Brick-and-Mortar Retailers’ Unlikely Hero: Generation Z

The retail apocalypse saga seems to be continuing as some of America’s biggest and most historic retailers file for bankruptcy and close up shops. On February 18th, long-time discount shoe retailer, Payless ShoeSource, filed for Chapter 11 Bankruptcy, less than two years after it filed for its first one.

The reasons for Payless’s downturn are many, including a computer malfunction during a critical 2018 back-to-school sale period, general inventory overstock, and more. However, per usual, many are quick – perhaps too quick – to conclude that Payless’s story, like other retail failure stories, is due simply to the boom in e-commerce giants like Amazon that has replaced traditional shopping in brick and mortar retail stores.

But this e-commerce narrative seems to be far from a complete explanation. TJX, operator of TJ Maxx and Marshalls is absolutely booming – it hopes to open up more than 1,000 additional stores throughout the US and Canada. Nordstrom and Home Depot also showed robust earnings in 2018, thanks in large part to their brick and mortar locations. There are numerous other retailers across industries that are faring extremely well in the physical space.

The younger generations of consumers, particularly Generation Z (“Gen Z”), warrant examination, as they have largely been deemed responsible for the downturn in retail shopping in physical stores. Gen Z is the first generation that essentially has not lived without cellular phones. Gen Z’s purchasing power is also substantial. It will almost definitively be the largest generation of consumers by 2020 and already accounts from $29 billion to $143 billion in direct spending annually. Its members have been defined by the infamous “instant gratification” label. And, contrary to expectations, “when it comes to shopping, Gen Z consumers are far more traditional – and substantially more patient – than many thought.”

A survey released by Euclid shocked many when it showed that Gen Z actually prefers to shop in and purchase from brick-and-mortar stores than online. For example, when asked if Gen Zers would prefer to purchase makeup straight from their smartphone or in a store, a resounding 72% signified that they would still prefer to purchase in a store despite the fact that 94% of millennials purchased makeup straight from their phone. So what can retailers like Payless do to feed this preference?

There’s no single answer, but a key will be understanding the distinct facets and preferences of the generation in the shopping context. Studies repeatedly find that Generation Zers deem personal relationships – which extend to brands – extremely important in informing their purchasing habits, along with transparency, convenience, and more.

The lesson that should be learned is that brick-and-mortar stores are not dead. Gen Zers actually want a physical shopping experience. Accordingly, retailers like Payless need not abandon the brick-and-mortar model, but they need to supplement their models by integrating elements like the convenience or experiential shopping that these young shoppers seek. If retailers like Payless can find avenues to translate these shopping preferences, they may be able to tap into the tremendous purchasing power of the young generation.

Brick-and-Mortar Retailers’ Unlikely Hero – Generation Z

Consumer Convenience and the Invasion of Privacy

In today’s modern age of technology, there is an increasing use of online websites for everyday shopping needs by average consumers. In the midst of this online shopping, many consumers have begun to notice advertisements for recently browsed electronics or clothing items. This is no coincidence; rather, these personalized ads are a part of a larger internet practice actively used by online businesses called “internet-based advertising.” This form of advertising is beginning to be used by larger companies, such as Amazon, and has become an additional pillar of its business, worth a total of $125 billion.

Many of Amazon’s internet-based advertising features are similar to those of Google and Facebook and has largely become successful by offering ways to target users based on their interests, searches and demographics. This targeting is done by directly working with Amazon’s staff, who placed the orders themselves. Additionally, Amazon provides advertisers and their agencies access to the self-serve system to run their own campaigns on and off Amazon’s websites. The advertising is useful to consumers given that the service consolidates advertisements based upon one’s interest and may provide additional information to a shopper regarding a product they would not normally have access to. For advertisers, the service allows for larger access to their products and the ability to target consumers that have an interest in their product. This interrelationship has proven to be successful as businesses have seen an increase in “clicks” on their websites and a reciprocal increase in the amount of orders for their products.

Although internet-based advertising represents a mutual relationship between consumers and businesses by delivering both convenience and a broader customer base, to what extent is there a boundary for the sake of consumer privacy? The tracking of customers’ online activities is typically invisible to consumers. Therefore, the average consumer does not know that due to their shopping on Amazon, an additional business knows where they live simply because they provided a delivery address. They likely do not know that Amazon knows how old their children are from access to their baby registries and even knows who has a cold, from cough syrup ordered with two-hour delivery. Although Amazon does not provide advertisers the name of the customers, it does provide additional information that the average consumer may not want others to have access to. Therefore, there must be additional regulations in place to ensure that there is opportunity for the protection of privacy while also allowing for business advertisements. Many websites have already taken theses additional steps by providing real time warnings on webpages that notify visitors that “you are giving implied consent to the use of tracking cookies on this website.” These types of “warnings” allow consumers to know their behavior is being tracked and allows the opportunity to gauge their future use of the respective website accordingly. This initiative, along with further regulations regarding businesses’ use of consumer information, could allow for an effective relationship between shoppers and corporations such as Amazon.

Consumer Convenience and the Invasion of Privacy

Navient Turns Down $3.2 Billion Takeover Bid

Navient Corp, the second largest student loan services provider, rejected the takeover bid of $12.5 a share with total worth of about $3.2 billion from Canyon Capital and Platinum Equity in a board vote on February 18.

The takeover offer was a 6.6% premium over Navient’s closing price on Friday of $11.73 a share. This price, however, was substantially lower than the $14-$15 informal price Canyon had given Navient in the past. Navient also said the offer “substantially undervalue[d] the company” and did not take into account the bidders’ approach to pending litigations against Navient or the financing information of the proposed acquisition. Particularly, upon a change of control, Navient’s $10 billion debt would become due but the bidders did not seem to “have a plan.”

The pending litigations facing Navient were brought by Federal Consumer Financial Protection Bureau and five states including Illinois, Washington, California, Pennsylvania, and Mississippi over its services of student loans.

CFPB initiated the lawsuit against Navient just two days before President Trump’s inauguration, alleging that the company harmed the interests of borrowers by “failing to steer them toward the loan repayment options” more affordable for them. As a result of Navient’s tactics, almost $4 billion additional interest charges were incurred to borrowers.

The five states filed similar lawsuits against Navient for alleged misallocation of payments and misleading borrowers into more expensive repayment plans. These pending litigations may take years to go through discovery, trial and possible appeals, which may mean a huge burden of legal fees and media pressure on Navient.

After Navient’s turndown of the takeover bid, Canyon Capital “has withdrawn its expression of interest” to acquire Navient according to the Schedule 13D/A filed by Canyon Capital on February 20 as an update of the acquisition. Instead, it plans to nominate four candidates for the election of independent board directors at the 2019 annual meeting.

Navient Turns Down $3.2 Billion Takeover Bid

Everyone Loves Rewards. No One Likes Fees

Everyone loves rewards. With every swipe, dip, and tap, consumers are converting everyday purchases into points for travel, fine dining, and entertainment. From the solid metal Chase Sapphire Reserve to the Rose Gold American Express, rewards credit cards promise consumers a desirable lifestyle.

However, no one likes fees. When a consumer makes a purchase at a store using their credit card, the store is charged an interchange fee, which is a percentage of the total sale. The store pays the bank that issued the credit card the interchange fee. These interchange fees are set by payment card networks like Visa and MasterCard and are roughly 1-2.5% of the total sale.

Recently, Visa and MasterCard have been preparing to increase their cards’ interchange fees. One reason could be the increasing risk of transactions due to data breaches like Equifax, affecting 143 million Americans, and the increase in fraud in online transactions. Another reason for the fee increase could be costly rewards programs due to savvy consumers strategically maximizing rewards. For example, in Q2 2018, rewards cost Chase $330 million because credit card users were redeeming points faster than anticipated.

Merchants strongly dislike the power that card networks have in setting interchange fees. In 2005, merchants filed an antitrust lawsuit against Visa and MasterCard that settled for a record $6.2 billion. In 2018, merchants sued American Express (Ohio v. American Express) for restricting merchants from encouraging customers to use other cards with lower fees. On the other hand, in Europe, interchange fees are capped, and card networks fear similar regulation in the U.S.

Most recently, major retailers, such as Amazon, Target, and Home Depot, have been pushing to stop accepting some rewards cards, pushing to end card network’s “honor all cards” rule. At the same time, to counteract higher fees, like from increased rewards card usage, merchants have historically passed those costs to consumers by raising prices. Therefore, although some reap the benefit of rewards cards, everyone, including those who use cash and debit or do not have access to credit, bears the costs of paying for those rewards.

At the end of the day, rewards cards are here to stay. Customers love rewards, the cards generate significant revenue for issuing banks, and they grow payment volume for card networks. However, nothing is free, and someone, whether it be merchants, customers, or banks, will have to pay for the rewards.

Everyone loves rewards. No one likes fees

PG&E Bankruptcy Presents Questions on Inverse Condemnation

PG&E has filed for bankruptcy amidst an outcry from key investors. Roughly one month ago, the investor-owned utility announced plans to file for Chapter 11, prompting investors to offer emergency funds in an effort to keep the company afloat—one investor group offered $4 billion to help avoid bankruptcy. Despite these pleas from shareholders, PG&E has nonetheless launched the bankruptcy proceedings—recently, it signed a commitment letter with several large banks, thereby obtaining $5.5 billion in DIP financing. Using this combination of revolving credit and term loans, PG&E will be able to continue its operations while it restructures.

At the same time, the PG&E bankruptcy has triggered fear among regional power producers. Energy companies (such as NextEra Energy, Inc.) generate power and sell it to PG&E. In an effort to reduce its financial obligations during the bankruptcy proceedings, PG&E may seek to void or invalidate its power purchase agreements. As such, NextEra and its subsidiaries have filed an action before the Federal Energy Regulatory Commission, seeking an injunction which would prevent PG&E from abrogating or amending the terms of its power purchase agreements.

Further still, while the bankruptcy and attendant legal disputes continue, ordinary consumers are worried that PG&E will raise rates as it tries to cover the cost of its contingent liabilities. Altogether, the utility company is embroiled in a legal mess, entangled in a web of various competing interests and financial obligations. The question presents itself: how did PG&E end up drowning in $30 billion of potential liability, swallowed in a morass of legal proceedings, and demonized by consumers who fear a rate increase? The answer lies in the doctrine of inverse condemnation.

The doctrine is typically invoked when the government takes or damages private property without paying the ‘just compensation’ required by eminent domain law. Essentially, where the government appropriates or damages private property for public use, the owner is entitled to just compensation. Where the government initiates a ‘taking’ of private property without compensating the owner, the doctrine of inverse condemnation provides an avenue for the property-owner to recover damages. Importantly, the doctrine can be invoked when the government has expropriated property, or when the government has damaged property so irreparably that it is no longer usable by the owner.

For example, in the midst of Hurricane Harvey, the Army Corps of Engineers released water from swollen reservoirs, causing nearby homes to flood. This was a necessary measure, helping to redirect the torrent and thereby averting far greater property damage in downstream communities. In short, they damaged private property, in order to serve the broader public good. Inverse condemnation provided a means for the flooded homeowners to seek redress; the Army Corps was forced to compensate the homeowners for the damage to their houses. How does inverse condemnation relate to PG&E’s bankruptcy?

Traditionally, inverse condemnation has been applied to government “takings.” It allowed private property-holders to extract compensation from public agencies. However, CA courts have ruled that investor-owned, publicly traded utilities are subject to the inverse condemnation doctrine as well. Thus, where investor-owned utilities (such as PG&E) take or damage private property, they can be forced to ‘justly compensate’ the property-holders. Importantly, damages arising from wildfires technically constitutes a ‘taking’—that is, if a utility is found to have proximately caused a wildfire that, in turn, causes damage to private property, then the utility can be held liable under the inverse condemnation doctrine. And, perhaps most importantly, liability does not require a showing of negligence—so long as the utility caused the damage or taking, it is liable.

This brings us to PG&E’s current troubles. In the past few years, California has been ravaged by wildfires, shattering the lives of thousands across the state as entire towns have been engulfed in flames. It is believed that PG&E’s operations caused many of these tragic fires. Altogether, the utility is facing up to $30 billion in liability. This contingent liability is what prompted PG&E to file for bankruptcy.

As the company spirals into legal and financial turmoil, the PG&E case raises important questions about the doctrine of inverse condemnation. Why should inverse condemnation apply to non-governmental agencies? Why should a doctrine intended for government takings be used to hold investor-owned, publicly traded utilities liable? And wouldn’t allowing PG&E to pass the cost of its liability on to ratepayers defeat the purpose of the doctrine? Supposedly, by imposing strict liability on utilities for property damage, we encourage these utilities to take more-than-reasonable, higher-than-ordinary care. But if utilities can simply shift liability costs along to consumers, then companies like PG&E have little incentive to invest in taking such extraordinary care. Altogether, the complex PG&E crisis may prompt state lawmakers to reconsider the value of an inverse condemnation doctrine with respect to publicly traded utilities.

PGE Bankruptcy Presents Questions on Inverse Condemnation

JPMorgan Chase Introduces Digital Coin

Last week, JPMorgan Chase became the first major United States bank to introduce its own digital token. The bank had already released a blockchain platform called Quorum that other institutions use to keep track of financial data. JPM Coin will operate differently than other popular cryptocurrencies like bitcoin and ethereum because it will be run by JPMorgan and backed by dollars in JPMorgan accounts. This contrasts with the wildly unregulated cryptocurrencies whose volatile values spike and fall depending on fluctuations in the market.

The reported advantage of the digital token is its speed. JPMorgan services major corporations and other banks who need to move large sums of money quickly and securely. Traditionally this would require a wire transfer that could take hours or even days, with transaction costs resulting from international transfers with changes in currency rates. In contrast, the digital token will be able to move instantly on the blockchain platform Quorum, and once transfers are completed the tokens can be converted back to dollars. JPMorgan moves more than $6 trillion per day, so any technology that can make that a more seamless process is obviously welcomed by the bank and its clients.

Unlike other cryptocurrencies, JPMorgan’s digital coins are not for public investment or individual use – they have been created strictly for institutional use. This has led some to question whether JPM Coin is a cryptocurrency at all.  Cryptocurrencies generally operate on public networks whereas JPM Coin will simply mimic real currency and operate on an internal payment system. In many ways, the process is no different than the typical online banking that JPMorgan already does – the only difference appears to be the speed at which large sums can be transferred as outlined above. Some critics say calling JPM Coin a “cryptocurrency” is simply a marketing ploy for the bank’s new platform that will attract business. It will be interesting to see if other traditional banks begin to test the waters with blockchain technology as well.

JPMorgan Chase Introduces Digital Coin

Walmart Crushed the Holidays

While many stores struggle to keep up sales against online retailers, especially Amazon, Walmart posted impressive sales numbers during the 2018 holiday season. Walmart saw an increase in both in-store sales as well as online sales, seeing a 4.2% rise in in-store sales compared to last holiday season. Even more impressive, digital sales increased by 43%, likely due to online pickup and delivery options as well as Walmart’s new grocery pickup feature. In 2019, Walmart’s total revenue rose by 2.8%. Walmart will continue to expand its pickup, delivery, and grocery options to stores across the United States throughout 2020. This will likely help the company continue its impressive growth.

It is worth noting that this was the first holiday season in recent years without Toys ‘R’ Us.  Walmart made a strategic decision to stock up on toys for holiday shoppers, which helped the company grow holiday sales.

Rather than focusing on opening new stores, Walmart will focus on expanding its online platform.  Walmart plans to open only ten new stores in 2019. The company is instead focused on expanding its delivery and pickup options at its current locations. While the company predicts growth in its online profile, Walmart says that online sales growth will likely slow to 35%.

To further boost its online profile, Walmart has made aggressive acquisitions of companies like Bonobos, Bare Necessities, and Modcloth. These acquisitions—specifically Bonobos and Modcloth—are are an effort to gain affluent and millennial customers that favor online shopping.  Walmart also acquired, an online retailer, back in 2016 in an apparent effort to compete more directly with Amazon.

Though Walmart may claim a victorious holiday season, Amazon also claimed record-breaking numbers. The online retailer said it sold more items than ever before on over the holidays, and one billion items were shipped with Amazon Prime during the holiday season.

Walmart Crushed the Holidays

A President’s Day Gift

In an early celebration of President’s Day, President Trump gifted himself $5.7 billion to build the border wall. Trump declared a national emergency on Friday to divert tax dollars to the wall, seemingly determined to test the constitutional boundaries of the executive branch.

Sixteen states, led by California, have not been afraid to challenge Trump’s declaration. The coalition filed suit against President Trump and his administration in the Northern District of California on Monday. The states justify the suit as a way to protect their residents, as well as economic and environmental interests. Additionally, three Texas landowners filed suit against Trump to protect their property rights.

So, what does this all mean? The legal challenges are likely to slow down Trump’s efforts, but will they be able to stop him? The courts have previously addressed the limits of executive power. In Youngstown Sheet & Tube Co. v. Sawyer, the Supreme Court put forth the analytical framework necessary to an evaluation of executive power. Notably, executive power is at its weakest when it opposes an explicit act of Congress — such as an allocation of taxpayer dollars.

President Trump seems to be standing on shaky ground. Congress has the exclusive power to tax and spend, and it explicitly chose not to fund the border wall. Trump’s legal team, however, could point to the fact that Congress routinely allows for discretionary spending, usually to bridge the budgetary gaps of federal agencies.

The statutory route does not look much better for Trump. Neither the National Emergencies Act nor the Disaster Relief and Emergency Assistance Act is likely to justify the use of emergency power to build the wall. Overall, the courts have been cautious about granting too much power to the executive branch. Thus, it is unlikely that President Trump will prevail.

A President’s Day Gift

Honda Harbinger: Automaker Leaves UK in Wake of Brexit

Since the British public voted to leave the European Union (EU), the United Kingdom (UK) has been in a prolonged state of political and economic uncertainty. As legislators continue to hold each other hostage as to what terms the UK will leave the EU, banks, manufacturers, and other firms are fleeing to jurisdictions with more stable legal relationships to neighboring markets. Just this past month, British vacuum manufacturer Dyson moved its headquarters to Singapore at the behest of Pro-Brexit founder James Dyson, and one of Britain’s richest men, Brexiteer Sir Jim Ratcliffe, moved to Monaco to avoid taxes.

Perhaps most devastatingly, Japanese carmaker Honda has decided to close its factory in Swindon by 2021. The move ensures a loss of approximately 3,500 jobs and a significant, potentially devastating blow to the economy of the region and the UK overall. While Honda denies that Brexit has nothing to do with the decision, many suspect that the prospect of higher tariffs and greater supply chain costs could be the reason why it has become no longer viable for Honda to maintain a manufacturing presence in the UK.

Since the UK joined the European Economic Community (EEC), the precursor to the EU, in 1973, many companies have used the UK as a launching pad for the larger European market. The EU guarantees the free movement of goods and materials across the region, as well as the free movement of labor. While the creation of the common market was a boon for firms, many voters heading into the Brexit vote felt that the common market was an excuse for governments to lower labor conditions and promote austerity in the name of competitiveness. Others felt that the EU common market with its free movement of people had invited an unacceptable level of immigration and settlement within the UK.

As many other countries, including the USA, consider withdrawing from trade agreements and common markets, these considerations must be weighed against the threat of capital flight, ala Honda in the UK. As recently described in Quinn Slobodian’s Globalists, a global history of the rise of our current worldwide trade regime, the threat of capital flight has long been used as a cudgel for loosening democratic control over how a firm operates in a particular country. Simply, a firm may threaten to move to another country in order to extract concessions from its host. In this case, it is unlikely Honda is seeking to extract concessions from the UK and is leaving simply due to regulatory uncertainty. Nevertheless, Honda’s decision to leave still serves as a warning to policymakers and electorates that they leave common markets at their own peril.

Honda Harbinger- Automaker Leaves UK in Wake of Brexit

T-Mobile and Sprint: Everybody Likes a Last-Minute Play

T-Mobile is making hail-Mary efforts to get public and government approval of the company’s merger with Sprint. T-Mobile executives say the $26.8 billion deal will lead to $6 billion in cost reductions and an overall better product for customers. Two weeks ago, Chief Executive John Legere told the U.S. Federal Communications Commission that T-Mobile will ensure “the same or better rate plans” for services up to three years post-merger.

Legere’s pledge responds to fears that the merger will lead to higher prices for low-income customers who currently benefit from the prepaid plans offered by the two carriers. Sprint and T-Mobile have long battled over the lower income customer base, and combining the two prepaid services will likely result in higher prepaid fees.

Last April, CNNMoney discussed the probable implications of the T-Mobile-Sprint deal for wireless prices. Following the merger, there will only be three major wireless service providers in the United States — Verizon, AT&T, and T-Mobile. As former FCC commissioner Michael Copps said, less competition almost always means less focus on customer needs. Additionally, T-Mobile has boasted about the company’s ability to deliver 5G to customers post-merger. However, the company’s delivery of 5G may entail updating current operations and playing catch-up with AT&T and Verizon.

One thing is for certain: Switching from 4G to 5G will indeed improve efficiency and welcome T-Mobile — and its customer base — to the era of rapid fast speed and massive capacity on a single device. Many agree that more options, beyond AT&T and Verizon, would be refreshing. However, we are in the era of an unpredictable President Trump, who pivoted from his business-friendly stance and surprised many by suing to block the $85 billion deal between AT&T and Time Warner last year. A national security panel headed by the Treasury Department has already signed-off on T-Mobile’s ambitions to acquire Sprint, but the Justice Department and FCC remain undecided.

For a deal that will likely take three years to merge customers, a three year promise to keep prices the same or better does not seem to be a lofty pledge. But, it may be a convenient one. Here’s hoping the Justice Department doesn’t do the math.

T-Mobile and Sprint- Everybody Likes a Last-Minute Play