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Don't See A Scenario That Moonves Stays At Company: Sweeney · Bloomberg Intelligence

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• 0:33
  Speaker 1: of CBS they are down more than a six percent
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  Speaker 1: after this ruling by the Delaware judge. A victory for
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  Speaker 1: Shari Redstone, who happens to be a CBS director and
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  Speaker 1: president of the of her family's movie theater operator, National Amusements.
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  Speaker 1: Of course, they're pushing for a merger with CBS and
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  Speaker 1: National Amusements controls viacom. Here to tell us more about
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  Speaker 1: it all is Paul Sweeney, Director in North American Search
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  Speaker 1: for Bloomberg Intelligence and Internet and media analyst for Bloomberg Intelligence.
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  Speaker 1: Paul uh, Is this the conclusion do you believe of
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  Speaker 1: Leslie Moonvest's career at CBS. Well, it certainly could be.
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  Speaker 1: I think we still have probably six months of litigation
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  Speaker 1: back and forth between the you know, like all the
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  Speaker 1: parties here, but this was a big blow for less
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  Speaker 1: uh and for the board that was trying to reassert
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  Speaker 1: some level of UH influence and and versus its control
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  Speaker 1: shareholder National Amusements here and and UH that initial uh
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  Speaker 1: opportunity for them really took a big blow here. So, UM,
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  Speaker 1: this is something that I think, you know, the next
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  Speaker 1: the ball is in the court of Sherry Redstone and
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  Speaker 1: National Amusements and what will they do with the board,
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  Speaker 1: what will they do with management including less Um? And
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  Speaker 1: I think with the stock down six percent kind of
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  Speaker 1: tells you that investors think a deal is coming and
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  Speaker 1: merger is going to happen, and it won't include less Moonves. Yeah.
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  Speaker 1: So so basically shares down more than six percent on
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  Speaker 1: the expectation that less Moonves will exit from the helm
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  Speaker 1: of CBS, that Viacom and CBS will merge, with a
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  Speaker 1: lot of shareholders of CBS don't want um just can
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  Speaker 1: you bring back the memory of y CBS is so
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  Speaker 1: y CBS showholders are against this merger at this point.
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  Speaker 1: I think CBS shareholders view Viacom as a flawed asset. Um.
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  Speaker 1: It's you know, it's a company that's been struggling. Um.
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  Speaker 1: The cable networks are particularly prone to chord cutting because
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  Speaker 1: the the MTV networks, the Nickelodeon networks and all those
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  Speaker 1: they tend to uh you know, be targeting younger demos,
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  Speaker 1: and the younger demos are spending a less and less
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  Speaker 1: time with television Number one and number two. The film studio,
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  Speaker 1: the paramount film studio has really been underperforming. So if
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  Speaker 1: you're CBS shareholder, you say, g my, CBS Stories working
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  Speaker 1: pretty well, the CBS networks doing well, the Showtime networks
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  Speaker 1: doing well. Um, and I'm pretty happy with my CBS investment.
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  Speaker 1: I don't want to uh see CBS buy Viacom because
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  Speaker 1: I just don't think they're a great company, and I
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  Speaker 1: think they're gonna be dilutive to my growth rate going forwards.
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  Speaker 1: So I think most investors, and I think less Moon
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  Speaker 1: of Us was saying, listen, if you're going to force
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  Speaker 1: us to merge with Viacom, it has to be on
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  Speaker 1: our terms at CBS. I E our financial terms. We
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  Speaker 1: want to we don't want to delude our shareholders, and
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  Speaker 1: more most importantly, it has to be on our management terms.
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  Speaker 1: We want our management team to run the combined company.
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  Speaker 1: And that management issue is really the stumbling block here. Paul,
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  Speaker 1: maybe just outline what was CBS trying to do tactically. UM.
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  Speaker 1: I think well, CBS was trying to invoke a part
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  Speaker 1: of their by laws, which is very unique to their
• 3:35
  Speaker 1: by laws, which allows them to convene a special meeting
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  Speaker 1: today of the board and to declare a one time
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  Speaker 1: stock dividend which would dilute the ownership the voting ownership
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  Speaker 1: of n A I from about eight percent down to
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  Speaker 1: sevent effectively Nick negating the control that Sherry Redstone would have.
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  Speaker 1: And that's what got blocked. You know, when you came
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  Speaker 1: in here, you said that Sherry Redstoree and less Moonves
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  Speaker 1: can never work together again, period the end. So even
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  Speaker 1: if there's some kind of win on this appeal, uh,
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  Speaker 1: you know, unless they actually can strip control from Sherry Redstone,
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  Speaker 1: less moon Vous is out. I think so, I think
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  Speaker 1: the I don't see a scenario here where, uh, this
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  Speaker 1: management team at CBS, this board at CBS can ever
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  Speaker 1: come back and work with Sherry Redstone and National Amusements.
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  Speaker 1: I just think that, you know, the trust, the relationships
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  Speaker 1: have probably been irrevocably broken here with these legal maneuvers.
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  Speaker 1: So I'd like you to put on your psychology hat
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  Speaker 1: because I know that you have one. And talk a
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  Speaker 1: little bit about Sherry Redstone when she reads this result,
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  Speaker 1: when she hears the court ruling, is she jubilant or
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  Speaker 1: I mean it's sort of a tricky thing because she
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  Speaker 1: also owned shares in CBS. Yeah, yeah, it's it's I
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  Speaker 1: I think she is. I think she's um. She's probably
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  Speaker 1: as a control shadow of both companies, is really playing
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  Speaker 1: the long game here. And the long game for her
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  Speaker 1: and for her family's interest into two companies is to
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  Speaker 1: in her mind, to put the company together to be
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  Speaker 1: a larger company with more global scale, more resources to
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  Speaker 1: compete not just against the Comcast and the Disneys of
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  Speaker 1: the world, but against the the Googles and the facebooks
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  Speaker 1: and the Amazons and the Netflix. Is um and that
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  Speaker 1: is that that is a theory that is prevalent in
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  Speaker 1: the media world today. We're seeing lots of consolidation again,
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  Speaker 1: most notably with Disney looking at twenty one century Fox,
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  Speaker 1: Comcast circling around those same assets. Um so a T
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  Speaker 1: and T, you know, trying to close its acquisition of
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  Speaker 1: Time Warners. So her strategic rationale is absolutely consistent with
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  Speaker 1: what's going on the marketplace. Uh, it's just simply that
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  Speaker 1: the you know, one of the two parties in this case, CBS,
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  Speaker 1: doesn't want to do the deal on her terms. Would
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  Speaker 1: it be possible for CBS under Leslie Moonvest to initiate
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  Speaker 1: a large acquisition, Uh no, because, um, you know, Sherry Redstone,
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  Speaker 1: as again control shareholder, would not allow it. And that's
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  Speaker 1: one of the reasons over the years, Uh, CBS hasn't
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  Speaker 1: really done any large acquisitions because, um, you know, they'd
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  Speaker 1: be a would have to get the approval of of
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  Speaker 1: of National Amusement and Sherry Redstone, and I guess they
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  Speaker 1: felt like that they never had that support. So, you know,
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  Speaker 1: I think the the only bowl case scenario left for
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  Speaker 1: CBS is that that they win their you know, legal
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  Speaker 1: case against National Amusements, um, and they are left as
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  Speaker 1: a standalone company with National Amusements maybe even diluted down,
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  Speaker 1: in which case then the story becomes very interesting for
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  Speaker 1: CBS shareholders because they can either uh you know, just
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  Speaker 1: grow with the existing management team and let the management
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  Speaker 1: team you know, kind of deal with it, or um,
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  Speaker 1: you know, they become a acquisition candidate of their own.
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  Speaker 1: But that assumes that they you know, kind of went
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  Speaker 1: all on appeals going forward. Here, I'm wondering if you
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  Speaker 1: could just extrapolate out into the future, and let's talk
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  Speaker 1: about Sherry Redstone strategy. You're saying that she's betting on
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  Speaker 1: a stronger combined company between Viacom and CBS. Viacom shares
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  Speaker 1: up about one percent on this news. Is she right? Well? Um,
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  Speaker 1: I don't. It remains to be seen the the assets here.
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  Speaker 1: One could argue that even if you emerge CBS and
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  Speaker 1: Viacom together, it's still not a great company. It's it's
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  Speaker 1: not a Walt Disney, um. You know, and and and
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  Speaker 1: you you take a look at some of the other
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  Speaker 1: media moguls in the marketplace. Jeff Bukas at Time Warner,
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  Speaker 1: Rupert Murdoch at twenty one Century Fox. They've effectively thrown
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  Speaker 1: in the towel and agreed to sell their companies because
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  Speaker 1: they recognize that, you know, going forward over the next
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  Speaker 1: five to ten years, you know, how do I even
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  Speaker 1: think about compete against Amazon and Google and Facebook and
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  Speaker 1: Netflix and all these companies in the Apple um. So,
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  Speaker 1: you could argue that even if you emerge these two companies,
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  Speaker 1: you're still left at a competitive disadvantage, you know, kind
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  Speaker 1: of going forward. And I do want to note it
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  Speaker 1: was up one percent that shares of Viacom, but they
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  Speaker 1: are now down about a half percent, so right, and
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  Speaker 1: the shares of CBS, they're down about the six and
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  Speaker 1: a half percent. Is there any likelihood just quickly, uh,
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  Speaker 1: Paul less moon Best could have a second career. I
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  Speaker 1: mean he's going to be a very attractive candidate for
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  Speaker 1: any position, absolutely, and uh, he's gonna have a lot
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  Speaker 1: of money in his pocket as well. So, um, you know,
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  Speaker 1: we've we've seen that in the past. Um, you know,
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  Speaker 1: Jeffrey Katkatzenberg has been able to raise some money to
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  Speaker 1: kind of get into back into the business on the
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  Speaker 1: digital side. What we're seeing here is, I think, you know,
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  Speaker 1: we've seen a lot of media execs who have left
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  Speaker 1: kind of the big conglomerates kind of go off on
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  Speaker 1: their own and you know, kind of try to figure
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  Speaker 1: out ways to make money in the digital side of
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  Speaker 1: the media business. Paul Sweeney, we will be having you
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  Speaker 1: back to discuss this more in depth, I'm sure as
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  Speaker 1: it progresses. A really interesting and fascinating and frankly surprising decision.
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  Speaker 1: Paul Sweeney, Director of North American Research for Bloomberg Intelligence.
• 8:39
  Speaker 1: The shares of oil refiners are surging today a delic
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  Speaker 1: US holdings up more than five percent, CVR Refining a
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  Speaker 1: gain of nearly four percent, Holly Frontier adding more than
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  Speaker 1: five and a quarter percent. Here to tell us more
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  Speaker 1: about the refining industry is Peter Polican. He is the
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  Speaker 1: U S Energy analyst for Bloomberg Intelligence. He joins us
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  Speaker 1: here in our and THREO studios. Peter, thank you very
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  Speaker 1: much for being here. Maybe you could just start up
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  Speaker 1: by explaining that US refining capacity is not necessarily aligned
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  Speaker 1: with the kind of shale oil that exists in abundance
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  Speaker 1: in the United States. Yeah, that's correct. I mean a
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  Speaker 1: lot of people when they think about, um, the explosion
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  Speaker 1: of shale and US independence, they don't realize that oil
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  Speaker 1: by itself can't is not really terrible useful. It needs
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  Speaker 1: to be refined. And the US refining complex, which is
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  Speaker 1: the largest and biggest in the world, was built prior
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  Speaker 1: to shale. So what that means is it was actually
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  Speaker 1: built in a world to process a very different type
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  Speaker 1: of crew to heavier type of crude than what shale is.
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  Speaker 1: So now reaching the point where these refiners have tried
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  Speaker 1: to benefit as much as they can from the onslaught
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  Speaker 1: of shale, but it's reaching a maximization saturation point. So
• 9:50
  Speaker 1: now that crew that's the US is producing needs to
• 9:53
  Speaker 1: find a new home. So you're seeing the spread between
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  Speaker 1: W A t I, which is domestic prices, and Brent,
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  Speaker 1: which are global prices blow U and that's gonna be
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  Speaker 1: persistent for some time. Who are the big refiners in
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  Speaker 1: the US. So we have Delic, there's Valero, um Pete,
• 10:06
  Speaker 1: There's PBF, Philip sixty six. All these refiners in general
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  Speaker 1: benefit because essentially they're gonna they're gonna capitalize on lower
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  Speaker 1: input costs and higher output output costs for their prices
• 10:17
  Speaker 1: for their product. So is this a reason why we
• 10:19
  Speaker 1: haven't really seen the profit boom in many shell companies
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  Speaker 1: that that some are expecting. I mean, most shell companies
• 10:25
  Speaker 1: are still spending more than they are taking in, that's right.
• 10:28
  Speaker 1: I mean overall price levels going up obviously helps all
• 10:31
  Speaker 1: these companies, but they do have a cash flow problem.
• 10:34
  Speaker 1: But oil prices at seventy dollars quite frankly cures a
• 10:36
  Speaker 1: lot of balance issues and debt issues that they're having.
• 10:39
  Speaker 1: Um But the issue going forward now for them is
• 10:43
  Speaker 1: domestic producers em p s will receive a lower price
• 10:45
  Speaker 1: and uh someone else globally, So that means is on
• 10:48
  Speaker 1: a relative basis, they're not winners, Peter. I'm looking at
• 10:51
  Speaker 1: the national average price as quoted by the triple A
• 10:54
  Speaker 1: and the price two dollars and nineties cents, although of course,
• 10:57
  Speaker 1: if you're in California or New York or any of
• 10:59
  Speaker 1: the host really uh, you're ending up paying U substantially
• 11:03
  Speaker 1: higher price in some cases California three dollars and seventy
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  Speaker 1: cents for a gallon? Is the increase also going to
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  Speaker 1: affect industries that use refined products other than gasoline, So
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  Speaker 1: I'm thinking of the chemical industry. Well, I think all
• 11:20
  Speaker 1: these industries are governed by by different forces, So the
• 11:23
  Speaker 1: refiners are really going to benefits essentially. The way that
• 11:26
  Speaker 1: you think about it is, look, they produce a variety
• 11:29
  Speaker 1: of products that go into a lot of different industries,
• 11:31
  Speaker 1: like you mentioned, from petro chemicals to gasoline, and the
• 11:35
  Speaker 1: margins for those products are widening, which is called the
• 11:37
  Speaker 1: crack spread. So all the the real winner and all
• 11:41
  Speaker 1: this uh is going to be the refiners, and they'll
• 11:44
  Speaker 1: simply elevate the cost of their products to UH the
• 11:49
  Speaker 1: UH the end users which are the petro chemical companies
• 11:51
  Speaker 1: in an ultimately U S consumer. So has there been
• 11:54
  Speaker 1: any talk about building more refinery capacity here? There has
• 11:58
  Speaker 1: been talk of it. Xon is thinking about expanding their
• 12:01
  Speaker 1: their light old processing capacity UM. But the real the
• 12:04
  Speaker 1: reality is refiners are really expensive facilities and in order
• 12:08
  Speaker 1: for them to consider UH green field expansion, the economics
• 12:14
  Speaker 1: need to be better. So what they've done historically is
• 12:16
  Speaker 1: sale boomed, is that they've done added things onto their
• 12:19
  Speaker 1: facilities such as altinization units and other type things to
• 12:23
  Speaker 1: to be able to process more crude. But at some
• 12:25
  Speaker 1: point these are capital these are capital maximizing companies, and
• 12:29
  Speaker 1: you cannot maximize the profits of refiners by increasing the
• 12:33
  Speaker 1: increasing exponentially the amount of shille that they process. Peter,
• 12:36
  Speaker 1: Can they just export it? Well, this is a great
• 12:38
  Speaker 1: question in the subject of the next research report I'm
• 12:41
  Speaker 1: writing on. But now we've actually going to reach a
• 12:43
  Speaker 1: cap in in exports. So currently re export about two
• 12:46
  Speaker 1: point seven million barrels per day, and if you look
• 12:49
  Speaker 1: at the chart for exports, it looks like something exponential growth. Now,
• 12:53
  Speaker 1: the mistake the markets are making is that they're extrapolating
• 12:55
  Speaker 1: that this exponential growth and exports can continue. But that's
• 12:59
  Speaker 1: about to hit a bottle next. So refiners are maxed out.
• 13:03
  Speaker 1: Oil has nowhere to go in the continental US, and
• 13:05
  Speaker 1: there's a glut of it being produced. So that's spread
• 13:09
  Speaker 1: between w t I and Brent is going to stay
• 13:11
  Speaker 1: wide for a long time. And this suggests that the
• 13:15
  Speaker 1: price that people are going to pay at the pump
• 13:17
  Speaker 1: could potentially rise just proportionately in the US to the
• 13:21
  Speaker 1: rise in Brent. That that's right, meaning essentially gasoline is
• 13:25
  Speaker 1: priced off of Brent global prices. So when people talk
• 13:28
  Speaker 1: about discounted U S crudin the abundance of US shil,
• 13:31
  Speaker 1: why aren't we seeing it at the pumps. The reality
• 13:33
  Speaker 1: is refiners process local crude, but the gasoline market is
• 13:38
  Speaker 1: a global market and that's priced much higher. Wow, that
• 13:42
  Speaker 1: was really fantastic. I understand this a lot better. Peter
• 13:44
  Speaker 1: at Pulican, he is U S Energy analyst for Bloomberg Intelligence.
• 13:48
  Speaker 1: We will look out for that next report, We will
• 13:49
  Speaker 1: read it and we will highlight it. Definitely really interesting
• 13:53
  Speaker 1: dynamic right now, given the fact that the the oil prices
• 13:55
  Speaker 1: are climbing to their highest level in years, and this
• 13:58
  Speaker 1: should help those shild is, it should help the pump.
• 14:01
  Speaker 1: And yet and yet earnings for companies in the SMP
• 14:21
  Speaker 1: five hundred up about so far, and yet the stock
• 14:25
  Speaker 1: market doesn't seem to reflect that increase in profits. Here
• 14:28
  Speaker 1: to help us understand more, as Casey Matthews, he is
• 14:31
  Speaker 1: economist chief investment officer for you m B Bank based
• 14:35
  Speaker 1: in Kansas City, Missouri, helping to manage more than ten
• 14:38
  Speaker 1: billion dollars of customer assets. Casey, thank you very much
• 14:41
  Speaker 1: for being with us. So what accounts for what is
• 14:43
  Speaker 1: seems to be a divergence you look at as you
• 14:45
  Speaker 1: As you mentioned profits are up, but stocks, well, the
• 14:49
  Speaker 1: SMP five hundred is up two year today. Right. My
• 14:54
  Speaker 1: take is our economy in the markets are in a
• 14:57
  Speaker 1: state of transition. We came from this Goldilocks environment where
• 15:02
  Speaker 1: we had low interest rates, low inflation, synchronized global growth,
• 15:07
  Speaker 1: and a course stellar corporate earnings. It's interesting our research
• 15:11
  Speaker 1: department and I were sitting around talking about, well, what's
• 15:13
  Speaker 1: the opposite of Goldilocks? Some degree it might be the
• 15:17
  Speaker 1: big bad Wolf. So today our economy is transitioned from
• 15:21
  Speaker 1: a Goldilocks environment to an economy riddled with these big
• 15:24
  Speaker 1: bad wolves. Now we have rising interest rates, changing inflation expectations,
• 15:30
  Speaker 1: a question regarding synchronized global growth, peak earnings, trade wars.
• 15:35
  Speaker 1: So you can see, you have all these issues that
• 15:38
  Speaker 1: potentially could blow down economic activity, and that of course
• 15:43
  Speaker 1: disrupts the market, leads to volatility and a lot of uncertainty.
• 15:48
  Speaker 1: The big bad wolf. I think you just coined the
• 15:51
  Speaker 1: new phrase casey values. Are we experiencing the big bad wolf? Um?
• 15:57
  Speaker 1: Given the fact that we are transitioning to the other
• 16:00
  Speaker 1: part of the Goldilocks story, Um, I'm trying to figure
• 16:04
  Speaker 1: out what does this mean that you're moving a greater
• 16:06
  Speaker 1: proportion of your ten billion dollars of assets into cash
• 16:09
  Speaker 1: or what are you doing with this? You have a
• 16:12
  Speaker 1: good question. Not yet. I think clearly there are some
• 16:15
  Speaker 1: yellow flags out there in the economy and financial markets,
• 16:18
  Speaker 1: but doesn't appear that we have the red flags. And
• 16:22
  Speaker 1: when you look at a lot of market signals, many
• 16:27
  Speaker 1: times if you look at those signals mutually exclusively, it
• 16:30
  Speaker 1: will lead to a premature decision to de risk portfolios.
• 16:34
  Speaker 1: The perfect example is the slope of the yield curve.
• 16:38
  Speaker 1: Of course, the difference between the two and tenure treasuries
• 16:41
  Speaker 1: about fifty three basis points today and this indicator has
• 16:45
  Speaker 1: a perfect track record forecasting looming recessions. Um So once
• 16:51
  Speaker 1: the once the slope of that yold curve becomes flat
• 16:54
  Speaker 1: to inverted, there's the red flag you've got an oncoming recession.
• 16:58
  Speaker 1: But it's interesting still have twelve to eighteen months before
• 17:03
  Speaker 1: you see the recession once that you old curve becomes inverted.
• 17:06
  Speaker 1: So what we like to do is look for pairings
• 17:09
  Speaker 1: of signals, and we found is when you look at
• 17:12
  Speaker 1: the slope of the yield curve paired with the change
• 17:16
  Speaker 1: in high yield spreads, you get a better signal uh
• 17:21
  Speaker 1: to de risk portfolios. And it's not as premature as
• 17:25
  Speaker 1: just looking at one the slope of the yield curve.
• 17:28
  Speaker 1: So those are things that we're watching right now, and
• 17:30
  Speaker 1: right now you get a bit of a green light,
• 17:34
  Speaker 1: meaning it's not time to de risk portfolios just yet. Casey,
• 17:38
  Speaker 1: If someone has new money to deploy, what would you
• 17:41
  Speaker 1: suggest they do. Well, of course it depends on their
• 17:44
  Speaker 1: their objectives and their risk budget. Well, let's say that
• 17:47
  Speaker 1: they're they're willing to weigh three to five years. They
• 17:50
  Speaker 1: don't want to lose it, of course, but they're willing
• 17:53
  Speaker 1: that to under to undertake an investment that there isn't
• 17:57
  Speaker 1: going to show a month by month increase in value. Yeah,
• 18:01
  Speaker 1: I think to some degree it's it's it's the old
• 18:03
  Speaker 1: adage of a well diversified portfolio. I would put money
• 18:06
  Speaker 1: at risk today. Um, I am favorable in the stock
• 18:10
  Speaker 1: market or ass allocation models are overweight risk via the
• 18:15
  Speaker 1: stock market and to something that US stock market, emerging
• 18:18
  Speaker 1: stock market, developed Europe, where would it go. Yeah, we're
• 18:22
  Speaker 1: overweight domestic large cap stocks. Of course, they have a
• 18:26
  Speaker 1: healthy weight to mid caps and small caps, and then
• 18:29
  Speaker 1: do have an allocation to international and emerging markets, so
• 18:34
  Speaker 1: across the board we would get exposure. But to answer
• 18:38
  Speaker 1: your question, I think the play right now is domestic
• 18:41
  Speaker 1: large cap stocks. Alright, So Casey, one thing that I'm
• 18:44
  Speaker 1: wondering is it's one thing to say, look, I don't
• 18:47
  Speaker 1: see a recession on the horizon. Companies look like they're
• 18:49
  Speaker 1: in pretty good shape. It's another thing to say, look,
• 18:52
  Speaker 1: the relative valuation just doesn't look so hot anymore, and
• 18:55
  Speaker 1: you're certainly seeing that narrative continue to gain prominence. Is
• 18:58
  Speaker 1: the tenure treasury rises? Where are you on that at
• 19:02
  Speaker 1: what point will the tenure treasury start to look attractive
• 19:05
  Speaker 1: as an alternative to stocks. Oh, I think the yield
• 19:09
  Speaker 1: has some legs to go on. That meaning three tan
• 19:13
  Speaker 1: it's too early. I don't think investors are going to
• 19:15
  Speaker 1: switch from stocks to bonds just yet, especially looking at
• 19:19
  Speaker 1: a tenure treasury. Um. I think you have to get
• 19:23
  Speaker 1: that yield up to closer to four percent. It's interesting.
• 19:25
  Speaker 1: At the beginning of the year, our forecast for the
• 19:27
  Speaker 1: tenure treasury was three and a quarter percent, and a
• 19:30
  Speaker 1: lot of people thought, oh, you're you're going to miss
• 19:32
  Speaker 1: the mark there, And here we are at three point
• 19:34
  Speaker 1: one percent already, So I think we got some time.
• 19:36
  Speaker 1: I think the tipping point would be closer to four
• 19:39
  Speaker 1: rather than three. Kasey Matthews, thank you so much for
• 19:42
  Speaker 1: being with us, with us and giving us the Big
• 19:45
  Speaker 1: Bad Wolf theory of the world. Kasey Matthews is an
• 19:48
  Speaker 1: economist uh and chief investment officer at u m B,
• 19:51
  Speaker 1: a bank with ten billion dollars un management. M This
• 20:09
  Speaker 1: is the time in the show when we wring our
• 20:11
  Speaker 1: hands and wonder whither Walmart. We announced a pretty good
• 20:15
  Speaker 1: earnings report earlier today and shares were up and now
• 20:19
  Speaker 1: they're down more than a percent here to Wax. Wax
• 20:24
  Speaker 1: Retail with US is a Jennifer Gatasha's senior US food
• 20:28
  Speaker 1: retail and mass Merchants analyst for Bloomberg Intelligence. Jennifer, what
• 20:31
  Speaker 1: happened here? Why are people treating this as a negative report? Well,
• 20:35
  Speaker 1: you know, it really was a solid quarter for Walmart.
• 20:37
  Speaker 1: But I think the news that is out about in
• 20:40
  Speaker 1: the deal between Kroger and Ocado is that is just
• 20:43
  Speaker 1: reinforcing the idea that there's no clear winner in online
• 20:46
  Speaker 1: commerce for grocery, especially UM, and that it's going to
• 20:49
  Speaker 1: remain a very competitive landscape for the indeterminate future. Tell
• 20:53
  Speaker 1: people about the Kroger deal, So yeah, what what this
• 20:57
  Speaker 1: deal that Kroger and Occada have have have penned and
• 21:00
  Speaker 1: is really about installing highly efficient automated warehouses that do
• 21:05
  Speaker 1: picking of grocery online orders. UM assembles those orders very
• 21:09
  Speaker 1: quickly and then UM is able to you know, achieve
• 21:12
  Speaker 1: a lot of scale so that they can be delivered
• 21:14
  Speaker 1: to people's homes in a very economical manner. UM. The
• 21:17
  Speaker 1: biggest challenge with a with the home delivery for groceries
• 21:20
  Speaker 1: is that it's it's the least profitable business model that
• 21:23
  Speaker 1: companies can follow. So something that's highly efficient and highly
• 21:26
  Speaker 1: automated really helps solve some of that problem, you know, Jennifer,
• 21:30
  Speaker 1: I'm struck by the fact that Walmart reported earnings that
• 21:32
  Speaker 1: included fairly good online sales. They purchased flip cart, uh,
• 21:37
  Speaker 1: and they were penalized for it because people were saying,
• 21:40
  Speaker 1: you're going outside your wheelhouse. But they showed pretty good
• 21:43
  Speaker 1: growth internationally. Why are they getting punished if they do
• 21:46
  Speaker 1: and punished if they don't. Well, it's one of those
• 21:49
  Speaker 1: situations where you know, at this point, um, you know,
• 21:52
  Speaker 1: Walmart is just going to stick true to their to
• 21:55
  Speaker 1: their their plan for the year, which is really about
• 21:57
  Speaker 1: optimizing their portfolio, making the or experience as good as
• 22:01
  Speaker 1: it can um. And at this point it's very difficult
• 22:03
  Speaker 1: to determine exactly what would make everybody happy, if there
• 22:06
  Speaker 1: is even such a thing, um So, so really it's
• 22:09
  Speaker 1: about staying the course, um. And they do expect that
• 22:12
  Speaker 1: the online sales will be back up in around the
• 22:16
  Speaker 1: entire year for for growth and the growth figureine And
• 22:20
  Speaker 1: really that's the plan right now. Do we have any
• 22:22
  Speaker 1: information that this ocado technology as used by Kroger in
• 22:27
  Speaker 1: the United States because the Occado technology is in use
• 22:31
  Speaker 1: in the UK in their business, also in France with
• 22:34
  Speaker 1: the deal with the casino supermarket operator. Is there any
• 22:40
  Speaker 1: information that says it's going to work here in the
• 22:42
  Speaker 1: United States, Well, you know, depending it could be very
• 22:46
  Speaker 1: efficient in the United States in certain areas. UM. The
• 22:49
  Speaker 1: model really relies on having a good population density so
• 22:52
  Speaker 1: near our big urban centers UM, and it relies on
• 22:56
  Speaker 1: people in continuing to adopt online grocery. And that's something
• 23:00
  Speaker 1: that's still more nation in the US than it is
• 23:03
  Speaker 1: in Europe at this point, but it is continuing to
• 23:05
  Speaker 1: grow at a pretty rapid pace. So there's an expectation
• 23:08
  Speaker 1: that by the time these facilities are built in our
• 23:10
  Speaker 1: operational but there will be enough demand to sustain them.
• 23:14
  Speaker 1: One thing I'm struck by so Kroger shares are of
• 23:16
  Speaker 1: about two point six percent so far today after this
• 23:19
  Speaker 1: news was announced. What strikes me though, is when you
• 23:22
  Speaker 1: start battling on the food grounds. I think about Amazon
• 23:26
  Speaker 1: dot Com and how we were talking yesterday about the
• 23:29
  Speaker 1: fact that they're offering their Amazon Prime members discounts at
• 23:32
  Speaker 1: Whole Foods. I mean, isn't this an uphill, uphill battle
• 23:37
  Speaker 1: at this point and give him sort of the footprints
• 23:38
  Speaker 1: that Amazon has. Well, it's definitely a highly competitive environment, right,
• 23:44
  Speaker 1: But you know, you have to think about with Amazon,
• 23:47
  Speaker 1: they still haven't really mastered fresh food. Um. They've brought
• 23:50
  Speaker 1: some some expertise in that area when they got Whole Foods,
• 23:53
  Speaker 1: but again, Wholefords only has about four hundred and sixty
• 23:55
  Speaker 1: stores across the United States. Um. Compare that to Kroger's
• 23:59
  Speaker 1: over tea house. Right. So UM. So Amazon, you know,
• 24:03
  Speaker 1: cannot ever be underestimated with their willingness to conquer a
• 24:06
  Speaker 1: particular category, and grocery is clearly in their sites. UM.
• 24:10
  Speaker 1: But I don't think that there's a verdict yet that
• 24:12
  Speaker 1: they've actually been successful doing that. And they're already scouting
• 24:16
  Speaker 1: sites in the United States for this new kind of
• 24:18
  Speaker 1: automated warehouse, right they are, indeed, UM, And you know,
• 24:22
  Speaker 1: I would expect that some of the initial sights will
• 24:24
  Speaker 1: be in areas where Kroger already has very strong market share. UM.
• 24:27
  Speaker 1: Certainly something that's close to their home hometown in Cincinnati, UM,
• 24:31
  Speaker 1: and perhaps somewhere like Los Angeles or Seattle area areas
• 24:36
  Speaker 1: where they have um leading market share and a good
• 24:39
  Speaker 1: number of stores in the area, so they have a
• 24:41
  Speaker 1: large customer base they can draw from. One thing I'm
• 24:44
  Speaker 1: I'm wondering as we talk about the Accada deal is
• 24:47
  Speaker 1: how much this has to do with people picking up
• 24:50
  Speaker 1: their groceries in crog locations versus and in packaging it
• 24:54
  Speaker 1: for them ahead of time, or how much it has
• 24:56
  Speaker 1: to do with actually delivering it to that because the
• 24:58
  Speaker 1: last mild delivery is what everybody talks about, is being
• 25:01
  Speaker 1: the most expensive and difficult to accomplish. Yes, uh, and
• 25:04
  Speaker 1: that's absolutely accurate. And these these store, these these centers
• 25:08
  Speaker 1: are really meant to to to be that last mad
• 25:11
  Speaker 1: delivery to people's homes. Um. And what what will happen
• 25:14
  Speaker 1: is at some point quick and collect for you pick
• 25:16
  Speaker 1: it up with the grocery stores is gaining popularity um.
• 25:19
  Speaker 1: But when you're picking those groceries in the store, at
• 25:21
  Speaker 1: some point that operation becomes interferes with other shoppers in
• 25:25
  Speaker 1: the store. Um. And you know, if if the offering
• 25:28
  Speaker 1: continues to grow at the pace it has, UM, there
• 25:31
  Speaker 1: are locations where their demand will outstrip their ability to
• 25:34
  Speaker 1: fill offers in stores, and then those could be shifted
• 25:36
  Speaker 1: over to one of these automated centers, Jennifer, Soabys which
• 25:41
  Speaker 1: is based in Canada, the retailer, the grocery store. Really,
• 25:46
  Speaker 1: they've also struck this deal with Okado for these automated warehouses.
• 25:52
  Speaker 1: Is there any indication that when this scales it will
• 25:55
  Speaker 1: be a competitive advantage and that maybe even Walmart look
• 26:00
  Speaker 1: to do the same thing well in in in Canada,
• 26:03
  Speaker 1: much like in the United States, SOBS has an exclusive
• 26:06
  Speaker 1: arrangement with Vocado. UM. But one of the challenges that
• 26:10
  Speaker 1: is that is there in the Canadian market is but
• 26:12
  Speaker 1: um the initial location for these warehouses are in the
• 26:15
  Speaker 1: Greater Toronto area, and that is not Soby's home base. UM,
• 26:18
  Speaker 1: it's not where they have the majority of their stores. UM.
• 26:21
  Speaker 1: So it will be interesting to see as it unfolds
• 26:23
  Speaker 1: if they're able to acquire market share away from the
• 26:26
  Speaker 1: UM from blah blaw and from Metro, who are the
• 26:29
  Speaker 1: ones who have a greater share in that area. I
• 26:31
  Speaker 1: want to thank you very much for being with us.
• 26:33
  Speaker 1: Always a pleasure. Jennifer Bartash is senior US retail and
• 26:37
  Speaker 1: Staples and Restaurants analyst for Bloomberg Intelligence. Thanks for listening
• 26:44
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 26:47
  Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever
• 26:50
  Speaker 1: podcast platform you prefer. I'm pim Fox. I'm on Twitter
• 26:54
  Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo. It's
• 26:58
  Speaker 1: one before the podcast. You can always catch us worldwide
• 27:01
  Speaker 1: on Bloomberg Radio