Before getting into news, two announcements:
Stockouters, I want to see you in Atlanta!
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Also, The Stockout show, which I co-host with Grace Sharkey, moves to a new time each week — now Mondays at 10 a.m. ET. I still aim to send out a newsletter each week.
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Rail investor and shipper interests at odds
CSX shares (blue) have outperformed Norfolk Southern shares (black) in the past year with one-year total returns of 15.5% and 4%, respectively. Chart: Barchart.com Inc.
Class I railroad management teams insist that maximizing shareholder returns is not at odds with delivering strong service levels to shippers. They also attempt to get investors and analysts to not focus so heavily on operating ratio. But the line of questioning on Norfolk Southern’s earnings call (which John Kingston wrote up here) and the news of activist activity in the company leave me with little doubt that the “Cult of the OR” (as independent analyst Tony Hatch puts it) is alive and well.
As is typical, shareholders liked the announcement that an activist is involved. (NS shares were up 7% on Thursday.) But this newsletter looks at logistics from the perspective of shippers, and they should be wary. In recent quarters, rail service levels have improved from dismal levels during much of the pandemic. Lately, I stopped hearing intermodal shippers tell me that they were pulling their containers out of rail terminals and trucking them and instead started hearing the opposite — that they were using intermodal more heavily.
I believe for a railroad to provide strong service levels, it needs to have more than the bare minimum of personnel and resources in place and not be so quick to furlough workers when volumes dip. Maybe don’t build the church for Easter Sunday, but at least build it for a slightly above-average Sunday. The temptation may be for Norfolk Southern’s management to cut expenses aggressively to appease the activists (reportedly, there are more than one with a meaningful position in NS), even if that means cutting into the bone or being unable to handle a surge in demand when one arises.
Any deterioration in intermodal service would negatively impact not only shippers but domestic intermodal companies, such as J.B. Hunt and Hub Group, which might lose volume. On Thursday, share prices of those two domestic intermodal providers were both down 2%, which may reflect service concerns but may also reflect read-throughs from C.H. Robinson’s earnings (which John Kingston described here).
The number of intermodal trains held on Norfolk Southern has declined from 2022 levels before a recent weather-related spike. Chart: US Surface Transportation Board and FreightWaves.
Retail data is the new gold to be sold to, or shared with, suppliers
(Graph: Barchart.com Inc.)
Retailers have gotten more sophisticated about collecting and utilizing data and have turned selling access to that data into a new fast-growing and high-margin revenue stream. Enhancing data capabilities was perhaps the ultimate rationale for the pending Kroger-Albertsons merger; upon completion, it will have data on more than 100 million U.S. households. Last week, Retail Touchpoints described how Walmart is leveraging its massive data collection, which amounts to 150 million transactions per week. Use cases for that data go beyond assisting suppliers in running ads and promotions to targeted consumers. Other use cases pertain to online selection management and inventory management. Some consumers opt in to providing feedback on their own behavior, which helps the retailer put stories around the data. In addition to selling the data to suppliers, Walmart provides a base level of data to suppliers at no cost, with an eye toward efficiency improvements that benefit both retailer and supplier.
See this topic discussed on Monday’s The Stockout show here.
The alcoholic beverage industry has a Gen Z problem
(Graph: Barchart.com Inc.)
While you wouldn’t know it from recent results from Constellation Brands, which owns Modelo and Corona, there are looming demographic challenges for beverage makers, beverage distributors and carriers that rely on that volume. In recent years, beer has been a declining category, with case shipments in 2023 at the lowest since 1999, and recent survey data suggests that decline may be intensifying. Consider these statistics highlighted in a recent Food Dive article: According to Mintel, only half of 21-24-year-olds reported drinking alcohol, and 40% of alcohol drinkers in that age group limited their consumption. And, the average consumer drinks three alcoholic beverages each week, down from four this time last year. The reasons for this are numerous, including feedback from fitness trackers and the legalization of competing indulgences. In response, alcoholic beverage makers are diversifying aggressively into soft drinks, nonalcoholic versions of existing products, and emerging categories like ready-mix cocktails and THC-infused soda (not your grandfather’s Pepsi). Beverage diversification is also a major trend in the opposite direction, with soft drink brands getting into alcoholic beverages — Monster and Hard Mountain Dew being two examples. With stats like those published by Mintel, one has to wonder whether the market for alcoholic options is already oversaturated.
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