Holiday Retail Industry Preview 2019

In this episode of MarketFoolery, Chris Hill talks with The Motley Fool's Dan Kline about some of today's business news. The holiday shopping season is in full swing, and sales numbers look like they'll be on the big side of the spectrum. Dan talks about how holiday deal-shopping has changed, what it means for retail in the big picture, and how consumers should approach bargain-hunting in light of it all. McDonald's (MCD -0.05%), meanwhile, is finally testing out premium chicken sandwiches, but there's no guarantee they'll stick around. And casino stocks didn't move much despite a 10% drop in gambling revenue. Find out why that might be, and why it's not necessarily a good thing.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 2, 2019.

Chris Hill: It's Monday, Dec. 2. Welcome to MarketFoolery. I'm Chris Hill. With me in studio, tanned, rested, and ready, because he was in the Bahamas over Thanksgiving, it's Dan Kline. Thanks for being here!

Dan Kline: Thanks for having me!

Hill: We have new data of interest to the casino industry. We have a new entry in the chicken sandwich wars. And, yes, we are kicking off our annual drive to expand the universe of holiday music.

But it's Cyber Monday, so that means we're going to talk about Black Friday. Shoppers spent nearly $7.5 billion online on Black Friday. It's the second largest day ever for online shopping in the U.S. Cyber Monday in 2018 was the biggest. We'll see. Let's just assume that today may top of that. But considering that there was concern going into this holiday season for retailers -- because of the way the calendar falls, it's a compressed shopping season -- things seem to be off to a good start, at least if you're a retailer with a robust online system.

Kline: What we don't know is what the brick and mortar sales are. That's really going to tell the tale. You're still looking at, I'll guess, 75% of overall sales. It was less than that last year, but, the numbers are definitely moving in favor of digital. But you're also seeing that Black Friday is still really important, but it's less important. It used to be you had Thanksgiving, some stores open on Thanksgiving, that took away a little bit of the crush of lines and the door-busters and all the excitement. Now, you have the weird, it's October 28th and we're announcing some doorbuster sales and some online sales. Everyone went really early this year. So far, it doesn't seem to have dimmed the enthusiasm. It does seem to have extended the season.

Hill: For the time that we've been doing this podcast -- in January, we'll be starting up our ninth year -- when it comes to this time of the year for retailers, we've seen the evolution of, some retailers opening up their stores early, to the point we're at today, which is almost like, retailers that are doing this well are victims of their own success, because shipping is so much faster, so many more people are Amazon Prime members, or whatever is the equivalent for Walmart, Target. Therefore, the big push for the Black Friday sale is followed up 24, 36 hours later by an email saying -- I'm just basing this on my email box -- "You missed the sale that we had 24, 36 hours ago. We've got even deeper discounts now!"

Kline: It's become very confusing for consumers. The one thing I'll say is, you have to track it, because there are different deals. You have to decide; do I want this specific robot vacuum? Or, do I want a robot vacuum? You have to know what the prices are and go into the season and accept that if you get a good deal, accept the exact item you bought, or maybe if the price goes down, you can get the difference, stop looking at other deals. If you've decided, "My big gift for the family is a 70-inch TV," and you woke up on Friday morning and you went to Target at 3am and you got in line and you got the $349 70-inch TV -- I'm making that up, but there were TVs in that price range -- don't look. If all you cared about was the screen size -- you didn't care about the brand, didn't care about anything else -- just stop shopping. Just be done with it. It's no longer possible to say the best deal on this is going to be when. The best deal on certain things might have been October 29th. But there are still good deals to be had. Obviously, Cyber Monday, some of it is repetitive. If you look at Amazon, they're doing similar sales across all of their devices. You really have from now until more or less Christmas to get a bunch of Echo Dots at a pretty good price. Is today's price going to be marginally better? It could be, but probably not.

You mentioned I was in the Bahamas. I was on a cruise, when you're going on a cruise, they send you every day, "You're not going to believe this deal and all the drink packages!" And it's always the same price. You don't even need the email, you can just go to their website and get it. So, it just becomes noise. I do think we could be in a situation where, in years to follow, it becomes so much noise that it doesn't move the needle. But this year, it did.

Hill: Two quick things before we move on to our next topic. One, has anything surprised you so far? Nothing has really surprised me from an overarching sense. The big players seem like they are off to a good start. The retailers that we've talked about on this show and on Motley Fool Money that have struggled going into the holiday season, we're not seeing any data that indicates that there's been some magic turnaround for Macy's or Kohl's. The only thing to this point that has surprised me is the degree to which devices are being pushed. You already named-checked the Amazon Echo. That's one. Maybe I shouldn't be surprised by that. But, the degree to which the tech companies are cutting prices to get these devices in our homes, it's a little bit more than I was expecting.

Kline: I think we're past the point where TV prices have just gotten phenomenal. Computer prices -- you could get a very good laptop for under $300. That doesn't mean you shouldn't buy a Mac Book or something, but if you're a casual computer user, that stuff is there. No, what surprises me is the media, and how often it's reported that online sales are bigger than brick and mortar sales, which is just not true. It's one of those things where we're seeing a shift in how people shop. There is definitely a lot more, let's call it mixed sales. That might be, I buy it online, pick it up in store; I might go into the store to look at it, but then order it -- maybe I'm buying my kid a bike, and I don't want to stuff it in the back of my Nissan Versa, and I want it delivered. There's just much more of a fluid model. And I don't want to say I'm surprised, but there's a pretty heavy level of consumer trust in delivery for companies outside of Amazon. Personally, I don't find that trust a great idea. My Walmart, Best Buy, Target delivery experiences during the year have not been super great. It doesn't make me super confident that during the Christmas rush, they're really going to get it together.

Hill: A month or two ago, we had these two divergent crystal ball predictions of what this retail season was going to be like. On the one hand, you had the National Retail Federation saying, "We think it's going to be in the neighborhood of 4% growth."

Kline: And they reaffirmed that yesterday.

Hill: And then we had some pretty respected economists pumping the brakes and saying, "I think it's going to be more like 2018, like a 2% growth kind of thing." If you had to bet right now, which way are you betting?

Kline: I'm going to say 4%. I would say the vast majority of Americans are confident enough to make bad decisions. I'm not talking about the people like you and I, who have budgeted out a holiday, and we're not going to go into the red to buy our kids things they don't really need. I'm talking about the people who tend to overextend themselves and spend a little bit too much. I think that group is confident that they're going to make more money, that they have the ability -- and they're right about that at the moment. Unless the economy takes a pretty big veer, people should be able to catch up in the next three months or so.

Hill: Gambling revenue in Macau fell nearly 10% in the month of November. Coming into the trading day, if you are a shareholder of Wynn Resorts or Las Vegas Sands or Melco, you were probably taking an extra gulp of coffee and bracing yourself for a bad day. Right now, these stocks are basically flat. Was that priced in? There was a time where that type of data would come out, and we would see those stocks going on sale to the tune of 5%, 8%.

Kline: It's happened before. I think there is a numbness to it, and an understanding that the trade impasse between the U.S. and China is hampering the growth of the Chinese middle class, which is part of an issue of who's going to go to these casinos. It's bumping up against this overall global, "Wait a minute, did we build too many casinos?"

I think actually, there maybe should be a little more panic than there actually is. It's one of those things where, if you hear the same bad news over and over again -- if your doctor keeps telling you have cancer, it doesn't really hurt as much as the first time.

Hill: That's a dark example!

Kline: [laughs] OK, that is. It's a terrible example, as well. In this case, I don't think we're going to see a quick fix for this market, because it really is based on the entire Chinese economy, which has bigger troubles than just the issues with the U.S. right now.

Hill: Yeah. Look, we are bottoms up investors. We focus on businesses and companies. But with this industry, I do think it's worth reminding ourselves that the macroeconomic trend that you just pointed out is really important -- not for every casino operator, but for the ones that have a presence in Macau and that have baked growth projections into the future based on Chinese people who like to visit casinos in Macau and spend money, more and more, month after month. It's probably worth pumping the brakes on that.

Kline: I'm nervous about the casino industry. And you know I'm a gambler. I'm a regular. I'm flying to a casino in North Carolina next week just to check it out. I am completely down with the industry. But I do think the oversaturation, and especially in the U.S., the increasing legality of sports betting takes away a reason to go to places where that was previously exclusive. You have an industry that has a finite amount of customers. Even in a very healthy economy, even if these Chinese casinos were doing well, there's still a limit to how many there can be. And until some shakeout -- which we've seen in Atlantic City, where five or six casinos are gone. That actually improves the market for the ones that survive, to a point. When there's only one or two left, the city doesn't become a draw anymore. But if you look at Vegas, there was a point where they were building too much. And we had some contraction, and now we have some growth again. Maybe we'll see that elsewhere in the world, like, Connecticut and Massachusetts have too many casinos, and you'll probably see some of them not make it.

Hill: Where in North Carolina are you going? Doing a little boots-on-the-ground research?

Kline: To be fair, maybe it's South Carolina. It's the Harrah's Council Bluffs. Matt Frankel, another regular on the podcasts, we are both Caesars rewards members, and Matt realized he was X amount of points away from the next tier. So, he looked and said, "It's only a $50 flight, why don't we go?" So, random work day, going to spend it on the ground in the casino.

Hill: Nice. Please report back.

Kline: It'll be, as far as the IRS is concerned, a business trip.

Hill: McDonald's is testing a crispy chicken sandwich in two markets. I'm sorry to report that neither of those markets is close to me. Houston, Texas and Knoxville, Tennessee. Today through the end of January, McDonald's is testing this out. I think if you're a McDonald's shareholder, you've got to be popping the champagne. This is the story of -- well, arguably, the story for McDonald's in 2019 is the sudden departure of the CEO. But right after that is earlier this year, where the independent board of franchisees sent a letter to management saying, "Priority No. 1 is a Southern-style crispy chicken sandwich so we can compete with Chick-fil-A and now Popeyes." And well done, franchisees, because they appear to be getting their wish.

Kline: Well done if it's well done. Chick-fil-A sets a pretty high bar. I have not tried the Popeyes chicken sandwich because I'm not going to wait in line for a chicken sandwich any more than the normal amount of time you wait in line for a chicken sandwich. But McDonald's has to get this right. And the reality is, they've struck out with premium chicken sandwiches. They also have not done a particularly good job in the past, I don't know, decade, since I was a kid, with event launches. Remember when it used to be like, "It's the Olympics!" McDonald's was the original pioneer in that seasonal, exciting, special offering. And it really petered out. They did that whole international menu earlier this year. If you weren't driving by a McDonald's, you didn't have a really good sense of what was going on. I do think this is good, but the sandwich had better be good, and that's not always easy to pull off.

Hill: Yeah, I'm trying to remember who it was. Maybe it was Burger King. Someone in the last year or two rolled out a new product that had been field tested, and it hadn't really worked.

Kline: I think a great example would be queso at Chipotle.

Hill: Yeah, that's what it was. Now it works, but the first time, they were like, "Hey, we tested it in these markets, and we're ready for the rollout." And nationally, it was a loss.

Kline: In my opinion, they asked some of the wrong questions. People liked the taste, but there was an expectation for appearance with queso that it still doesn't deliver on. They were missing the mark. I don't think McDonald's will do that. But tastes are subjective. Do you really believe the Popeye's chicken sandwich is better than a chicken sandwich at a nice restaurant that does chicken sandwiches? Probably not. But people have gone mad for it, so it becomes a viral thing, and more a status symbol than necessarily the quality of the chicken sandwich.

Hill: I absolutely agree with you that they need to get this right, but I also think that they don't need for this sandwich to be the best. They don't need it to be better than Chick-fil-A's. They just need it to be good enough so that, particularly on Sundays, when every Chick-fil-A is closed, people say, "All right, I'll go to McDonald's for that."

Kline: I feel like if you're McDonald's, you should really just google "How do I make Chick-fil-A chicken sandwich?" You can do that! You can find all the fast food and different ways to make it at home. And that really should be your flavor profile and what you're going for. I'm not saying copy it 100% exactly. Maybe 98% exactly. But there's clearly a standard for this. Chick-fil-A has created a reputation that it's a premium product which people will pay a premium price for. McDonald's has struggled with premium price. They may have to deliver a premium product at a pretty good but not premium price. It's a bit of a tightrope. But, yeah, if they can make this work, I think it'll be a driving hit for them.

Hill: Thanks for being here, it's always good talking to you!

Kline: Thanks for having me!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.