Goldman Sachs On The “Crescendo” Of Higher Food, Fuel, And Apparel Prices Coming Later This Year


Getting a lot of buzz today is a note from Goldman Sachs’ Adrianne Shapira on the impact of commodity costs to the retail sector.

Crescendo of higher food, fuel and apparel prices to hit in 2H11

While the inflation topic is not new, higher raw commodity costs have yet to hit consumer spending or SSS and therefore stocks have yet to fully reflect the impact. With DCF now peaking and likely blunting today’s higher oil prices, we expect the impact to be more significant in 2H. The two key questions we try to address are:

  • Who gets impacted
  • What gets impacted?

Goldman’s answer. The high end will do great, and the low to middle-end will be slammed.

For the low- to middle-income consumer, essential spending accounts for 21.5%of income as compared to only 15.8% for the higher end. Further exacerbating the impact is that the macro backdrop is not improving fast enough as non-farm payroll growth remains in the low single-digits and weekly earnings growth has fallen below 1%. The combination of rising fuel, food and apparel costs could drive a re-allocation of income across low- to moderate-income demographics, with the potential crowding out of retailers and brands that cater to these segments.

More generally, apparel makers are in trouble

Pricing power will be key as consumers are asked to choose what they are willing to pay more for in 2H11. When studying the Herfindahl index, which studies market share concentration, we found apparel manufacturers to have weaker pricing power than their respective retailers as compared to food manufacturers and their suppliers.

Note the dominance of large staples retailers (the top 10 controlling 45.8% of the market)…


vs. apparel companies, where the top 10 brands only control 6.7% of the market.