00:00:05:14 – 00:00:22:28

Sylvain

Hello, ladies and gentlemen. Welcome to Digital Grocer. Season 5 Episode 6 I’m your host. Sylvain Perrier, president and CEO of Mercatus Technologies. And joining me today is Mark Fairhurst, my co-host Mercatus ‘, VP of Marketing.

 

00:00:22:28 – 00:00:25:16

Mark 

Morning, everyone. Morning, Sylvain good to see you again.

 

00:00:25:16 – 00:00:33:13

Sylvain

Well, it’s great to see you. It’s like, you know, this kind of like our regular thing. Now we’re catching up. We’re doing much of episodes. It’s kind of cool. Yeah.

 

00:00:33:13 – 00:00:41:18

Mark 

And certain someone on my team is very happy that we’re doing more more shows, as I’m sure some of our retail clients as well.

 

00:00:41:18 – 00:00:51:11

Mark 

Absolutely. Absolutely. So this is going to be an interesting show, folks. It’s part three of a three part series in part one and part two.

 

00:00:51:11 – 00:01:21:14

Sylvain

We interviewed some amazing guest, Zac Wilson from Raley’s Director of e-Commerce, and John Lucot, the retired president and COO of Giant Eagle. We talked about some important subjects. We talked about the transition out of COVID-19, and I like to think this we’re in a period of new normal until we hit the fall. I think. The impact of inflation on e-commerce and how retailers are or should prepare and what they’re doing to in fact prepare.

 

00:01:22:01 – 00:01:50:08

Sylvain

Now in this episode specifically, we really want to talk about the Canadian and U.S. economy and the impact that it is having on consumers. The risk of a recession, stagflation period. And let’s be honest. We also want to tackle, you know, what’s happening from a geopolitical perspective and what it is going to do on the economy, the effect on the economy as well as consumers.

 

00:01:50:27 – 00:02:20:24

Sylvain

Now, as always, you know, it’s one thing for Mark and I to really speculate on these broad topics and in line with our promise to our listeners and a quarter our own DNA, we decided to bring in an expert to help us tackle this subject. And so joining us today is Claire Fan. Claire joined the Royal Bank of Canada one of Canada’s largest banks, on the economics team in 2019 as an Economist.

 

00:02:21:14 – 00:02:34:24

Sylvain

She holds a bachelor’s of business administration from the University of Toronto and is as a master’s of financial economics from Western University. Claire, thank you so much for joining us today on Digital Grocer.

 

00:02:34:24 – 00:02:37:14

Claire

It’s great to be here. Thanks for having me Sylvain.

 

00:02:37:14 – 00:02:41:28

Sylvain

Awesome. So let’s just dive in. We have a bunch of questions we want to ask you.

 

00:02:41:28 – 00:02:59:01

Sylvain

And this is something, you know, Mark and I read all the trades and we read newspapers in Europe, the newspapers in both Canada and the US. So we like to say we wax philosophically on some of these things. But you’re our resident expert for this show today. So we’re going to ask you a bunch of questions now to start off.

 

00:02:59:02 – 00:03:09:16

Sylvain

Can you share with the audience what you and the team at RBC are seeing as current macro trends for both the U.S. and Canadian economy?

 

00:03:09:16 – 00:03:32:15

Claire

Yeah, of course. So in terms of the current macro trends, let’s start with the current macro state of both the Canadian and U.S. economy. So what we’re where we’re at is really sort of healthy, strong economic conditions that seem to be actually in access demand by both central banks.

 

00:03:34:13 – 00:03:59:23

Claire

So it’s pretty much over the course of the pandemic, you know, demand for goods, particularly durable goods from consumers, has become extremely elevated and a part of that was because a lot of the close contact services, things like travel, where dining out and dining out simply weren’t available for consumers to purchase. So they opt to buy more goods instead.

 

00:03:59:23 – 00:04:32:20

Claire

It was toilet paper at the very beginning and morphed into PCs tablets throughout the pandemic. So that’s been happening for quite a while now. And now we’re we’re seeing with these close contact services reopening, you know, everyone’s heading to the airport. Everyone’s going somewhere. And travel demand is picking up. Travel services is rebounding quite rapidly as well. So we’re really sort of at this top of the health sort of economic conditions where consumer demand is extremely resilient and strong.

 

00:04:32:20 – 00:05:08:12

Claire

And at the same time, we’ve been having a lot of problems on the supply side. So we’ve all heard about supply chain disruptions, you know, the extended shipping time, elevated shipping expenses. On top of that, the ship shortage, the geopolitical sort of turmoil that we will be touching on later as well. So a lot of that is creating disruptions for wholesalers, manufacturers, importers and retailers to really to be able to produce enough to catch up with the demand that we spoke about that was so elevated.

 

00:05:09:13 – 00:05:34:23

Claire

So in this sort of scenario, you know, it’s not really adding to growth anymore. We’re not seeing growth is increasing drastically any further. What we’re seeing is higher prices. And that makes a lot of sense, you know, in this sort of scenario. So inflation, has been surging globally here in Canada and the United States as well. And at the same time, labor market conditions are extremely sort of elevated.

 

00:05:34:23 – 00:05:59:15

Claire

We counted about 70% higher in job openings relative to pre-pandemic competing for 13% fewer unemployed workers. So it’s it’s a really unbalanced sort of dynamic even in the labor market that’s been driving wage growth higher. So, that’s sort of where we’re at this stage really.

 

00:05:59:15 – 00:06:11:20

Sylvain

That’s just an eye opener, and is you and your team at RBC. Are you guys seeing a change how consumers are spending or saving saving their money right now?

 

00:06:11:20 – 00:06:39:09

Claire

Well, yeah. Well, the short answer to that question so far is no. But we do expect to see some changes upcoming. You know, first of all, in the near-term what we counted the savings stockpile that’s hoarded by consumers partially because, again, they weren’t able to consume, partially because a lot of them were receiving government support throughout the pandemic. So that counted to be north of $300 billion.

 

00:06:39:09 – 00:07:10:05

Claire

And that’s a huge amount that’s roughly equal to three times the annual total spend on travel activities back in 2019. So that’s going to alter some buffer in the near-term, you know, with higher inflation biting more into consumers purchasing power as well as rising interest rate, pushing debt servicing more debt servicing costs higher. So all of these headwinds to consumer spending will be countered a little bit, at least in the near-term, just because of the suffering that we spoke about.

 

00:07:10:06 – 00:07:24:11

Sylvain

But we’re seeing exactly that. So if we track internally, you know, our own debit or credit card spending and that’s showing something like total spending. So. 30% above levels pre-pandemic. And that’s 2019.

 

00:07:24:11 – 00:07:24:17

Mark 

Yeah.

 

00:07:24:17 – 00:07:34:15

Claire

Yeah. So it’s extremely elevated and part of that will be price increases. but, if we see inflation is it’s it’s only it’s not only but it’s it’s only 11%.

 

00:07:34:15 – 00:07:49:21

Claire

So 11% of that 30% would be price increase. But all the rest of that 30% would be organic, strong and incredibly strong spending at the moment still. So that’s where we’re at right now. Yeah. Go ahead.

 

00:07:49:21 – 00:08:09:10

Sylvain

Yeah. It’s interesting, I love the fact that you kind of talk about this buffer. Mark I recently had a conversation with a grocery retail CEO out of the United States where you know, we were asking questions about what are you doing in your business in terms of protecting, you know, price increases down to your consumers, you know.

 

00:08:09:11 – 00:08:27:03

Sylvain

And he was sharing very much their strategic process. We push back on the consumer packaged goods companies to defer price increases so we can control. And they have done that quite, quite easily in the first six months of the year. The latter part of the year will be very difficult. They will have to allow it to go through.

 

00:08:27:23 – 00:08:43:05

Sylvain

And and also, they are going back to market to source for different providers. And and that becomes very difficult because as you’re saying, the supply lines are still constrained, to a certain extent.

 

00:08:43:05 – 00:09:10:05

Sylvain

And now I, I am old enough to remember that, maybe not that old enough to remember but when we went through in Canada in 82, a stagflation period; and at the time our prime minister Pierre Elliot Trudeau, you know, have put a price freeze on, I think it was dairy and wheat products and so on.

 

00:09:10:20 – 00:09:29:06

Sylvain

So could you. You know, and recently we just went through a 1% rate hike here and a rate hike here in Canada. The U.S. has gone through an increase in interest rates as well. And the media is talking about recession, stagflation, in my experience. Having seen my parents go through it. And this is a two part question for you.

 

00:09:30:26 – 00:09:47:29

Sylvain

Can you define stagflation for us? And if you can, I’d love to. Maybe it’s a three part question now, draw a comparison of the stagflation we may be in today if we are versus what we lived through in 82.

 

00:09:47:29 – 00:10:06:04

Claire

Sure. So to define stagflation to begin with, which is the first part of the three part question since stagflation would be a the period where you see slowing in economic activities, you know, labor market conditions start to deteriorate.

 

00:10:06:11 – 00:10:34:11

Claire

But at the same time, you see inflation accelerates. So all three of those are just sort of what makes a stagflation type of scenario in the economy. And you know, we’re not we’re simply not not in that sort of scenario. As I spoke about earlier in the first question, you know, the current inflation trends are very much driven by really strong economic fundamentals still.

 

00:10:34:12 – 00:11:00:11

Claire

So we’re at an incredibly sort of heated condition. And that’s what’s been driving the inflation trends these days. And there are there are a lot of reasons to expect inflation to start to come down. We counted it should turn a corner by the end of next quarter, although we have been saying that for quite a while.

 

00:11:02:14 – 00:11:29:06

Claire

But yeah, eventually it will be true. But, you know, a lot of headwinds for inflation. You know, we’re seeing a persistent easing in and there’s sortment of shipping indicators. We do get shipping time to export data that counts the days, you know, products from factory floor and in Asia that it gets to here in North America as well as north in Europe.

 

00:11:29:13 – 00:11:52:06

Claire

So that time has been shortening quite significantly. And that’s not something that’s seasonal because it’s persistent for quite a while. It’s been persisting for quite a while now. So we’re seeing a lot of that. At the same time, you know, global commodity prices. So we prices and oil prices. I don’t know where oil prices it’s a tough one.

 

00:11:52:06 – 00:12:25:24

Claire

It’s like the volatility in the oil price, which is quite substantial these days. But still they’ve come down from $120 bucks per barrel a month ago to something, if I counted correctly, it was more like 96 yesterday when the markets closed. So you know with with the lot of those sort of turning a corner, we do expect to see some good signs in terms of inflation slowing presumably coming very soon both in Canada and the US, especially with the central bank hiking rates more substantially as well.

 

00:12:27:03 – 00:12:59:19

Claire

So what we’re seeing of the three part that’s required for a stagflation to happen where we’re expecting inflation to come down. So that’s why we’re not expecting both economies to be heading for stagflation. But at the same time, the risk of a recession is actually rising at this as we speak. And that’s simply because, you know, the Bank of Canada, like you said, has high rates by its price, a bigger one, full percentage point just earlier this week.

 

00:12:59:20 – 00:13:24:22

Claire

And you know, it’s sort of absolutely necessary at this point for them to keep inflation expectations well anchored, because once they lose that it will take much drastic and higher rate hikes in order to bring those expectations down to 2% again. And I like all of us, we don’t really expect the bank to be willing to risk sort of having that happen.

 

00:13:24:22 – 00:13:53:14

Claire

So, you know, with the central banks dialing rates steadily up or not, so it’s actually in a quite drastic pace over the near term above that neutral range to more of a restrictive territory. So and that’s going to put a strain on economic activity down in 2023. So we do expect a small mild to or relatively short lived a recession that’s in our base case now and we think is quite likely.

 

00:13:53:14 – 00:14:18:03

Claire

And from there on, you know, if, both were to both things that we’re expecting more to be true, meaning that inflation’s coming down more steadily and at the same time we do get a small decline over contraction in economic conditions. Then added at that time, you know, we think the bank will reassess and start to, you know, reverse course and bring rates lower.

 

00:14:18:03 – 00:14:35:18

Sylvain

And now I can remember I was in Los Angeles when the Soviets decided to invade Ukraine.

 

00:14:36:28 – 00:15:02:25

Sylvain

And the one thing that you know, and I consider myself a student of history, so I’m pulling out, you know, books right the history of Russia, the history of Ukraine. And come to find out that those countries are, you know, have been historically intertwined. And the Ukraine is considered the breadbasket of that whole region. And now we’re hearing concerns being able to export wheat.

 

00:15:02:25 – 00:15:17:13

Sylvain

We’re seeing natural gas being cut into Europe. How much of this geopolitical conflict is going to have an impact on consumers come Q3, Q4, of this year?

 

00:15:17:13 – 00:15:38:09

Claire

That’s a great question. We’ve done quite a lot of analysis at the beginning of this whole year when it just started to unfold back in spring. And, you know, first of all, to account the direct trade linkages from Canada to Russia and Ukraine is quite small.

 

00:15:38:09 – 00:15:54:29

Claire

So we don’t have a lot of direct trace with them. We don’t export a lot to them. We don’t import a lot from them. So from that perspective, you know, it’s it’s not a sort of any sort of material impact in terms of what we’re trading is more so everything’s flowing through from prices. So we’re back to inflation again.

 

00:15:54:29 – 00:16:23:09

Claire

So sort of like you said, Ukraine itself actually, I think. Yeah, well, it’s definitely already having quite a big impact in terms of supporting wheat and other commodities to areas close to Russia and Ukraine. But Ukraine, we counted to be exporting something like 3% of global wheat consumption and we think Russia is still exporting at the moment, although there are a lot of sanctions obviously going on.

 

00:16:23:09 – 00:16:45:10

Claire

But, you know, the back to the point direct trade, not so much of an impact, but it is you know, markets are pricing in what could be happening down the future. And that’s sort of what’s been driving the surge in wheat prices at the beginning. Markets were foreseeing a lot of future disruptions that could potentially cause an impact to global supply.

 

00:16:45:19 – 00:17:13:14

Claire

So that’s what’s been driving up commodity prices much higher and that’s what’s been driving, unfortunately, local gasoline prices also much higher. I haven’t checked maybe I don’t want to check like every time I pass past by a gas station and since it’s a few cents higher. So, but to that point, you know, it’s really sort of an inflation where we expect the geopolitical sort of influence to flow through.

 

00:17:13:18 – 00:17:38:11

Claire

And on that front, the commodities prices have turned a corner. You know, exactly how this geopolitical sort of situation unfolds in the future. It’s something that’s you know, it is quite an uncertainty at the moment. But we believe that, you know, prices after having hit a peak already, you know, the further sort of impact on inflation trends probably downward.

 

00:17:38:22 – 00:17:56:21

Mark 

On that note, I mean, interestingly enough, I believe Canadian wheat farmers are going to expect to have a bumper crop this year and they’ve actually planted more crop and that which will hopefully offset some of the food price increases.

 

00:17:56:21 – 00:17:57:19

Claire

Yeah.

 

00:17:57:19 – 00:18:15:01

Sylvain

That’s great. And and so to the business leaders that are listening to the podcast and you know, they’re starting to plan for 2023. Any advice for them?

 

00:18:15:01 – 00:18:51:20

Claire

Yes, of course. So first of all, you know, there’s three things I would say to takes to to sort of expect for or from anyone really in terms of what we’re projecting in our base case. First of all, we can expect lower inflation and we counted all the headwinds and why we can reasonably, from this point out, hopefully expect lower inflation trends absent any sort of major disruptions to or any sort of other geopolitical, you know, sort of drivers happening again.

 

00:18:51:20 – 00:19:25:15

Claire

I’m my words, but you get the idea. So, lower inflation in our base case, we are expecting core inflation so core inflation is defined as anything outside of food and gasoline. So and it’s more a true reflection of domestic consumer demand rather than a lot of these global factors, because food prices were being influenced by wheat, gas prices will being influenced by oil prices, but so core inflation is expected to dial lower to 3% by the end of this year.

 

00:19:25:16 – 00:19:52:14

Claire

So, you know, it’s that’s what we’re projecting and moving into the into 2024, it’s going to hopefully start to come closer to the target range of 1% to 3% And the second thing that we can all expect is obviously slower domestic and foreign demand for goods and services and you know, in the near-term, we talked about the savings buffering a lot of the headwinds.

 

00:19:52:14 – 00:20:22:21

Claire

But in the longer run, you know, first of all, the savings is not evenly distributed around among households. Higher income households have saved more of the excess savings in comparison to some of those that are earning lower incomes. So that means a substantial, substantially smaller buffer for these households that are historically also more sensitive to economic cycles. So these are the households that are going to have to pull back demand first.

 

00:20:23:12 – 00:20:46:08

Claire

They’re how to rethink about their spending pattern. And we allocate their budget curb back on things that are discretionary just because, you know, things like food and gas, you really they’re non-discretionary. And the costs are surging so much higher. So it’s going to cut into their spending first and it’s going to spread more to a broader lessening demand from consumers across goods and services.

 

00:20:46:24 – 00:21:14:26

Claire

Eventually lead to a downturn a mild downturn in 2023. So that’s the second thing to expect. And the third thing to say, you know, the labor shortage issue, which I’m sure like a lot of business leaders are struggling with, you know, that when we have demand lessening over 2023 you might see a temporary easing in the shortages just because there simply aren’t that the same level of demand for workers probably with with consumer demand for consumption lowering.

 

00:21:15:01 – 00:21:35:10

Claire

But you know you can expect that to come back because we’ve been talking about this for a while now. It’s labor shortages they’re underpinned by long run structural demographic changes. They’re the new normal. You know, we already have a substantial proportion of the working age population above the age of 65, and that’s only going to grow.

 

00:21:35:11 – 00:22:06:19

Claire

You know, in Canada, we have great immigration policy, which is going to offset some of that, but it’s not going to offset the the sort of broader trend of aging demographics. So we expect that to come back. So at the same time, a lot of things can be done, you know, invest better for better equipment, invest in retaining or training program to, you know, get more out of the existing pool of labor that you already have, we think would be sort of the solution moving forward.

 

00:22:06:19 – 00:22:15:28

Claire

So that’s that’s pretty much what we’re expecting for the economy into 2023. Yeah.

 

00:22:15:28 – 00:22:33:19

Sylvain

Awesome. So I think I think the one to kind of synthesize also what Claire just shared with us is for the retailers that are considered EDLP everyday low price, right. We can think of someone some of the ones here in Canada you would have you would have Wal-Mart you would have No Frills in the United States and there are ton of those.

 

00:22:34:19 – 00:23:02:11

Sylvain

This is a great time. If so, if you have a consumer that is going to be tight on capital, you risk of them trading out of your business and going to your competitor that can offer an even better price. Normally, we would advise at this point to make strong investments in your private label brands that are typically less expensive than your national brands but offer you better margin.

 

00:23:02:11 – 00:23:22:26

Sylvain

As a retailer. So at the very least you’re protecting your AOV although your unit counts per order will go down. And also, we’re seeing the U.S. government. I think, Mark, correct me if I’m wrong, the U.S. government just announces a revised investment in SNAP EBT.

 

00:23:22:26 – 00:23:24:17

Mark 

USDA is expanding the program.

 

00:23:24:17 – 00:23:28:00

Sylvain

USDA is expanding the program to be able to help consumers.

 

00:23:28:24 – 00:23:43:11

Sylvain

So great advice. Claire, it’s been amazing having you in our show. Thank you so much. Thank you for lending credibility to a subject that most people just read the headlines. Right. And they just you know, you kind of demystified it for us. Thank you. Awesome.

 

00:23:43:11 – 00:23:44:29

Mark 

Thank you Claire.

 

00:23:44:29 – 00:23:51:03

Sylvain

Folks. Thank you so much for tuning in to this episode. We got to our next episode will be really amazing.

 

00:23:51:03 – 00:24:08:29

Sylvain

We’re going to be bringing on board Mike Davidson. He is the CEO of Buehler’s from Wooster, Ohio. Mike’s going to kind of share from his perspective what’s happening in at Buehler’s and how they’re preparing for the current economical situation and how they’re servicing their customers.

 

00:24:08:29 – 00:24:29:26

Mark 

Thanks for watching and listening to our show. We’ve got more great episodes on digitalgrocer.com and we’d love to connect with you on social media, @digitalgrocer, on Facebook, Instagram and Linkedin and @digital_grocer on Twitter like, subscribe, and click the Bell Icon so you never miss another Digital Grocer podcast.