one close to me does.
Joe: (24:31)
So in 1997, this was a $1 stock, and now it's a $226 stock. So nice couple, three decades. But what is the story there?
Sam: (24:39)
Yeah. So the story there is, well, I mean, from 1997, it's been store growth, phenomenal management team. Listening to those calls, reading the transcripts, it's simply a phenomenal management team. And what they, you know, what they sell are everything from grain and things that you feed animals, different farm tools, equipment.
Tracy: (25:01)
Baby chicks.
Joe: (25:03)
We’ve gotta do a tractor episode. You know who we should have on Tracy, who I bet would be good, who we've had on to talk about tobacco in the Lawrence Hamtil. He'd be great. He knows all the real American companies. He's like, anyway, sorry, keep going. Keep going.
Sam: (25:17)
But Tractor Supply, you know, one pace of fair wage. And has invested all along with their employees and two, has had spectacular same store sales growth through the inflation. They can pass inflation on. It's known to farmers that there's inflation. And people in rural communities that there's inflation, and farmers are doing, and rural communities are doing rather well in this environment. I mean, one of the ways I will know price over volume is breaking is when Buc-ee's stops advertising that an assistant general manager at a very large gasoline station can make $225,000 a year plus benefits. Is that true? It's a sign that sits out in front of every Buckee's store I've been to over the last two months.
Joe: (26:01)
That's another, we gotta do a Buc-ee’s. I mean, I'll just say both of my kids, one of their first ever diaper changes was in a Bucee's bathroom and they're famously clean. And so I have a very big affinity towards a Bucee’s.
Tracy: (26:16)
Okay. These, these are Odd Lots tips, change your kids' diapers at a Buc-ee’s and go to Target for lower prices.
Joe: (26:23)
They do have the cleanest bathrooms in the world, that’s like their calling card. Everyone knows you get a really clean bathroom at Buc-ee’s.
Tracy: (26:30)
Sam, you actually mentioned something that I wanted to ask you, which is what would make you start to think or suspect that the POV strategy is starting to fall apart?
Sam: (26:41)
Sure. So kind of going back to the way that I break it down into goods, services and leisure, I would like to see leisure break first, right? That's really, when people stop spending the incremental money on a very expensive Norwegian cruise or more expensive airline tickets, when that begins to break down, I think you begin to have at least a signal that the consumer is no longer able to take those price increases.
And leisure comes first, services second, goods last. You have to buy peanut butter. At least I do, or my daughter will have a problem. But you have to buy those staples. So that's called the cadence of POV that I'm looking for. Another rural stock, I'm a big fan of looking at Middle America as a signal for how the economy's doing, is Polaris Industries. You know, they make snowmobiles and side by sides.
And one of the things that they have said is we're, you know, ‘we're seeing two things. One, we're seeing volumes not necessarily be that great, but we are seeing pricing go up.’ So they're pushing price and that's working on rural America pretty steadily. So I want to see things like that begin to no longer happen. And when that begins to break down, that's kind of the first signal that the consumer’s no longer able to take the pricing on, you know, going out to Cracker Barrel or going to Texas Roadhouse, Olive Garden and their expensive lettuce.
That was actually one of the best comments I heard on conference call. That lettuce was, I think it was a $2.5 million headwind on the cost. Because they have unlimited soup and salad and lettuce is really expensive.
Joe: (28:26)
Wait, Olive Garden does? Oh, I thought they just had unlimited breadsticks. Do you remember the famous Starboard, and they're like, come on, put some salt in the water and like, cool it with the unlimited breadsticks.
Tracy: (28:42)
Didn't you write a big, like, riposte to that?
Joe: (28:46)
That was a great, that was just like some amazing content.
Tracy: (28:50)
Wait, so, Sam, you were talking about the cadence of people pushing back against price. And so I'm assuming if people start to push back first against leisure activities and then maybe, you know, non-essential goods like a snowmobile, would that be a signal or a clue that maybe we're heading towards a soft landing?
Sam: (29:12)
Well, that depends how the Fed reacts. Because it's going to be very difficult in my mind for the FOMC to get off of, we call it 25s for life, until they begin to actually see corporations decelerate pricing. And when Smuckers says for 2023 it's 8%, that is not good for the FOMC. When Cracker Barrel’s saying wage increases are 5% to 6%, that's not good for the FOMC, you know, one is a consumer good and one is middle America getting a pay raise. When Walmart's raising their minimum wage, again, that's a pretty big deal when it comes to consumption on the lower end.
So do I think it pushes us to closer to a softish landing? Oof. I would argue it is going to be rather easy to accidentally read too much into CPI decelerating simply because you're going to have used autos, which, you know, you don't consume a used auto all the time. You do consume groceries all the time. It's going to be easy to read in a little too much to CPI and PCE readings over the next few months and be really excited that maybe the Fed doesn't have to go to 550, 575 and then all of a sudden get caught a little off guard when corporations continue to push pricing, trying to find the elasticity on their margin.
Joe: (30:58)
I have just like two more questions, but you know, I just, I wonder, you know, we don't get conference call transcripts obviously for privately held companies, but, you know, it does seem as though there are differences in how companies that have to be accountable to shareholders every quarter and answer Wall Street analyst questions every quarter behave.
We did an episode recently with an investor in Arizona land and he was saying that the privately held home builders feel more comfortable holding unused land on their balance sheets than the publicly held ones that have to, again answer like, ‘why are you holding so much land? Don't you remember the great financial crisis?’ I think there have been stories in the oil patch as well where some of the privately held drillers are a little bit more comfortable expanding in part because, you know, again, and this is a Jeff Currie Goldman thing, the exact, you know, profitability over volume, the end of volumetric expansion is something investors want to see. Do you have any reason to believe that some of these dynamics that you describe may be different, and that maybe some privately-held companies see an opportunity for VOP to take advantage of when their publicly traded counterparts are doing POV?
Sam: (32:11)
Ooh, I'm trying to think of a good example of that and, you know, call it the oil patch being in Houston and talk to a significant number of these smaller operators. It's kind of two things are playing into it. One, they're feeling cost pressures that are far higher than their publicly traded peers. So their ability to do volume over price is very, very limited at the moment. Because, you know, their publicly traded peers have far more power, power and scale.
It's somewhat different for the private frackers. They're doing a little bit more volume on, call it the margin, but not much. And so it's a much different, I would say, mentality in the oil patch, even with the private guys. But the private guys, it's much more of a cost issue than it is an attempt to do the volume. I'm sure they would. I mean, this is Texas, right? Drill, drill, drill . It's pretty straightforward.
When it comes to consumer goods, it's difficult to find any that call it have reliable size. You know, you can kind of look at some of the companies that are growing pretty quickly in the private markets, but it's difficult to parse out exactly whether they're going for volume or it's just the trend is their friend.
Joe: (33:43)
And I just have one last question, but it's sort of dawned on me, you know, did Odd Lots help contribute to the inflation?
Tracy: (33:51)
I was just thinking about that -- all our supply chain episodes.
Joe: (33:54)
If the real story is that companies use news about disruptions, about avian flu, about ports, about semiconductor shortages, about wings, chicken prices, as excuses to raise prices rather than real like, it’s like okay, we spent three years talking about all these things and then the company is like, thank you Odd Lots. Please keep doing stories about disruptions so that we can do the pricing power. Is it all our fault?
Sam: (34:20)
I wouldn't say it's all…
Tracy: (34:22)
Thank you.
I mean there's blame to go around, but there is an interesting part of that to that egg story. You know, going into Christmas, the USDA does this weird, it does a whole bunch of weird stuff, but one of the best reports out there was a post-Christmas one, where it was the largest, they call it ‘disappearing’ of eggs on record that they had done per person, or per household. I think it was eight eggs per household during Christmas. So even with the higher pricing, volumes were up. So that's just an interesting side note. And I think a lot of it, kind of going back to one Tracy's points earlier, was we hadn't really been able to get reliably together for Christmas. And you know, Omicron was a year ago. So we hadn't been reliably able to get together for Christmas, so we went big on baking this time around.
Tracy: (35:15)
We were eggcited to be together again.
Joe: (35:18)
I think Tracy baked.
Tracy: (35:19)
I did, I baked, cookies, sugar cookies. Oh my God. They took me forever. I have, sorry, I have one more question. In an attempt to deflect some of the blame away from Odd Lots, what are companies actually doing with the additional money? Is it actually going to pay off higher input costs and maybe some wage raises like we've been discussing? Or is it being returned to shareholders, or investment? What are you seeing?
Sam: (35:45)
All of the above? It's a combination of needing to offset the input cost increases. They are non-trivial, obviously, some labor, and better return for shareholders dividends, etc. There's a great chart from John Deere on basically the revenue gain off of the price, which is most of it volume, which is very, very little if any. And then the material costs, labor costs and the return to shareholders. And the offset to the input cost increases is 135, 140%. So it's a very interesting, and again, that's basically a duopoly in in the US, but it's a very interesting study and there's enough to go around to cover all of it.
Tracy: (36:35)
Alright, Sam, thank you so much for coming on Odd Lots. That was fantastic. Even though it did lead to the realization that we are part of the problem.
Joe: (36:44)
Tracy and I, I feel like the light bulb must have gone enough in the exact same second. It was like, ‘oh, I'm so sorry we did all these episodes.
Tracy: (36:49)
Yeah, thanks Sam.
Sam: (36:51)
Thank you.
Tracy: (37:05)
Joe. I think we should call this excuse inflation.
Joe: (37:08)
I like excuse inflation. And you're right, the Baker said it. He told us, he said, even in the past, because this was even his point when he said it was that even like prior to the pandemic, etc., when he as a baker was thinking about when to raise prices, which he wanted to do every year, the opportunities best arrived when something related like, oh, a disruption in flour. Or eggs were in the news. It’s like, okay, this is the moment that you can raise prices without consumers pushing back too much. And then the last three years have been a lollapalooza of excuses.
Tracy: (37:40)
Nothing but one-off disruptions. That's right. But obviously it does raise the question of what can break the cycle? And it does seem, you know, listening to Sam layout some of the comments that we've seen on earnings calls, it does seem incredibly sticky. And once you have that pricing power and you've managed to push through the price, it feels like there's just very little incentive to reverse that. Why would you, if you're Pepsi, why would you start lowering prices?
Joe: (38:10)
And you know, the thing is, and obviously the irony to me, which I think, you know, because people talk about greed and greed inflation, right? And there's like, they don't need to be raising prices, they're just expanding their margins. The irony to me is that as long as companies are in this greedflation equilibrium, like a sort of corner of the payoff game theory matrix, the stock prices are not going to do well because this will keep the Fed on the 25 forever standpoint. That's sort of keeping financial conditions from getting too loose. So the irony is the companies would probably wish they could get out of this part of the matrix because management is mostly going to have their wealth tied to the stock rather than anything else. So it's like a pretty undesirable state for I think everyone right now.
Tracy: (38:53)
What if higher interest rates, which increase interest rate expenses, also end up fueling the POV strategy? Because you have to make that up in one way or another.
Joe: (39:05)
We gotta have Warren Moesler on to talk about, we actually we do at some point.
Tracy: (39:09)
This is definitely an episode that I think has me thinking about like eight other episodes.
Joe: (39:14)
Let's get Larry Hamtil on to talk about Tractor Supply though.
Tracy: (39:17)
Yeah. Okay. All right. And chicken wings, obviously. Okay. Shall we leave it there for now?
Joe: (39:22)
Let's leave it there.
You can follow Samuel Rines on Twitter on @SamuelRines.