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Companies servicing middle-income consumers ‘are struggling’ amid wage inflation: Analyst

Stifel Head of Retail, Consumer, & Diversified Industrials Investment Banking Michael Kollender joins Yahoo Finance Live to explain how inflation is affecting the business climate for the retail and industrial sectors.

Video transcript

[MUSIC PLAYING]

- Will we or won't we fall into recession in the next 18 months? A new survey of corporate executives, business owners, and private equity investors found only 3%, 3% say the answer is no. Michael Kollender is the Stifel head of Retail, Consumer, and Diversified Industrials Investment Banking. He joins us now with more on this study.

Good to see you, sir. That was a shocking and, well, rather frightening number. How did it surprise you? And if you could break down when the majority of those believe we will get a recession?

MICHAEL KOLLENDER: Sure. Great to see you. Thanks for having me. Over the past months, I've been in regular dialogue with CEOs, private equity executives, and the like. And we've been hearing it consistently, that they believe that we're either in a recession or heading to one very shortly. So we chose to do our annual survey again and found those stats to be incredibly true. 97% believe either we're in a recession today, and the vast majority believe we'll be in recession over the next 6 to 18 months.

- Michael, it's interesting here, because only 3%, like you said, think of recession will be avoided. Yet the biggest concern here when it comes to a threat to their business, 64% say the labor constraints versus inflation and recession. What's your reaction to that?

MICHAEL KOLLENDER: Yeah, we're hearing that all the time, that CEOs are struggling to find significant levels of labor at attractive enough pricing. So pricing and cost of labor has moved up dramatically. But not far behind labor is inflation, recession, and supply chain issues. So those are the four big issues we found in our survey. And that's consistent with what we're hearing anecdotally over the past several months when speaking with CEOs.

- That issue that Seana just brought up, is it particularly regarding a skills gap? Or what's the difficulty they're having in finding labor?

MICHAEL KOLLENDER: Well, it's not necessarily just a skills gap, but we have some of that. It's just capacity. We've ratcheted back so quickly. And now we're pushing up labor rates dramatically. But we're also finding, which is really telling, and we've been hearing this while speaking to executives, is despite how far the cost of labor has moved up, those earning under $100,000 a year are not keeping up with the rate of inflation. So companies that are servicing a consumer that's in the $75,000 and below are actually more struggling and are seeing contraction of their business, given the fact that the wage rate for their core customer has not kept up with the rate of inflation.

- Yeah, Michael, so 2/3 are increasing their investment into technology and automation to help mitigate some of those labor shortages. To what extent do you see this potentially helping address this challenge?

MICHAEL KOLLENDER: Yeah, actually what we found was two interesting things. Companies are spending capital on M&A and on technology to offset rising wage inflation. So they're willing to deploy CapEx, both for mergers, acquisitions, along with technology investment as a way of reducing their need for headcount. On the merger and acquisition side, we're seeing both vertical integration and horizontal integration, where they're buying capacity, they're buying supply chain, they're going back further to the supply chain, or they're buying competitors so they can leverage a fixed overhead structure.

- Since early in the pandemic, supply chains have been a massive issue for businesses around the globe. What are you finding now that we appear to be on the back side of it? Have they cleared, according to the people you've surveyed?

MICHAEL KOLLENDER: It's not as serious an issue as we found a year ago, but it's still in the top four. So although it's not as significant and cost of distribution, costs of containers have come down, they're not where they were prior to the pandemic. And it's still an issue for them.

- Michael, you, obviously, closely track the retail sector. We've had a couple of big names report today, yesterday, over the last couple of days. Walmart and Target are basically saying that the worst is likely behind them. They're actually pretty positive about what we could see play out over the next couple of quarters. What do you think about that? Do you think the retail landscape will significantly improve as we look ahead to 2023?

MICHAEL KOLLENDER: Yeah, that's a generalization. It's the haves and have nots. We're seeing retailers who are absolutely struggling. I think we will see heading into the back part of this year and early part of next year some select pickup in retail bankruptcies. And there's others that will succeed. So there's clearly a bifurcation. Those who are targeting the lower-end consumer I believe will struggle through the balance of this year into next year.

- Is there any broad lesson that you've learned from the consumer over this past week? We mentioned Target and Walmart and Lowe's and Home Depot and retail sales today. What have we learned about the consumer?

MICHAEL KOLLENDER: One of the things we've seen with consumers is they're still spending on experience. They're still spending on the must-haves. But we think as you come out of the summer months, where they spend a lot of dollars on travel and leisure, that will pull back. And we're a bit concerned heading into the holiday season.

- All right, Michael Kollender, thanks so much for joining us of Stifel. And Dave, it's really interesting here when you see what's playing out. Like Michael was saying, it's two totally different worlds, right? You have the one area, the higher-income earner who doesn't seem to be affected by inflation, at least at this point.

The lower-end consumer clearly changing their spending habits. And retailers are having to adjust. We're seeing that play out this past earnings season, likely will affect the company in the coming quarters.

- Well, Walmart did say their biggest market share gain was those who make $100,000 or more. So you are seeing at least middle-to-higher-income people trade down. But back to the study, there are some interesting takeaways as well. When you see some of these companies actually benefiting from inflation, you see why in Michael's numbers, because 81% of businesses told him that they are entirely passing on the rising cost to the consumer.

But one other positive takeaway, it was just my assumption, and just anecdotally having heard from people, that it's hard to raise money in this environment, given the actions of the Fed. That's not the case according to the numbers from Michael. Again, 86% said that the increase in rates have had no impact on their ability to raise capital in this environment. So that is certainly some very good news for new businesses and for companies looking to grow in the this environment.

- Yeah, certainly a rosier picture than I was expecting to see, at least at this point. All right.