THE HPS FEBRUARY LETTER: FEAR-MONGERING, JOURNALISTIC MALPRACTICE, A WELCOMING SMILE, AND MORE

01-02-24: “2024 will mark the end of the post-pandemic economy.” Bloomberg Opinion: “Economists did not believe it was possible, but they’ve been wrong a lot lately, and in their defense, it has only ever happened once (or maybe twice) before: We may be witnessing that rare achievement known as a soft landing. The U.S. Federal Reserve’s latest forecast expects the inflation rate to slide back down to 2 percent without much job loss or economic slowdown. But before we celebrate this bravura monetary performance, or decide unemployment and growth aren’t sensitive to inflation or interest rates after all, allow me to offer two observations, one looking backward and one forward. First, the last few years have been highly unusual. Second, this year will mark the end of the free-lunch economy. The post-pandemic economy was marked by several unlikely factors. Shortages coming out of the pandemic sparked inflation, which was then exacerbated by unnecessarily expansionary monetary and fiscal policy. Just as the economy was poised to recover, in other words, policymakers gave it rocket fuel. All that stimulus money increased household savings. Savings-rich households kept spending, and firms desperate for workers faced an exceptionally tight labor market. Meanwhile the Fed not only pursued nominal zero rates, it tried to bring down longer-term rates and mortgages, and did so well after the pandemic had ended. The result was that even as rates increased, the economy stayed somewhat resilient. During the long period of low interest rates that preceded the post-pandemic, many firms, investors, and households locked in low rates. Thus they were relatively unaffected by rising rates. Now, as we head into 2024, it’s increasingly clear that America has spent its post-pandemic dividend. Households in the bottom half of the income distribution don’t have so much extra savings, and some are even going into debt. Debt-dependent firms and investors are approaching their maturity wall and have to refinance at a higher rate soon. HPS Analysis: What will follow the end of the post-pandemic economy? We have speculated about this for several years now, and in part the era we are entering will be defined by the maturity wall debt-dependent businesses face, and will either have to refinance at higher rates, become zombies, file for Chapter 11 protection while restructuring, or liquidate. Businesses that are not now debt-dependent will look to a future where making a net pre-tax profit will be dependent on managing their cost of doing business and not selling anything below their cost of doing business, including service labor. This is eminently doable but does mean some in the bicycle business will have to rethink their business models, including embracing the fact that their business is the brand. This is particularly important for bike shops to think through.

01-02-24: “China’s Xi Jinping warns of economic ‘winds and rains’ as recovery disappoints.” The Wall Street Journal: “Chinese leader Xi Jinping urged his countrymen to brace for more economic challenges in the year ahead, sounding a cautious note as a string of weak readings highlights the many headwinds facing the world’s second-largest economy. ‘On the path ahead, winds and rains are the norm,’ Xi said in a New Year’s Eve speech to the nation on Sunday, promising more efforts to shore up growth and address concerns over jobs and the cost of living. ‘Some companies are facing business pressures and some people are running into difficulties finding jobs and in their daily living.’ Xi’s remarks came hours after Beijing published data that offered fresh signs of weakness in the Chinese economy, piling pressure on the government to take bold new steps to fire up growth in the coming year. Official surveys released on Sunday suggest factory activity slid deeper into contraction in December, owing to thin order books at home and abroad, while the services sector struggled as consumers kept a tight leash on spending.” HPS Analysis: We have tried to inform our readers about the importance of the Chinese bicycle consumer market to the multinational bicycle brands and the global market. The quarterly financial reports of the public bicycle companies have reinforced our assumption, and while we still don’t know the exact amount of business being done in China, we do know it is substantial. Since China is the second-largest global economy, we think it is logical that it is the second-largest market for many of the multinational bicycle brands. A warning from the Chinese leader about ‘winds and rains’ in the Chinese economy in 2024 does not bode well for the financial reports from the multinational bicycle brands.” Note: HPS uses the U.S. CPSC definition of a “bicycle” as found in 16 CFR 1512.

01-03-24: “These are the five potential trouble spots that could knock the global economy off course.” Bloomberg: “The global economy was tested in 2023 as it rarely has been before: inflation and the most aggressive monetary tightening campaign in decades, wars in Europe and the Middle East, a festering real estate crisis in China, and the deepening rivalry between Washington and Beijing, which is forcing companies to rethink supply chains and security.” “The International Monetary Fund forecasts global growth of 2.9 percent in 2024, a whisker below last year. With two wars raging and some 40 national elections on the calendar, political developments will shape the year, especially as Donald Trump makes a go at winning back the presidency. But crucial economic stress points could upend the benign outlook.

  1. Will the American consumer capitulate?
  2. Can Beijing keep a lid on the housing crisis?
  3. European laggard
  4. Japan’s risky exit from negative rates
  5. Can India live up to its promise?”

HPS Analysis: We don’t often stray into the weeds of politics, wars, and international economic pain points, but the five trouble spots that Bloomberg has identified as having the potential to knock the global economy off course got our attention. We think the top three are of most interest to the global bicycle business. Number 1. “Will the American consumer capitulate?” The whole point of the Fed’s efforts to cool down Inflation impacts American consumers, and the difference between a recession and a soft landing will depend in great measure on how the job market holds up. The Fed’s latest projections see the jobless rate climbing to 4.1 percent by the end of the year. Unemployment claims, published weekly, are a leading indicator of labor market softness and should be watched closely. Number 2, “Can Beijing keep a lid on the housing crisis?” The world’s second-biggest economy is in the midst of a multiyear slowdown. Nomura Securities Co. estimates that 20 million apartment units were presold for which construction has been delayed or hasn’t started. Top officials have pledged to prevent a cascade of debt defaults by developers that will engulf the banking sector, and this may be the year of a full-blown government bailout. Number 3. “European laggard” refers to Germany being the worst performer among major economies in 2023. Higher energy prices and tight monetary policy, coupled with weaker global demand for its exports, caused a slight contraction in gross domestic product for the year. Germany is the largest bicycle market in the EU. China is an important market to the global bicycle business as is the U.S., meaning that the first three of the potential trouble spots are very important to the bicycle industry.

01-04-24: “Wall Street’s ambitions in China run into a rising firewall.” Bloomberg: “One of Wall Street’s biggest banks stopped briefing the head of its subsidiary in mainland China on sensitive company strategy, so the government can’t easily eavesdrop or demand details later. At nearby outposts for other U.S. and European banks, executives are spending tens of millions of dollars to locally house financial data and set up on-site internal controls. Some units are even looking at reshaping balance sheets to stand separate from parent companies. Those are just some of the many behind-the-scenes machinations taking place inside the Chinese arms of global financial firms as they try to navigate heightened tensions between the world’s two largest economies, as well as new rules in the name of national security. JPMorgan Chase & Co., Morgan Stanley, and HSBC Holdings Plc are among a long list of banking behemoths that have deep ties and long histories in China.” HPS Analysis: This is very disruptive to the Wall Street powerhouses who back in 2020 benefited greatly from China ending an era of frustration for global investment banks by loosening rules to let them take full control of the joint ventures they had set up with local partners in China. Western bank leaders had hoped to integrate their joint ventures into their mainstream businesses to compete harder for deals and trading in China’s growing economy. Four years later, their big banks’ local outposts are being left as underdogs against China’s domestic giants.

01-05-24: “U.S. unemployment has been under 4 percent for the longest streak since the Vietnam War.” National Public Radio: “The U.S. job market held up well in 2023 despite rising interest rates. Employers added 2.7 million jobs last year and unemployment remained under four percent throughout the year. The U.S. job market capped off a strong year in December, as employers continued hiring at a solid pace. Employers added 216,000 jobs last month, according to the Labor Department. The unemployment rate held steady at 3.7 percent. Unemployment has now been under four percent for almost two years, the longest streak of rock-bottom jobless rates since the Vietnam War.” “December’s job gains were concentrated in government and health care. Retailers added 17,000 jobs, suggesting a solid finish to the holiday shopping season.” HPS Analysis: As HPS understands the economic dynamics at play. U.S. unemployment being “under 4 percent for the longest streak since the Vietnam War” is the primary reason many economists are predicting a soft landing, as inflation edges toward two percent and the country avoids a recession. It is also an important factor in the probability that the bicycle business could see a modest increase in unit volume in 2024 over 2023. There is still a great deal of uncertainty, with the biggest unknown being consumer demand for sporting goods and specifically bicycles in Q2 and Q3 of the 2024 season.

01-05-24: “A major Chinese shadow bank has filed for bankruptcy on the grounds it was unable to pay its debts.” BBC: “On Friday, a Beijing court accepted the application from Zhongzhi Enterprise Group (ZEG), which has lent billions to real estate firms. Chinese officials launched an investigation into ‘suspected illegal crimes’ against the firm in November. It followed reports that ZEG had declared it was insolvent. The struggling group reportedly told investors in a letter in November that its liabilities – up to $64bn (£50.6bn) – had outstripped its assets, now estimated at about $38bn.” “ZEG is a major player in China’s shadow banking industry, a term for a system of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.” HPS Analysis: First, please do not confuse Zhongzhi Enterprise Group (ZEG) with ZEG, the large European bicycle dealer cooperative, ZEG. Second, the shadow banking industry is also well-established in Europe and North America. It is unregulated, as it is in China, and is much more willing to take financial risks in return for much higher interest rates on loans compared to the regulated banking sector. This may not be quite the white-collar version of a loan shark, but it does show the desperation of some of the Chinese real estate firms.

01-05-24: “Yellen declares U.S. economy has achieved soft landing.” Bloomberg: “Treasury Secretary Janet Yellen declared Friday that the U.S. economy had achieved a long-sought soft landing, a historically unusual event in which high inflation is tamed without significantly damaging the labor market.” “Government figures out earlier Friday showed job gains and wage increases in December both exceeded expectations. The report, which suggested continued upside for inflation, prompted investors to trim bets that the Federal Reserve would begin cutting rates in March.” “Yellen zeroed in on the latest wage data, which showed average hourly earnings rose 4.1 percent in the year through December. Given consumer inflation for the year is projected by economists to come in at 3.2 percent, that would mean wages exceeded price growth in 2023.” HPS Analysis: Treasury Secretary Janet Yellen is a respected economist. Two years ago she consistently rejected the gloomiest predictions for the U.S. economy, even as the central bank pursued an aggressive rate-hiking campaign through 2022 and 2023. While never ruling out a recession, Secretary Yellen said she saw a so-called soft landing for the U.S. economy. HPS appreciates her optimism. She has been mostly alone in declaring a soft landing, although several well-respected economists have also opined that the U.S. economy is on the cusp of a soft landing, which will be generally good news, bringing one certainty to an uncertain 2024.

01-08-24: “Vosper: compared to last year, 2024 doesn’t look so bad after all.” Bicycle Retailer and Industry News: “It’s been a tough year for a lot of people, both suppliers and retailers. If you’re one of the businesses that did well in 2023, congratulations, and more power to you. As for the rest of us (you know who you are), there’s some relief to be found in knowing 2023 is finally behind us. To get a sense of what happened on a nationwide basis, I reached out to Patrick Hogan, senior research manager for the PeopleForBikes Coalition. ‘2023 (consumer bike) sales have been at an all-time low for 20 of the last 24 months,’ as measured through Circana (formerly NPD), Hogan told me. ‘We’ve seen a steady decline in unit sales for adult non-electric bikes. Units have historically ticked down, while dollars tick up as the price tags get higher every year. This is especially true as more and more e-bikes enter the product mix.’” “The year is projected to come in at 12.8 million units, he says, for specialty and mass channels combined, a number that does not include the growing category of consumer-direct sales, which leaves out a huge piece of the e-bike market. In fact, it’s the weakest year for bike sales since PFB began keeping track of that data in 2015. Combine all-time low sales with all-time high product inventories, and it’s made for a 12-month series of body blows to many in the industry.” HPS Analysis: Rick Vosper has done his usual excellent job with this article. Patrick Hogan and PeopleForBikes (PFB) have provided all the data that is required to get a really good picture of the past year, and the decade from 2015 through 2024 based on the Global Risk and Opportunity Forecast as produced by S&P Global for PFB. But therein lies the rub. The first thing that jumped out at me was “… the weakest year for bike sales since PFB began keeping track of that data in 2015.” 2023 was most certainly a weak year for bike sales, but there are good, accurate bike sales figures readily available going back to the 1950s. The second thing that jumped out to the point that I stared at off and on for about a week, is the bar chart in the article (see below). I talked to a friend who works on bike industry data in Europe, and he mentioned the same thing I did. Both of us stared at and studied this bar chart and then did a rough trend analysis. In my uneducated but experience-based opinion, this would have been a better and perhaps a tad more credible forecast if it had been based on 20 or 30 years of sales history, which is still available.

01-15-24: “No, e-bike fires are not a ‘leading cause of death’ in NYC.” electrek: “It’s a new year and yet we’re facing the same old problem as last year: electric bike fear-mongering from irresponsible journalists painting an overblown risk of e-bike fires. This time we’ve got a doozie of a headline from Men’s Journal: ‘E-bike batteries a leading Cause Of Death in NYC.’ “The only problem is it’s wrong. As in, completely wrong. The premise is not even close to aligning with reality. This isn’t to say that fires from improperly constructed or tampered with electric bike lithium-ion batteries are a non-issue. It is an important matter requiring increased regulation, something NYC has already begun. The issue is a fatal one, even. New York City saw at least 17 deaths last year from fires started by faulty lithium-ion batteries. It’s worth noting that many, if not most, of these fires aren’t actually caused by e-bike batteries but rather electric scooters and e-motorbikes that firefighters don’t understand and thus lump into the e-bike category. But that’s a nuance lost on most people so we’ll ignore it for now and include all micromobility-related fires. Every one of those 17 deaths last year is a tragedy. And increased regulation to weed out the ultra-cheap, poorly made e-bikes can help. But to call it a “leading cause” of death in NYC is journalistic malpractice. In fact, in all of my extensive research, I can’t even tell you what rank it is because it is so far down the list of leading causes of death in NYC that the statistics don’t even go that low.” HPS Analysis:  Micah Toll, author of this electrek article is right on. The media is guilty of “journalistic malpractice” and “fear-mongering” if it over-hypes the actual risk, and ignores the legitimate New York City education campaign about the risks and dangers of non-complying lithium-ion batteries for micromobility devices, like e-bikes and e-scooters. What the Fire Department of New York has been saying is that lithium-ion battery fires are tragically causing fire deaths, but that the fatalities attributable to these fires can be reduced with community education and understanding of both the dangers and best practices for managing the hazardous, noncomplying lithium-ion batteries now in the hands of consumers, including recycling and getting them out of the public domain. (For reference, there were reported 386 deaths by homicide in New York in 2023).

01-16-24: “Scott Sports next to get multi-million loan from owner.” Bike europe, SEOUL, South Korea by Jo Beckendorff: “Scott Sports owner Youngone Corporation has granted its subsidiary a temporary financial injection of SFR 150 million (€160.6 million). The high inventory level throughout the bicycle sector is tying up so much capital that even profitable companies like Scott Sports are in urgent need of capital to continue their daily operations.” “According to the official Youngone statement, the loan will be used to support the company’s working capital, including the payment of the salaries of Scott Sport employees. Youngone has also appointed a dedicated controller to manage and supervise the process.” “Scott Sports, known for their bicycle and outdoor bands like Avanti, Bach, Bergamont, Bold Cycles, Dolomite, Lizard, Malvern Star, Powderhorn, Scott and Syncros, intends to use the capital injection ‘to support its business operations.’’’ HPS Analysis: The key issue pointed out by Jo Beckendorff is, “The high inventory level throughout the bicycle sector is tying up so much capital that even profitable companies like Scott Sports are in urgent need of capital to continue their daily operations.” It is true that Scott Sports is primarily a European brand, but there is distribution in North America, and the point that HPS is concerned about is that there is simply not enough capital in the whole of the global bicycle business for many companies to continue daily operations without either a loan from a parent company or a financial institution. Additionally, debt-dependent firms and investors in the global bicycle business are approaching their maturity wall and will have to refinance at a higher rate this year.

01-16-24: “Chinese Premier makes surprise economic growth disclosure.” The Wall Street Journal: “Chinese Premier Li Qiang gave global business elites a big hint on highly anticipated growth figures, as he sought to reassure them that investing in China is an opportunity, not a risk. Li delivered the message in an address at the World Economic Forum in Davos, Switzerland, as Chinese leaders seek to stem an exodus of foreign investment with growth slowing and relations deteriorating with the U.S.-led West. In doing so, he made an unusual early disclosure, saying that China’s growth last year is expected to be about 5.2 percent. The country is set to release the official gross domestic product figure for 2023 on Wednesday.” “The question is whether global firms are buying it. Foreign businesses and investors have been souring on China’s huge economy, data show, with billions of dollars fleeing Chinese stocks and bonds through most of last year. Foreign direct investment in China was negative in the third quarter, with outflows of capital exceeding inflows by $11.8 billion, implying that companies were yanking profits or disinvesting from China altogether. That marked the first negative quarterly outflow of direct investment recorded in balance-of-payment data that stretch back to 1998.” HPS Analysis: U.S. and European businesses are attempting a de-risking strategy that doesn’t require extensive decoupling from Chinese sourcing which has been deemed to be neither reasonable nor feasible. What this boils down to is shifting some production to Vietnam, Cambodia, Thailand, and Taiwan, without totally withdrawing and relying on China for component parts and subassemblies. Meanwhile, Taiwanese and U.S. companies are pulling capital and profits out of China. 

01-16-24: “Pandemic darling.” Bloomberg The Brink: “E-scooters and e-bikes are emerging as the latest pandemic darlings to tumble into a wave of distress as cutthroat competition weakens providers and rising costs damp consumer demand. Bird Global, which filed for bankruptcy last month, is the latest victim. The U.S. operator struggled to turn a profit, losing market share amid rising prices and waning demand after workers returned to the office, according to the filing. But the list of struggling providers is much longer. In Germany, where many of these startups emerged, e-scooter manufacturer UNU is undergoing an insolvency process, while executives at Tier Mobility spent months hunting for emergency funding before merging with peer Dott last week. ‘Some companies might have overspent in technology, expansion, and hiring when funding was cheap,’ said Kersten Heineke, a Frankfurt-based partner in McKinsey. ‘What is key is how quickly companies were able to switch gears from being growth-focused to achieve profitability as soon as possible.’’’ “Stricter safety regulation is also impacting e-scooter firms. In September, Paris became the first European capital to outlaw the devices following a referendum.” “It’s not going much better for e-bikes. KKR’s Accell Group, which defines itself as ‘the European market leader’ is grappling with cash burn, while its debt is failing to attract demand in the secondary market. In the Netherlands, manufacturer VanMoof went bankrupt in July. While many in the U.K. took to cycling during the pandemic lockdowns, the demand for e-bikes stalled in 2023, according to a survey by researcher Mintel.” HPS Analysis: It is instructive to get Bloomberg and McKinsey’s reading of the micromobility market. HPS agrees with Heineke that, “The next 18 months are going to be a defining period when most of the consolidation will happen.” Heineke goes on to opine, “You are starting to see some winners, including those who have achieved profitability, those who have already announced mergers, companies which have different lines of business aside from e-scooters and e-bikes, or those focused on niche geographies.”

01-17-24: “How will store of the future look?” Sourcing Journal: “Physical retail is here to stay, but the shops of the future are upgrading the in-store experience. At the National Retail Federation’s Big Show in New York City this week, industry experts and executives outlined what they see as a new model for the store of the future, one that emphasizes experiential elements and a focus on community.” “In general, shoe brands appear to be opting for newer, smaller concept stores that aim to blend a showcase of top-tier products with unique experiences catered to specific regions. They’re interesting because they’re smaller square footage, so they’re much more productive, and they are hyperactive in that you can use those stores to ship to the consumer locally. Other retail leaders emphasized the need for stores to build connections with their local communities. HPS Analysis: Brand was also mentioned in the article, and the fact that consumers know your brand goes right to the point that local bike shops ARE the brand in the minds of their local communities, and are the brand the local consumer knows. The fact that the National Retail Federation (NRF) is making the statement that “physical retail is here to stay” is significant, coupled with declaring that “… the shops of the future are upgrading the in-store experience.” Omni-channel has fallen out of popularity as a descriptor, but it tells the story of the retail methodology that the vast majority of bike shops need to migrate to, along with a major change in dropping the attitude and adopting an inclusive, welcoming smile for everyone that walks through the door.

01-17-24: “Retailers are stuck in a cycle of constant sales.” Marketplace: “Retail sales numbers were up 0.6 percent in December, the month that closed out the 2023 holiday season. Last year, holiday promotions started as early as the day after Halloween. Meanwhile, we just came off Martin Luther King weekend that also came with deals. Next up, there will be sales for Valentine’s Day, President’s Day, and every ‘Day’ after that. We’ve even gotten to the point where sales inspire sales. When Amazon has Prime Day, Target has Target Circle Week and Walmart has Walmart Plus Week. So the question is: if everything’s always on sale, is it actually ever on sale? And how did we get to this 24/7 sales environment?” HPS Analysis: While the rest of the retail world got to the 24/7 sales environment before the pandemic, and the whole of the bicycle industry joined the constant sales and discounting retail environment at the end of 2022 as the direct result of rising retail prices during the pandemic and an extraordinary glut of inventory, we are now stuck in a cycle (no pun intended) of constant sales. Consumers enjoy getting something they want on sale. MSRP (Manufacturers Suggested Retail Price) was what the mainstream brands used to control the American market, and what kept retail pricing in check for the better part of several decades. They may try to bring MSRP back. It will be a question of whether consumers will let them. Marketplace tells the story of Ron Johnson. In the early 2010s JCPenney hired a new CEO, Ron Johnson, a former VP at Target and Apple. Under Johnson, JCPenney made a bunch of changes, the biggest one being doing away with sales. Johnson figured consumers would rather pay a consistent, low price instead of having to deal with coupons, markdowns, and sales. He was wrong. Shoppers were confused about the brand, so they stopped shopping. Sales plummeted, Johnson was fired, and JCPenney went back to markdowns and sale prices. During the pandemic the bicycle brands were able to double MSRP, followed by roughly eight months of drastic discounting and sale pricing. When inventory ratios stabilize, will brands be able to get away from the 24/7 sales environment?

01-17-24: “Holiday sales hit new record – so do full-year sales.” Chain Store Age CSA: “Despite inflation and high interest rates, consumers ramped up their spending in December, helping to end the holiday season and full year on an upbeat note. Core retail sales during the 2023 holiday season grew 3.8 percent over 2022 to a record $964.4 billion, according to U.S. Census Bureau data. The results easily met the National Retail Federation’s forecast that holiday sales would increase between three percent and four percent over 2022 to between $957.3 billion and $966.6 billion. Sales for the full year grew 3.6 percent over 2022 to a record $5.13 trillion.” “The holiday total, which is not adjusted for inflation, includes online and other non-store sales, which were up 8.2 percent at $276.8 billion.” HPS Analysis: American consumers kept spending in 2023, just not on bicycles. According to this report’s data from key sectors for the two months combined on an unadjusted year-over-year basis, electronics and appliance stores were up 9.3 percent, the highest of the seven categories. Sporting goods stores were up 0.3 percent, the lowest of the seven categories.

01-18-24: “Macy’s to cut more than 2,300 jobs, about 3.5 percent of its workforce, and close five stores.” CNBC Retail: “Macy’s on Thursday said it will cut about 3.5 percent of its workforce and close five of its namesake mall locations as the legacy department store moves to trim costs and turn around slowing sales. The move will affect approximately 2,350 positions across its corporate office and stores, company spokesman Chris Grams said.” “The company notified employees about the layoffs on Thursday and the last stores that will be shuttered are located in Arlington, Virginia, San Leandro, California; Lihue, Hawaii; Simi Valley, California and Tallahassee, Florida. The stores will close in early 2024.” “Macy’s is in the middle of an effort to turn the roughly 166-year old department store into a brand that resonates with consumers who are shopping online, looking for value, and turning to competitors including e-commerce retailers such as Amazon and Shein, big-box players such as Target and off-price names such as TJX-owned T.J. Maxx, instead of its stores.” “Macy’s has 723 locations across the country as of Oct. 28, the end of the most recently reported quarter. The majority of those, roughly 500, are its namesake stores, followed by 158 Bluemercury stores and 56 Bloomingdale’s stores.” HPS Analysis: Macy’s is a legacy department store retailer with a 166-year history. It is taking on every retail format that has chipped away at its legacy over the last 30 years and become an online player in the bargain. Macy’s was in the business news at the end of January for turning down a multimillion-dollar buyout offer that analysts concluded was all about the land and buildings Macy owns, and not the retail business. This alone was a huge clue to the challenge Macy’s has in pulling off its multi-channel retail strategy.

01-18-24: “Shipping costs to increase more than 5.9 percent in 2024.” Logistics Management: “To no one’s surprise, the big two carriers raised rates for 2024, announcing an identical 5.9 percent general rate increase (GRI). It was smaller than recent increases but make no mistake, it will drive up the cost of doing business for millions that rely on shipping. Hidden fees, changing requirements and added surcharges drive actual increases well beyond the reported rate. Reveel’s analysis finds the average customer will pay 7.72 percent more with UPS and 8.17 percent more with FedEx. HPS Analysis: Ocean freight rates dropped like a rock at the end of 2023. The big carriers raising rates in 2024 is no surprise as they attempt to gain some degree of profitability after, in HPS’ opinion, gouging the market during the pandemic. HPS will watch this situation carefully, and we urge ocean shippers to talk to their carriers and brokers and work at locking in the most favorable rates and routes possible for 2024. Fortunately, the Suez Cannel isn’t an important route for North America, but the Panama Canal is, and there is an East Coast longshoremen’s strike almost certain in Q2. West Coast ports will be loaded as will intermodal routes to the Midwest and East Coast.

1-19-24: “Davos sees nothing normal about the global economy for 2024.” Bloomberg Economics: “The world is finding an uneasy equilibrium with a more benign economic backdrop overshadowed by a panoply of geopolitical risks, according to the final Davos panel of 2024. The prospects of subsiding inflation and a pickup in global trade offer some encouragement for investors despite the backdrop of war and populism, European Central Bank chief Christine Lagarde and peers agreed, as the World Economic Forum drew to a close. ‘Normalization – that’s what we have begun to see,’ she told the audience in the Swiss resort town, before adding an important qualifier. ‘It is not normality that we’re heading to,’ she added. The six-member panel was charged with summarizing the mood in Davos after a week where participants tended to put a brave face on the global outlook, accentuating the likelihood that a deep recession will probably be avoided despite unprecedented monetary tightening to bring inflation under control. HPS Analysis: The overriding theme at Davos was uncertainty. Several members of the final panel agree that the world economy is seeing more normalization, but it is clearly not normality that the world is headed toward in 2024. The global economy was challenged during the pandemic when global trade was disrupted and the J.I.T. (Just In Time) systems were totally blown up and replaced with J.I.C. systems (Just In Case) that led to over-capacity, excess W.I.P. (Work In Process), and finished goods inventories that are still disrupting supply chains and markets. The U.S. economy beat down inflation and just might make a soft landing, but recession still looms as uncertainty grips the world’s economies.

01-19-24: “Sports Illustrated announces major layoffs, putting the brand’s future in jeopardy.” The Wall Street Journal: “Sport Illustrated announced major layoffs on Friday, according to the publication’s union, throwing the future of the legacy sports magazine into question. The union said it was notified by the magazine’s publisher, the Arena Group, that it intended to ‘lay off a significant number, possibly all’ of Sports Illustrated’s unionized staffers because Arena had lost its license to publish the magazine.” “Arena said in a regulatory filing that it lost the license to publish Sports Illustrated after it missed a $3.8 million quarterly payment to its licenser, Authentic Brands Group.” “Arena said it was in discussions with Authentic Brands and would continue to publish Sports Illustrated until the matter was resolved.” HPS Analysis: The union reports more than 80 unionized employees at Sports Illustrated. This situation shows again the extreme difficulty publishing has in keeping pace with the transition to digital media and the changes in advertising. I thought Sports Illustrated had figured it out when they chose Martha Stewart as their swimsuit model last year.

01-22-24: “The one thing all great bike shops know.” Bicycling: “Local Bike Shops are a cycling institution. They’re up there with the cycling club or the group ride as one of the handful of concepts that are core to riders of all kinds. But while other things in cycling have moved forward, many shops seem to be stuck in the past. The basic tenets of bike shops haven’t changed much since I first worked in one in the early 2000s. The business model is the same — one part as a dealer of bikes, gear, and apparel, and the other as a service department that fixes almost anything with two wheels. What changed is how riders buy their bicycles and cycling gear. Even though I believe buying a bike in person is a good idea, especially if you’re unsure of sizing or simply want to throw a leg over it before laying down the money, I acknowledge that many of us buy bikes from direct-to-consumer brands. While this buying model has pricing advantages, it also has drawbacks, the obvious being not knowing if you’re buying the right size and difficulty in finding spare parts, especially proprietary ones. But a big disadvantage of purchasing a consumer-direct bike is one that shouldn’t exist and that I’ve experienced often: the resentment you feel when you walk into a shop with a bike you bought online.” “It’s off-putting to get a lecture or a snide remark from mechanics or the shop’s owner simply because the bike wasn’t bought from them. It’s bewildering as a consumer and it’s self-defeating for the shop itself.” “The death of the local bike shop has been foretold over and over. But the good ones are still here. And they keep thriving. They do so, in large part, because they respect that there’s still one thing that can’t be ordered online, great service.” HPS Analysis: We recommend this article to you. We encourage bike shop owners, managers, and employees to get past their prejudices, drop the attitude, and replace it with an open mind, welcoming smile and attitude for everyone who walks into the shop. Great service goes beyond the service shop and the service department staff. Great service is all about attitude and truly wanting to help customers and serve their needs no matter where they may have purchased the bicycle they own. They are coming to you for something they need, and that’s the magic that can create a connection that can last a lifetime.

01-22-24: “Investment bankers are starting to see Mexico as a money spinner.” Bloomberg Markets: “For years, Mexico was an afterthought among investment bankers, a perennial underperformer overshadowed by Brazil. Not anymore. Suddenly there’s growing conviction on Wall Street that the country is on the cusp of a breakout if it can avoid squandering the opportunity. Bank of America Corp., Morgan Stanely, and Goldman Sachs Group Inc. all predict investment banking revenue from Mexico will jump this year. Banco Santander SA, the top local bond underwriter last year, will invest $1.5 billion to beef up technology for retail clients. JPMorgan Chase & Co. CEO Jamie Dimon said his bank has ‘doubled or tripled’ capital in the country over the past six years and sees a ‘great’ outlook for growth.” HPS Analysis: This is most welcome news. Finally the “real” money in the U.S. is taking capital investment for manufacturing and distribution in Mexico seriously. This is the BIG piece that has been missing up to now. The Chinese have already established manufacturing beachheads, but this is an opportunity for European and Taiwanese entities with the know-how in bicycle manufacturing to find financial partners and establish manufacturing inside North America.

01-24-24: “Just-in-time makes a comeback.” The Wall Street Journal Logistics Report: “Retailers are reviving an old playbook for managing inventories. Companies have largely brought inventories back in line with sales after struggling the past four years to find a sweet spot between holding enough merchandise and not too much. The WSJ Logistics Report writes that retailers now say they are replenishing items rather than building stockpiles. The shift marks a return to the ‘just-in-time’ inventory management strategy many companies had employed before pandemic-driven product shortages and volatile shifts in consumer demand prompted a switch to a ‘just-in-case’ approach. Executives at apparel seller Tailored Brands, furniture maker IKEA, and big-box retailer Walmart, say their supply chains are running smoothly, allowing them to better predict lead times and forecast customer demand. But logistics experts caution retailers could change back if supply-chain turmoil gets worse amid disruptions at the Suez and Panama canals.” HPS Analysis: It is about time! Purchasing and manufacturing best practices are finally getting re-established after the J.I.C. (Just In Case) system was made necessary by the disruptions of the pandemic years. There may be better forecasting methods coming online, but they are all improved front-ends for J.I.T. supply chain systems.

01-25-24: “U.S. economy grew at 3.3 percent rate in latest quarter.” The New York Times: “The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled and a widely predicted recession never materialized. Gross domestic product, adjusted for inflation, grew at a 3.3 percent annual rate in the fourth quarter, the Commerce Department said on Thursday. That was down from the 4.9 percent rate in the third quarter but easily topped forecasters’ expectations and showed the resilience of the recovery from the pandemic’s economic upheaval. The latest reading is preliminary and may be revised in the months ahead.” HPS Analysis: While the sporting goods sector and the bicycle business haven’t benefited from the strength in 2023, and will by all accounts continue to struggle in 2024, it is a strong U.S. economy that holds the promise for a slow and steady recovery for the bicycle business going forward.

01-25-24: “Pacific Cycle recalls e-bike models because of fire hazard.” Bicycle Retailer and Industry News – WASHINGTON D.C.: “Pacific Cycle is recalling two e-bike models because the wiring harness that manages the lithium-ion battery charging was improperly assembled and can overheat and catch fire. There have been three reports of the battery catching on fire, resulting in one injury of second-degree burns. About 1,700 Ascend Cabrillo and Minaret e-bikes are affected by the recall and consumers should stop using and keep them unplugged before receiving a refund.” “The e-bikes were sold at Bass Pro Shops and Cabela’s stores nationwide and online from January 2023 through November 2023 for between $1,400 and $1,500.” HPS Analysis: Product safety recalls are always troubling. In this case there are no reported fatalities, although there are injuries. This product recall case stands out to HPS because it is proof of the position the NBDA has taken based on the advice from HPS to advocate for testing, certification and listing for UL 2849 and UL 2271 by a N.R.T.L. (Nationally Recognized Testing Laboratory). A N.R.T.L. is required to perform four unannounced inspections of the component manufacturers that make up the electrical systems tested for compliance to UL 2849 throughout the year after the testing of the system is successfully completed and the e-bike electrical propulsion system is certified. Some in the industry have argued that only the battery should be tested, and others that the testing and certification should be done by an authorized testing lab that has no requirement for unannounced inspections after the initial testing. HPS has advocated for testing of the whole system under UL 2849 by a N.R.T.L. to make sure the components, like the wiring harness, are tested and the manufacturer is visited and inspected after the initial testing to make sure they are producing the same level of quality that was tested as part of the complete system. This recall of a population of 1,700 e-bike systems has resulted in three fires and one injury. You do the math.

01-26-24: “REI lays off more than 300 employees as it warns about rocky 2024.” Sourcing Journal: “CEO Eric Artz notified employees in a Jan. 25 letter that the outdoor retailer would lay off 357 people across its organization, including 200 corporate employees at its headquarters, and 121 in its distribution centers. The news follows Nike’s December announcement to ‘streamline’ its organization and cut costs, partly via layoffs. Google and Amazon have also announced fresh job cuts for 2024 .In announcing the layoffs, Artz described an ‘increasingly challenging’ state of REI’s business and the outdoor industry at large, and said he expects these challenges to persist this year. He projects 2024 revenues to be down compared to 2023. ‘As you know the state of the business – and our industry – has become increasingly challenging and highly promotional,’ Artz wrote, adding that the outdoor specialty retail channel has been in decline for four quarters. ‘While we were able to outperform this trend for much of the last year, it caught up to us in Q4 and we now expect conditions to remain very challenging throughout 2024.’“ HPS Analysis: My compliments to Eric Artz for his honesty about the situation. I have had to lay off employees and terminate employees in my past experience as a company executive, and I didn’t like it. The layoffs are just a symptom of a financial problem that goes to the capital strain on REI that is probably attributable to excess inventory in the face of reduced and declining revenue. I am troubled by his prediction that: “we can expect conditions to remain very challenging throughout 2024.”

01-30-24: “8 logistics trends to watch in 2024.” Supply Chain Dive: “Risk is sparing no mode of transportation in 2024, as geopolitics, labor talks, freight demand and capacity fluctuations will continue to alter supply chain strategies.” “While conversing with several experts on the risks ahead for the year, Supply Chain Dive rounded up eight logistics trends to watch in 2024:

  1. Red Sea crisis threatens rates.
  2. Panama Canal restrictions add complexity.
  3. East Coast port labor talks loom large.
  4. West Coast ports may experience heightened traffic.
  5. Overcapacity remains a problem for trucking companies.
  6. Labor clashes a risk for parcel delivery networks.
  7. Air forwarders eye growing e-commerce activity.
  8. Forwarders wary of geopolitical risk.”

HPS Analysis: So much for “normalization” in the face of uncertainty. Freight volume of all types is down, but freight rates are increasing again, primarily because of the eight disruptions listed above. The Red Sea crisis affects primarily European ocean routes. However, the Panama Canal restriction, because of a drought and low water levels, effects ocean shipment to the Eastern ports of the United States. East Coast port labor slowdowns and a possible strike make the East Coast port problem worse. More ocean freight can be routed to the West Coast ports and more containers can be routed to stack trains to the Midwest and East, but the railroads are reducing service and laying off train crews. Shipping by truck is still viable. Parcel delivery services have increased rates as they are laying off people and there are more labor problems coming up this season that might interfere with shipping service. Air forwarders are increasing rates and reducing service, and forwarders are dealing with a great deal of uncertainty and avoiding as much “risk” as they can, which will affect both shippers’ cost and service.

Contact Jay Townley: jay@humanpoweredsolutions.com