On the eve of Independence Day (July 4) U.S. employers cut payrolls by 62,000 workers last month, for the sixth straight month of nationwide job cuts, showing the U.S. economy is far from out of its deep trench, according to statistics released this morning by the U.S. Department of Labor. The overall U.S. unemployment rate remained at 5.5%, up nearly a full percentage point in the last 12 -to- 14 months.
The Labor Department report released this morning also includes a snapshot analysis of the business conditions across the U.S. corporate and small business spectrum. the report says employers are being hit hard by soaring fuel and energy prices; and even worse are extremely uncertain about how long the current severe economic downturn will last because of the combination of so many negative economic indicators and conditions--the soaring cost of fuel and energy, the continuing credit crisis, the housing foreclosure mess, record-high food price inflation, record government debt, and decreasing consumer spending and confidence in the economy.
So far this year the U.S. economy has lost 438,000 jobs, for an average of 73,000 lost jobs a month over the last six months, from January -to- June, 2008, according to the U.S. Department of Labor.
The employment sectors where the most job losses have occurred are: construction, manufacturing, financial services and retailing.
Most economists are predicting continued job losses and a poor economy for the rest of 2008, despite the $168 billion dollar economic stimulus rebate program in which the U.S. government put checks ranging from $300 -to- $1,200 in the hands of every American who filed a tax return. Every U.S. taxpayer who filed a return should have received (and probably spent) their economic stimulus rebate, according to the U.S. government.
Some economists fear that when the stimulus force (consumer spending of the money) of the rebates ends, the economy will be in for another rough patch. Those analysts worry that the economy--which has been coping with sluggish growth at best--will have a "relapse" and lose momentum near the end of this year.
In fact, many of these economists are predicting a higher national U.S. unemployment starting early next year, with the unemployment rate rising to 6% or slightly more in the first quarter of 2009. Nearly all of these economists attribute this rise to employers being reluctant to increase hiring even if the economy starts to show signs of improving because of all the uncertainty they have due to the multiple negative economic conditions and indicators described earlier in this piece.
Add to that uncertainty the fact that inflation concerns are growing. With inflation concerns growing, the Federal Reserve last week ended an aggressive rate-cutting campaign, started last September to shore up economic growth.
Fed Chairman Ben Bernanke and his colleagues are caught between risky crosscurrents of plodding economic growth and soaring energy and food prices that threaten to spread inflation. Lowering rates further would worsen inflation. But boosting rates too soon to fend off inflation could hurt the fragile economy. Its a Catch 22 situation in most ways.
Meanwhile, Oil prices today neared $146 a barrel for the first time, while gasoline prices hovered above $4 a gallon.
Additionally, food price inflation continues in the U.S. According to statistics just released this week by the United States Farm Bureau trade organization in Washington D.C., food costs are up overall in the U.S. by 8% in just the last 12 months. Further, prices of key food staples like bread, milk, eggs, cereals and most meats are up by double digit percentages, in many cases in the 20 -to- 25% range, over last year.
The U.S. food and grocery industry has been doing a pretty good job of holding the line on food price increases, despite getting hit with a tsunami of factors, including soaring ingredient costs and fast-rising fuel and energy costs.
Manufacturers and suppliers have been cost-cutting where they can and trying to limit price increases to retailers. In turn, retailers have been taking some margin hits rather than reflecting the total percentages of the price increases they receive from suppliers, especially on key items like bread, milk and other staples.
Despite these cost-containment and margin hits by suppliers and retailers, food inflation remains high, which demonstrates how powerful of a negative factor it currently is in the U.S. economy.
On the retail side, sellers of household goods like Bed Bath & Beyond, Room Source, Cost Plus World Market, Pier 1 Imports and numerous others are doing poorly and in many cases on the verge of filing for bankruptcy.
Food and grocery retailing generally does well, and sometimes even thrives, during a down U.S. economy because consumers shift a greater percentage of the food spending they previously did at restaurants (generally about 40% of all food spending dollars in the U.S.) to supermarkets (what's called at home spending) and other retail food stores. In other words, they cut back significantly on eating out and redirect that spending to supermarkets.
However, with soaring food and grocery prices, we're starting to see a bit of a different pattern emerge. Lower income and middle income consumers are cutting back significantly on how much money they spend at the supermarket, as well as overall on food. This is due in large part to the soaring cost of gasoline, which averages over $4 a gallon currently nationally and is nearing $5 a gallon in states like California.
Speaking of California, the western U.S. where Tesco has its current 62 Fresh & Easy Neighborhood Market small-format combination discount grocery and fresh foods grocery markets, is doing worse economically than the nation as a whole.
For example, the unemployment rates in California, Nevada and Arizona--the three states where the Fresh & Easy stores are located--are over 6% respectively, which is significantly above the national average of 5.5%.
California's unemployment rate for example just hit 6.8%, and in some parts of the state like the Central/San Joaquin Valley counties of San Joaquin (11%), Stanislaus (11.7%) and Merced (12.3%) counties its near double that, according to figures released this month by the California Employment Development Department.
California, Nevada and Arizona also are three of the states hit hardest by the housing credit and foreclosure crisis, which is driving the higher unemployment numbers in these three states due in large part to the near complete collapse of the residential housing and mortgage industries.
In terms of food and grocery sales, Tesco's no frills, limited assortment and low-priced focused Fresh & Easy grocery stores should be positioned to thrive during this serious economic downturn in the three western U.S. states where it operates stores.
Fresh & Easy's pricing is low, its neighborhood grocery concept is one in which consumers can shop frequently for reasonably priced groceries without driving miles to a Wal-Mart Supercenter and spending lots of money on gasoline for example, and its fresh, prepared foods are priced low enough, and yet offer a decent enough level of quality, to serve as a substitute for restaurant meals for consumers, while saving them lots of money.
The jury is still out though as to consumer response to the Fresh & Easy offering, which as we said should be super-popular in these bad economic times in Southern California, Arizona and Nevada. The fact is, the stores aren't performing as they should or could in this economic climate, which with high food price inflation and soaring gasoline prices is an economy in many ways made for a no frills but yet somewhat fashionable upscale format like Fresh & Easy.
If Tesco can seize on better positioning, merchandising and marketing for Fresh & Easy, it has the potential to thrive in this down U.S. economy. Of course, since value is now the key in food and grocery retailing, every grocer from SuperValu, Inc., Kroger Co. and Safeway Stores, Inc., to regional supermarket chains and even Whole Foods Market, Inc., is embracing the value and lower prices mantra in various ways and adjusting their retail merchandising and marketing accordingly.
And, no food and grocery retailer is doing so more than the world's largest retailer, and the now number one national seller of food and groceries in America, Wal-Mart, Inc.
If you've talked with Wal-Mart suppliers and vendors like Fresh & Easy Buzz has over the last couple months, you'll know the first and last message given to supplier sales reps when they sit across the desk from a Wal-Mart buyer, is that part of doing business with the brawny big box retailer (and soon to be small box too with its new Marketside stores in Arizona) from Bentonville (Arkansas) in the current bad economic downturn in the U.S. is for that supplier, big or small, to suck up as much margin as it can--and then some--when it comes to giving increases to Wal-Mart.
Supplier price increases to Wal-Mart are currently being met with immediate buyer phone calls to that supplier's Wal-mart rep, the content of that buyer phone call being: the price increase is too high; you need to lower it or eliminate it. In large part, this is why Wal-Mart is thriving in the current economy, as its most recent sales and profit numbers demonstrate.
Lee Scott (Wal-Mart CEO) and company at Wal-Mart have decided to seize on the economic downturn in the U.S. to not only firmly establish the retailer as America's premier discount or value retailer, but to use its huge buying clout to steal market share in the food and grocery categories away, for what it hopes is the long term, from other grocery chains. Thus far it seems to be working.
Of course, a considerable percentage of U.S. consumers just plain hate Wal-Mart. However, it appears many of these consumers are being persuaded to take a second look at the retailer in this down economy.
Meanwhile, Tesco has the potential to become the anti-Wal-Mart in Southern California, Nevada and Arizona with Fresh & Easy--a small box rather than a big box, conveniently located rather than miles away from where people live, low-priced yet not overwhelming--despite having its own segment of anti-Tesco consumers back home in the UK, where as that nation's dominant retailer it serves as the evil "Wal-Mart of the UK" for its own respective consumer segment.
In terms of achieving that, the jury is still out for Tesco's Fresh & Easy. However, the time to begin doing so for the British-based retailer come to America is in the current recessionary or near recessionary U.S. economy.
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