Rundown: Price hikes backfire, Shein & Temu suppliers struggles & Peloton's TikTok partnership

0:05Hello, welcome back to the Modern Retail Rundown. I'm Gabby Barco. I'm here with Editor-in-Chief Kale Guthrie-Weissman. And yeah, Happy New Year. Welcome back. Happy New Year, Gabby. How was your break? Did you have a good holiday, you know, little rest season? Yeah, yeah. I tried not to look at the news too much, but you know, it's hard. So that was fun. What about yourself? Yeah, it was good. I did look at the news, But that's why we're going to have such a jam-packed show today because so many things continue to happen in the retail industry. Yeah, it does not stop. So today we are going to be covering a few topics, some of the headlines that came in over the week.

0:55These include, this is an interesting development, which is that price hikes are backfiring on retailers and brands for a couple of years now. We've been talking about how these price increases have been padding margins, but now it seems like there is a backlash. So we'll get into that later. Then we'll talk about the suppliers reporting low margins, the Xi 'an and Tmue suppliers who are reporting low margins and pressure to cut prices. This just kind of goes to show how intense the model is and how much pressure it puts on these vendors. And lastly, Peloton is coming to TikTok. So watch out. We're going to get into that later.

1:45Yeah, so first up, let's get into the price hike. So essentially what happened is a couple of different pieces of news, which is that the big one, I think, is Pepsi. who's been one of the big CPG brands that's been increasing all of their prices basically for the past couple of years is now slowing down sales. I mean, this has been happening for a while, but now we're seeing volume shrinking, but then obviously the sales price at the end helps keep them afloat, but that's not really working anymore because there's a revolt happening. Tell us about that. There's a revolt happening. I love it. I love a revolt, especially a French revolt.

2:33Exactly. I was going to say it's a classic. So there are a bunch of things at play and there are a few headlines that were kind of jigsawing together to make this into a good narrative, but it is a good narrative. Don't worry, listeners. But pretty much, I was doing research while putting together all the stuff for the show and you've written a lot about this, which is Pepsi has been increasing its prices over the last couple of years. And even though most of the time, Pepsi said maybe our volumes went down a little bit, the increase in price more than made up for it. And it meant that, you know, organic revenue kept growing.

3:11It was able to get most people to continue buying the products. But there has been a lot of annoyance, you could say. And, you know, you've written about this. Others have written about this. There's shrinkflation, the idea that some manufacturers, some CPG conglomerates are, you know, having products that are smaller in size, but higher in price. And we saw a little bit of this revolt happen specifically with the same retailer we're going to talk about, which is Carrefour, which is a European-based grocery brand, pretty much the biggest grocer in all of Europe. A few months ago, I think it was earlier this year, Carrefour put up signs that said, just so you know, this is shrinklation.

3:56These are smaller, you know, more higher prices, smaller products. And it was a way to signal to, you know, shoppers, you know, you're not getting as much value as you used to. And then now we have Carrefour is saying it's not gonna sell certain products from PepsiCo in some of its major markets. Let me find the major markets because this was a pretty big one. It was France, Italy, Spain, and Belgium, a variety of PepsiCo's most popular products. It's just not going to be in Carrefour for the time being. I know that they've been having a lot of negotiations over pricing, etc. And clearly those have broken down.

4:37But this is part of a bigger narrative. This isn't just the story about PepsiCo and one major grocer, the pricing power of the major companies has been dwindling over the last few months. A lot of the bigger players that have raised their prices and have cited just huge demand even when prices went up are now saying that's not the case. And so we have General Mills and Targets have both recently cut their sales outlooks, which I think is a good sign that there's definitely a shift in consumer shopping patterns and consumer demand. You have airlines are cutting their prices for off-peak fares. This was all from a CNBC story that just said that the pricing power that a lot of these companies had over the last few years is beginning to go down.

5:27But I wanted to go into, because you've covered a lot of the Pepsi stuff. And so let's go into a little bit of the history. What exactly, Can you give a little bit of details about what happened with Pepsi over the last few years? During the lockdowns in the early pandemic period, all of these food brands, the grocery were killing it. They were doing really well. But as we got into about 2021, there's a lot of supply chain pressure that was just making everything more expensive, whether it's freight, ingredients, all of that. So then you started to see just, I guess, gradually the prices of things like, you know, Tostitos or Pepsi or whatnot is starting to creep up.

6:15So what's happening is that obviously that's pushing customers to either trade down to things like private label. Or I've heard also that, you know, if you're going to pay$6 for Doritos, you might as well go for like the nicer, maybe better for you brand that's about to cost about the same. So it's like an interesting, yeah, dichotomy there happening. But, you know, I think this we've been talking about this for about a year or two, but like this is not a sustainable model. You can't just like at some point be, you know, selling a bottle of Coke for ten dollars because that's just not, you know, culturally what we expect from junk food or fast food, at least.

6:54But with that said, and then there's been also, you know, political pressure. Like, obviously, this is a problem beyond just snack food. Like this is grocery that millions of people rely on. So it's just become harder and harder for people to afford groceries. And so, but that hasn't really stopped these big companies from hiking prices. And they just kept saying like, no, no, no. Like, you know, up until a couple of months ago, they're like, no, everything's really expensive. We need to keep raising prices. I think Pepsi raised them in the double digits for the past maybe like seven quarters.

7:28So could do the math on that. But then they'll like turn around and tell their shareholders like, no, everything's great because the increases are offsetting, you know, the fact that we're selling less products technically. But yeah, like we said, I think something was going to give at some point. Yeah, there's always been hints of this. And this was I found this quote from a story that you wrote that I thought really got at the tightrope, the dynamic that these major CPGs were walking. So this was from literally pretty much exactly a year ago or not exactly a year ago, February 2023. Pepsi reported that demand dropped for Quaker Foods in North America and 2 % for PepsiCo's North America beverage segment, which one would think would be bad news for a company like PepsiCo.

8:18But the CEO said focus on driving growth and winning in the marketplace while developing advantage capabilities to fortify our business for the long term was the major focus for 2023. So this past year, Pepsi said it expected 6 % increase in organic revenue and plans to hike prices again. So even though demand is dropping, Pepsi was just saying, I don't care. We're still going to raise our prices. And that had to reach sort of a boiling point sometime. And it seems like that boiling point is now. It's not only PepsiCo, but I think they're a great example of this where they pretty much were doing kind of like they were flying too close to the sun.

8:58They kept saying, what if we just increased it a little bit? What if we just increased it a little bit? And after a little bit, that really has to have an impact. And now we see Carrefour. And I want to actually, I think just to really put a point on this, it's not just Carrefour is going to drop one or two products. According to the Wall Street Journal, the publication saw notes that in stores they were not selling Lays, Doritos, Cheeto chips, Baranuts, Alval gazpacho, Lipton teas, Pepsi and 7-Up drinks, and Quaker foods. Those are major, major products that sell. And so if you have one of the major European grocers saying we're not going to sell those, that's going to have an impact.

9:45And we're seeing in the earnings reports for some, like earlier, I mentioned General Mills, I mentioned Target. They're all cutting their outlooks. We don't know what's going on with Pepsi yet. It doesn't report earnings until next month. But I feel like this is a trend we're going to be seeing where all of these companies that really thought they could raise prices and people would continue buying are now like, oh no, something has changed and the demand that we saw is not the same. Yeah. And then one more downside of this strategy is that it also impacts repurchase rates from customers and the cadence, just velocity.

10:24So at the end of the day, I feel like it's just kind of, it ends up kind of being all the same. I feel like, I don't know if that makes sense. But it's not, I don't know why they think this is a good long-term strategy if you're basically shrinking your customer base or at least the purchases every quarter. But I don't know. Maybe we'll see. Who knows what they'll announce soon. Yeah. And there's another thing that I think CNBC pointed out in its article about pricing power is that the shift that's going on now is instead of the raising of prices, it's the era of cost cutting. And we've written about this, but we're seeing a bunch of different companies that once talked a lot about how they were able to, you know, see heightened demand, still raise their prices.

11:11Now they're not. Nike lowered its annual sales forecast and planned to cut costs by$2 billion over the next three years. Spirit Airlines offered salary workers buyouts. Hasbro laid off over 1 ,000 employees. All of these are companies that really realize that they can't raise prices anymore because the demand is shrinking. And so they're having to resort to other means by which to conserve cash and try and grow demand. For the next segment, we are going to be talking about Shein and Timu. This has become a favorite topic of ours organically the last couple months, but obviously they're two huge companies that are constantly in the news.

11:58But basically what's happening now, this week, the Wall Street Journal reported that both apps are starting to see pressure from their suppliers, their vendors, everybody basically, the factories that actually make their products, mostly China-based, are starting to report that they are essentially not really making as much money as there should be or promised at the beginning of their contracts. because of the way just inherently Shein and Teemu operate, which is that they, instead of placing large orders the way maybe a retailer, I don't know, like Walmart would do with a vendor or brand, they do these really small batches that they're hoping to just sell out because everything is happening in real time.

12:49Everything is very urgent when you're on Shein. And so if it sells out, who knows if it's going to come back. That's the whole point. But this is now hurting these factory or at least some of the business owners that sell to them. Yeah, none of this is surprising. The big question has always been, who are the invisible suppliers and manufacturers behind all of these cheap products that Shein and Timu are selling? But there was a really interesting story that just pretty much said these, you know, these warehouses, these factories are feeling increased pressure to put products up for sale on these platforms.

13:31And then they have to manufacture them really quickly. And then they're also feeling increased pressure or actually not even pressure. They're just being told you have to lower these prices. And so, you know, even though they're manufactured relatively cheaply compared to, say, U.S. manufacturing, the margins are really hurting these companies. And some of them, according to the story, are saying, I don't want to sell here anymore because I'm not able to really make things work. You know, the price of labor is going up in China. And so with all of those factors put together, it makes it very difficult to, you know, be able to manufacture something both very quickly and very cheaply in a way that it can be then shipped out, you know, to other continents in the course of a few days.

14:18So, you know, I thought this was a really good reminder of just the invisible workforce behind these platforms that have been gaining huge popularity over the last couple of years. You know, we've talked about it. Nearly every business publication has talked about it. Shein and Timu are, you know, some of the – often the one and two shopping apps on app stores in, you know, dozens of countries. They have billion-dollar valuations. They're talking about going public. They're in a huge public relations war with each other. And I think that it's a very interesting thing to hear this being talked about because the pressure to raise prices is something very similar that Amazon sellers have often talked about.

15:07But this is like cranked up to a thousand. It's a similar but very, very magnified phenomenon, I guess you could say. And so, you know, from the Wall Street Journal, the report said some suppliers that spoke with them said they were grappling with razor-thin profit margins and intense pressure to cut prices. Others said they were drowning in unsold inventory and were questioning whether dealing with Sheen and Timo would be sustainable in the long run. And so it's this constant pressure to have as many products as possible sell. Like if you've been on these apps, it's an endless scroll of different types of products, some similar, some not.

15:47And so the people who are manufacturing and creating those products are feeling that pressure to continue putting them on there. And so it's, yeah, it's not surprising, but it's something worth noting, especially as more coverage of these companies continues. Yeah. And this is coming at a time, you know, with the coverage actually is there's a lot of scrutiny of at least Sheehan or has been for a while about, you know, their labor practices, ethics, all of that. So this is kind of pretty much feeding into that is the issue. Yeah. And one of the interesting things is that Shein is on a big PR sprint right now, which I'll say again, we've talked about a lot to sort of dampen or recast the conversation about its labor practices.

16:41You know, it says, you know, it pays its warehouses fairly. It's tried to sort of be a little bit more open with who makes its products and how they're made. There's been a lot of skepticism surrounding that. Shein, to its credit, does actually say how many factories and suppliers it works with. According to the Wall Street Journal, it has 5 ,400 suppliers, primarily in China. But then you have Timu, and Timu will not say. It did not say how many different factories it works with. It did say that they are mostly in China. But this is a big problem where in one of the most important and largest manufacturing hubs in the world, These two companies are becoming a dominant force and are sort of really impacting, you know, the products that are coming out and the people that are running these factories who are now trying to cater to the needs of these platforms.

17:37So definitely interesting. Yeah. And I think maybe the biggest thing would be to see whether this will start to impact the number of these factories or these businesses that are selling to at least Shein because the platform relies on constant newness. That's the whole point. Like I just said that before. But so they do need them. I'm sure, you know, there are other they could always replace them with others. But it's long term if you're trying to, you know, rebrand into more a little bit more high end or just, yeah, I guess more ethically run platform that they'll have to kind of figure out a way to to close that gap.

18:23And I think, and this is a really important point, Sheehan talks about its fast fashion model. I forget the exact branding that it uses to say it's not the same as fast fashion when, you know, it is. but it always says that it does everything in very small batches. So maybe it'll release seven types of a garment, put it on the app, and if it sells, then it'll tell the manufacturer to manufacture more of these. But this story kind of goes against that where the Wall Street Journal specifically spoke with some factories who said we had to make a bunch of different products, But then if they don't sell, you're just stuck with the inventory.

19:07And not only that, they're not able to sell it on other platforms. And so they're just stuck with dead stock. And that goes against the model that Shein has been touting, which is that it's all totally fine because the only manufacturer are few. And if there's demand, then you'll sell more. But that's not what these factories say that they're experiencing. And I think that that's worth noting because the way that a lot of these apps combat the bad public relations is they say that it's not about, you know, flooding the zone in the same way where a manufacturer will make, you know, thousands of the same products.

19:42They do it at a much smaller scale, but it still is having an impact and leading to some factories to make products that aren't selling and then sit on that and be unable to resell it. And it's hurting their businesses. Yeah. Yeah, it's framed as a small batch artisanal runs, production runs. My favorite artisanal brand is Shein. Okay. Well, we will watch out for that. I think, you know, with the IPO coming up, TBD, but I'm sure these types of headlines will continue to increase. Nice. Okay. So next up we have Peloton's Next Move. It is partnering with TikTok on short form content. It's pretty much what it sounds like.

20:28They'll be pushing out content to millions of TikTok users of their, I guess some kind of form of what they already teach in their fitness app, their classes. And so this is part of this big Peloton rebrand that started last May, which is essentially trying to become a more inclusive, wide targeting fitness company, as opposed to, you know, three years ago, it was really very much seen as this like luxury bike. It was always called the Apple or the iPhone of cycling bikes. So, and, you know, targeting kind of like high income households, but they're trying to really get away from that. The reason is once again, big theme is there's a lot of churn, their revenue it was down, they essentially were backed into a corner to do this.

21:19And yeah, I think the content strategy is really interesting. It's just hard to tell. I think so far there, it's not really, we're not seeing much results of whether there's more subscriptions from these types of announcements because subscribers continue to drop. So you want to run the numbers there, Kale? Yeah, I was just looking at them there. They're not the prettiest. So in three months ended September 30th, Peloton lost 30 ,000 members. Also, its revenue has fallen. So the most recent earnings, it was$595.5 million. Three years earlier, it was$757.9 million. And so over$200 million in lost revenue over the last three years, which is not a great place to be in, especially during a time when people aren't spending as much as they were.

22:14And so, you know, it'll be hard to convince people to buy a bike. That's why maybe you want to get more of a captive audience on TikTok, I guess. Yeah, because the hardware is a one-time purchase. So the idea is that you that's how people get in. That's why they dropped the price of the actual bike and the treads. But you get in and then I think$40 a month subscription is really what the incremental revenue is supposed to bring in. Retailers love subscriptions, but that's not really how it's working. There is this trend of people who pause and unpause their app based on, I guess, their workout schedule.

22:51I know people who paused it during the holiday season because they're like, I can't deal with working out right now. So it's just not very sustainable, which is why it makes sense that Peloton is expanding and almost like licensing their content because they really, you know, pride themselves on these really high quality virtual classes that they have like famous instructors at this point that teach them. The last partnership that was announced a few months ago was with Lululemon. And we'll get into that because I find that one really interesting. Yeah, I guess my big question is, and it makes sense, you'd want to partner with TikTok.

23:25That's where a lot of the eyeballs are. But is what Peloton wants its customers to do compatible with how people consume content on TikTok? You know, TikTok is short form. It's ephemeral. Is this just an ad? According to the story, the partnership will create a new fitness hub. And so am I supposed to go on TikTok now and then do a 20-minute workout? Because that's not how I've ever used TikTok before. yeah it's right you're asking a very different audience it's probably scrolling in bed to be yeah exactly that um although i mean i guess it works for things like recipes right but most people are probably just saving that for later but uh yeah it'll be interesting to see whether this will just look like you know with what tiktok looks like now just to to the audience like will just look like an ad?

24:16It's hard to tell. Or will they be like, oh, look, it's free Peloton classes, essentially, which that brings me to the next point is that so far, these partnerships haven't really been making money. They are essentially, there's a lot of free trials and intros. So their initial investments, including Lululemon, so kind of similar thing. Peloton last September announced that it is basically pushing out content to the Lululemon fitness app, which is kind of an interesting turn of event. And with that said, it's coinciding actually with Lululemon basically discontinuing the sale of Mirror. Remember Mirror, they bought that for$500 million in 2020.

25:04That number I will remember till the day I die. And I think that's emblematic of the overall, this virtual connected fitness industry hasn't panned out the way we thought maybe three years ago. Yeah, I think that there was a big, the beginning of this movement was that these were connected products and they were virtual or digital, I should say. They weren't virtual, they were digital, but they were also expensive hardware. And that fit with the lifestyle of early pandemic. But now that has not panned out. Most of these companies aren't doing well. And so they're trying to find digital tie-ins that can create recurring revenue, get more eyeballs, that type of thing.

25:47But I don't know. I was thinking the other day about how there were a lot of headlines. I talked with a lot of analysts a few years ago about Nike and how Nike was going beyond apparel and was becoming this entire connected lifestyle. And so it used its app for workouts. You would be able to track all these different things. And that is no longer the strategy anymore. And as I said a few minutes earlier for an earlier segment, Nike's sales outlook is not looking great and it's cutting costs. And so I think all of these grand dreams of being this one-stop connected hub where you will have content and products, etc., is not working out for most of these companies the ways that they thought.

26:32And for Peloton, that's kind of all it has right now. So it can't rely just on the bike anymore. And so it has to be able to expand its content so that more people will work out and subscribe. And so it's working with these other apps, but also that entire area has been kind of flailing for the last few years as well. And so it's very interesting and we'll see how this works out. But it seems like the strategy that was very dominant in 2021 is not the strategy that's working out now. And so a lot of these companies are probably going to have to regroup if these partnerships don't go the way they hoped.

27:08Yeah. I think one interesting aspect of this is that just a few short years ago, and I can't believe 2021 was three years ago, but this was the height of Peloton actually investing in supply chain. like they bought a factory. So like it just feels like day and night of, you know, the demand that they forecasted is, I guess there's like a market cap at some point. Not to mention you could at this point buy a used Peloton for pennies on the dollar. Sorry, but it's literally the truth. You can go on Facebook Marketplace to buy one. So that's why, you know, all of these pivots had to happen. Yeah, so maybe TikTok will be the saving grace.

27:50Who knows? But I will be swooning on TikTok. TikTok is the panacea for everything. Yeah, everyone is just holding out for TikTok to save us. That is our show for this week. You can rate and review us on Apple Podcasts, Spotify, or wherever you're listening. Please come back to the Modern Retail Podcast to hear interviews with industry leaders every Thursday. I believe Kale has always a fun guest. Who do you have on next week, Kale? Next week, I speak with Ryan Babinzine, the CEO and co-founder of Jolie, which makes a filtered showerhead, among other things. We talked about having a physical product like a showerhead be marketed as a beauty and wellness product.

28:41It was a really fun and interesting conversation. So definitely check it out. Yeah, yeah. That's one company that is essentially doing what subscriptions are supposed to be. I say that as a Jolie subscriber sorry full disclosure but and of course come back Saturdays for the Modern Retail Rundown we will be back with more news next week thank you for listening