Consumer Staples just got a moat

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ertyu
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Consumer Staples just got a moat

Post by ertyu »

This reddit user argues that as AI improves but its use is still unregulated, Grocery etc. companies who traditionally were an oligopoly subject to the prisoner's dilemma can now collude and price monopolistically by all using the same AI which guides their pricing and supply decisions in the same way.

Might be one of the best sectors to shelter for the inflations that come.

Thoughts?

Edit: if true, this development also busts the strategy of urban fucks like myself who hope to still somehow manage without producing their own food. Lean into your homesteading and gardening, everyone!

ducknald_don
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Re: Consumer Staples just got a moat

Post by ducknald_don »

Then a new Aldi or Lidl pops up with a business model of undercutting the AI monopoly. I can see AI causing a significant amount of upheaval but don't see this being a problem.

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Ego
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Re: Consumer Staples just got a moat

Post by Ego »

Food and apartments are not the same markets.

Groceries compete for the most lucrative customers. A small percentage (some say 20%) of grocery store shoppers are responsible for all the profits. They buy the high margin items. Those customers are not price sensitive. They want convenience and efficiency. They want exactly what they want, delivered to their doorstep exactly when they want it. They don't switch because of price. They switch when the things they want are not fresh or not available NOW.

So grocery stores and distributors build waste into the system. They keep enough of the high margin stuff on hand to satisfy a small segment of their customers and send most of it to Grocery Outlet, Lidl and my grocery liquidator friend at cost or below. That is good for those of us who like high end items and are happy getting them whenever they show up on the liquidator's shelves, but would never pay the full retail price.

The problem I am seeing is that the price differential between the liquidators and retail stores in shrinking as the supply to the liquidators is more regular. If an item shows up at Grocery Outlet once every few weeks, it is generally a fraction of retail price. If it is consistently on the shelf at the liquidator, they charge a price that is closer to retail.

7Wannabe5
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Re: Consumer Staples just got a moat

Post by 7Wannabe5 »

This isn't really anything new. I used an intelligent pricing program when dealing in used books on the internet. I don't think that many retailers with very slim margins will be willing to go entirely "black box" with such a mechanism.

The real problem with the system is that commodification lends itself to creating Prisoner's Dilemma type situations. Before the invention of of grain elevators and the standardized commodities market in Chicago, farmers would send their product to market with their own unique imprint on bags of grain. So, it would never be the case that you were just buying Winter Wheat- Grade B- 1 bushel. You would be buying 1 bushel of Farmer John's special variety wheat grown in Happy Valley under Farmer John's unique Green Thumb management.

As a seller in any market, you are only able to set your own price to the extent that your product is unique. So, even in a situation where maybe I am only 1 of 3 dealers on the planet selling a Good condition copy of "19th Century Bridges of Indiana", an unintelligent pricing mechanism will cause the 3 of us to auto-compete down to minimum possible profit. So, most intelligent dealers will set their auto-pricing mechanism to match rather than beat pricing of competitors, with periodic consideration of Value vs. Price. For instance, a mechanism that just Matches will never catch on to the fact that nobody will ever want to pay $100 for any of the 3 copies of "Your Uncle's Very Bad Self-Published Poetry." It also won't recognize that $20 is not enough to ask for a very rare commodity with only intermittent demand such as "Translated from the Russian Slim Text on Aspect of Abstract Algebra."
if true, this development also busts the strategy of urban fucks like myself who hope to still somehow manage without producing their own food. Lean into your homesteading and gardening, everyone!
The answer is that you don't have to grow your own food in order to better integrate yourself into supply stream. It's true that as a consumer/buyer, taking the perspective of commodification/efficiency will tend towards lowering your $$ outlay, but it will also lower the resilience of the system if-everybody-does-it (which they do!) If you pay yourself the marginal wage you could make elsewhere on the labor market, growing your own food is rarely going to be comparatively advantageous. So, the same goes for doing something in between such as doing an experiment in finding local growers from whom you can buy your food, but this practice will provide you with more resilience in your food supply chain, likely a healthier diet, and maybe even some opportunities to reduce your overall costs through barter or similar.

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Re: Consumer Staples just got a moat

Post by jacob »

They must not be using AI in the US since corporate profits are down relative to last year. Or maybe EU reporting is lagging? Or maybe the redditor picked a lowpoint like the 2020 lockdowns afterwhich profits can only become much better relatively speaking even insofar they still follow the overall trend.

When it comes to inflation it has always been a question whether a given business can avoid the price hike from its suppliers and hike the price on its sales. Profit sits in the middle between this rock and that hard place. Higher inflation tends to make this a more volatile process which makes it less predictable. This is why price-sensitive investors reduce the P/E multiple they're willing to pay when inflation is higher or worse "unstable" (high and unstable is the worst combo).

In that regard, consumer staples (non-cyclicals) is generally considered a safer harbor using the argument that "people gotta eat". That doesn't mean that earnings won't suffer, because oftentimes people realize they actually can spend less; usually after they get laid off and actually have less to spend.

Overall, you can be absolutely sure that companies use some kind of inventory management for their supply chains that go beyond "manager's visual inspection of the stock room" these days. The same goes for deciding when and how much to buy at which price. Whether they use the same AI or the same business graduates from Wharton, they will also be more or less looking at the same data each engaging in win-lose behavior with the invisible hand supposedly providing a win in the general sense as measured by how much money is made (not whether everybody gets to eat steak).

TL;DR - It's much more likely that AIs will be engaging other AIs in win-lose behavior. Insofar AIs collectively decided to keep supermarket prices high for maximum profit, it becomes possible to underbid them by running a supermarket that doesn't use AI, no?

7Wannabe5
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Re: Consumer Staples just got a moat

Post by 7Wannabe5 »

jacob wrote:TL;DR - It's much more likely that AIs will be engaging other AIs in win-lose behavior. Insofar AIs collectively decided to keep supermarket prices high for maximum profit, it becomes possible to underbid them by running a supermarket that doesn't use AI, no?
The intelligent pricing mechanisms I used were at least two degrees more strategical than that. For instance, they at least took pace of sales and outliers into consideration. However, these weren't what I would consider true black box self-learning AI mechanisms. Although I did not have direct access to all the programming, I could usually figure out what was going on.

Where AI would really shine would be in a situation where it was legal/possible to charge different customers different prices. For instance, used car salesman AI.

frommi
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Re: Consumer Staples just got a moat

Post by frommi »

Only 20% of the S&P500 consumer staples etf are "food" retailers. Namely WMT,COST and KR. Main part of the index are companies like PG, KO or PEP, which are price setters because people buy them for their brand and not on price alone. Thats the reason these companies exist since a very long time. Brands ;) . WMT, COST and KR are so big that they can easily compete on price because they can buy in huge size and therefore have operating leverage over their suppliers. All of them are good in inflationary times, as 2022 has shown. They dont need AI for pricing at all.

PhoneticNachos
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Re: Consumer Staples just got a moat

Post by PhoneticNachos »

Don't think AI is going in that direction. Humans guide corporate strategy like a scalpel. AI is brute force like a sledgehammer.

It's going to really hurt outsourced labor pools for simple tasks, like email/phone/mailer farms are pretty much doomed.

AI will be used along with crypto to track and consolidate shipping and sourcing of materials in the supply chain for most companies.

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Seppia
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Re: Consumer Staples just got a moat

Post by Seppia »

Mass retailers are among the companies with the lowest bottom line. Consumers have it amazing, food has never been this good for this cheap in the history of mankind.
They are (mostly) price takers.
I think it is not unreasonable to think that their long term profits (as an aggregate) will rise along with inflation

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Re: Consumer Staples just got a moat

Post by WFJ »

I would be equally worried that AI will significantly increase crop yields, producing so much food that 99% of the world's population will become obese. All technological advancements benefit some industries, crush some and create new ones. AI will be no different.

7Wannabe5
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Re: Consumer Staples just got a moat

Post by 7Wannabe5 »

AI can also be applied to the intelligent design and maintenance of very small localized growing of fresh produce. The integration of vertical hydroponic low-water usage projects is already being considered by some large supermarket chains. This will destroy some low-paying jobs such as 10 people being field-hand strawberry pickers and replace them with one hydroponics engineer interacting with AI system. For example, AI systems are already much better than most humans at identifying particular crop diseases or pests. An AI system doesn't have to wonder what the pH level is; it just knows through its sensors.

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Re: Consumer Staples just got a moat

Post by chenda »

@7w5 - We might see a luddite revolution to destroy the thinking machines.

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Re: Consumer Staples just got a moat

Post by 7Wannabe5 »

@chenda:

For sure. I am willing to bet $5 that it will occur when self-driving fleets creatively destroy all trucking jobs.

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Re: Consumer Staples just got a moat

Post by jacob »

chenda wrote:
Thu Mar 09, 2023 9:58 am
@7w5 - We might see a luddite revolution to destroy the thinking machines.
We will for sure see a "this was written by an actual human"-labels, which will likely be similar to the "handmade"-labels. I'm already seeing complaints from the artsier corners that there's no point in reading poetry insofar its not connected to another human. That's not exactly how I see the world---it tends to more interobjective than not---but those whose main worldview is intersubjective in nature will fundamentally refuse to accept that non-humans have anything meaningful to say to them insofar the messenger doesn't meet the inclusion parameters of their group.

chenda
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Re: Consumer Staples just got a moat

Post by chenda »

I believe the Dune trilogy was based on this premises. Although I have never made it past the first few chapters as it feels like it was written by some nascent AI bot. The author refused to use conjunctions, and the writing just doesn't flow like normal prose.

zbigi
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Re: Consumer Staples just got a moat

Post by zbigi »

jacob wrote:
Thu Mar 09, 2023 10:35 am
We will for sure see a "this was written by an actual human"-labels, which will likely be similar to the "handmade"-labels. I'm already seeing complaints from the artsier corners that there's no point in reading poetry insofar its not connected to another human. That's not exactly how I see the world---it tends to more interobjective than not---but those whose main worldview is intersubjective in nature will fundamentally refuse to accept that non-humans have anything meaningful to say to them insofar the messenger doesn't meet the inclusion parameters of their group.
I can definitely see their point. When you read poetry written by a human, the text is just a way for (unidirectional) interaction with that person. You get a glimpse into their world, can wonder why they've chosen to write about the particular subject, why that was ommitted, why this or that was stressed, what in their life led them to using an unobvious association etc. - and, with each of those questions, you're basically creating a "theory of the mind" of that person. It's fascinating, at least if one is interested in people. Whereas, poetry written by an algorithm has none of that. I guess it's the same with an abstract painting made by an actual painter vs a random, but visually interesting, stain of gasoline spilled on asphalt.

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