A colleague and I just returned from a busy trip visiting 16 public companies in the US, taking us everywhere from New York City to Winona, Minnesota (population: 25,000!). After two years of Zoom meetings, it felt great to interact with people face-to-face and see how businesses operate in person.
In this article, I’d like to share with Livewire readers some of our key learnings from the trip.
1. Consumer spending is holding up, for now
I can see from the articles and comments on Livewire in recent weeks that front-of-mind for many investors is the possibility of a recession, and concerns about the impact of inflation on consumer spending.
Anecdotally, our experience was that US retail shops, restaurants and airports were as busy as ever. While touring the stores of eight large US retailers, in some cases with company representatives, we were consistently told that so far there hasn’t been a noticeable change to consumers’ spending patterns in response to inflation – for instance substitution with cheaper products. But retailers recognise that consumer behaviours can change quickly and that the risk of a slowdown grows the longer that high inflation and interest rate increases persist.
2. The competition for labour is fierce
In the US, there are currently two job vacancies for every unemployed person.
You may have read in the news about the record number of people leaving their jobs during the pandemic (‘The Great Resignation’), and a growing union movement.
During our visit the extent to which most businesses seemed short-staffed was confronting. Almost every retail store, restaurant or other small business was advertising for positions, with many offering cash payments as an incentive for applicants just to have an interview. The listed companies we visited were also finding it more difficult to retain and hire staff across the whole spectrum of skills, from entry-level jobs to advanced software developers.
Market-leading businesses that offer a good workplace culture, pay and benefits have been better able to attract and retain staff. For instance we met with Tractor Supply (NASDAQ: TSCO), the leading US rural supplies retailer and a holding in the Aoris portfolio, which grew its headcount by 10,000 people through the pandemic and retains its store managers more than twice as long as the average retailer.
3. Supply chain pressures are easing
During the last two years businesses have had to contend with numerous supply chain challenges including high transportation costs and a shortage of key raw materials and semiconductors, which have also contributed to the price inflation in physical goods.
On this trip we heard consistent feedback that supply chain pressures are easing. Zebra Technologies (NASDAQ: ZBRA) , the leading maker of mobile devices for front-line workers, told us that the cost and time to ship a container from China to the US has more than halved in the last 12 months. The prices of key commodities like oil and copper have fallen 25% from their peaks at the start of the year. The notable exception is semiconductors, which still seem to be in short supply.
International freight costs have more than halved in the last 12 months.
4. Vertical integration is strategically valuable
More broadly, the pandemic highlighted the fragility in many companies’ supply chains after decades of offshoring and barebones ‘just-in-time’ inventory management.
For instance since Zebra Technologies outsourced the manufacturing of its devices to Asian contractors a few years ago, it has had to contend with the tariffs on imported goods from China, factory closures across Asia due to COVID-19 lockdowns, and elevated shipping costs to take the finished goods to customers in the US and Europe.
In the US we met with Graco (NYSE: GGG), an Aoris portfolio company that is the global leader in premium-quality pump and spray equipment for fluids and powders, for example paint spray guns. Its products are manufactured to exacting standards in Minneapolis, and with 95% of its materials suppliers based in the US. Not only does Graco internally make the metal and plastic parts that go into its final products rather than importing and assembling them, it even creates the tools that it uses to machine these parts! In the last two years it has been a more reliable suppliers to customers than its peers due to its high manufacturing uptime, which has contributed to meaningful market share gains.
5. Companies continue to move to the cloud
Almost every business we spoke to was actively transitioning its internal IT to the public cloud providers Amazon AWS, Microsoft Azure or Google Cloud, and advocating for the benefits of doing so. There are massive cost savings in not needing to purchase and maintain expensive IT equipment and not needing dedicated IT staff to oversee the equipment, which is especially relevant with today’s labour shortages. Companies also benefit from the flexibility of the cloud: they can quickly increase or decrease their usage depending on real-time business needs, which speeds up the IT development process.
The cost savings from moving IT infrastructure to the public cloud are even more compelling in a tight labour market.
Only about a quarter of global computing power is in the cloud today, leaving plenty of room for the large cloud providers to grow. Notably, even sectors like government and financials that are traditionally slower-moving and security-sensitive are beginning to make the jump. We met with Tyler Technologies (NYSE: TYL), the leading provider of software to local and state governments in the US, who told us that over half of their new business is now in the public cloud, from almost nothing five years ago.
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Source: Livewire
