A predicted slide in Halloween consumption is the latest blow for heavily-indebted retailers battling mounting overheads and the trend of consumers trading down to cheaper products.

US spending for the holiday will drop by 5 per cent to US$11.6 billion (S$15.1 billion) this year, according to the National Retail Federation. Sales of greeting cards and costumes are likely to see the greatest decline, a hit to merchants reliant on seasonal splurges in what’s already been a tough year for the industry.

Households on the lower end of the income scale are broadly struggling as unemployment has edged higher this year and underlying inflation has remained persistently high. Retailer Michaels Cos. said on a recent earnings call that households earning less than US$100,000 are retrenching, resulting in lower basket sizes.  

“2024 has been a perfect storm for retailers of all stripes,” said Erica Weisgerber, a partner at law firm Debevoise & Plimpton. “Inflation, high operational costs, and reduced consumer spending have been especially challenging for brick-and-mortar retailers, and online retailers have struggled with steep competition from e-commerce giants like Amazon.”  

Many of the troubled firms, including Michaels and At Home Group, are owned by private equity managers after buyouts during the pandemic proved ill-timed when interest rates rose and inflation crimped household budgets. Home, clothing and hobby retailers dominate the list of distressed retailers because the size of their debt means they lack the liquidity to compete with better capitalised competitors, according to Moody’s Ratings. 

Still, Michaels and At Home are hopeful that they can win a larger slice of the holiday spending. At Home saw a strong start to Halloween spending after flat second-quarter net sales of about US$443 million, chief financial officer Jerry Murray said on a September earnings call.

Michaels also saw a revenue pop tied to Halloween as customers began to buy inventory earlier this year, according to people on last month’s earnings call. That’s a fillip for the firm whose earnings declined by about 20 per cent to US$50 million in the second quarter from a year earlier, the people said, asking not to be identified as the information is private. 

The pullback is creating challenges for the wider industry and has contributed to several high-profile bankruptcies this year, including Joann Inc., Big Lots and Conn’s Inc. It also makes it harder to turn around firms simply by slashing costs. 

With capital markets shunning troubled firms, more retailers turned to bankruptcy rather than distressed exchanges over the past year as the companies require deeper restructuring that is best done in court, Moody’s Ratings said in a report last month. It’s part of a wider trend that saw quarterly filings for Chapter 11 bankruptcy protection rise to the highest level since 2012 in the three months through June.

Private equity’s widespread failure to hedge against rising borrowing costs also means it’s less able to come to the rescue of troubled firms, which could have knock-on effects for the economy and jobs. 

Source: Straitstimes

Citigroup has struggled to adequately train employees in risk, compliance and data roles, according to the bank's own assessment, shedding light on why it is taking it years to fix regulatory issues even as billions are spent on an overhaul.

Citi’s analysis, a portion of which was seen by Reuters and has not been previously reported, shows the bank has been grappling with a shortage of skilled personnel, finding at times that it did not have the right training and assessment tools to fix its regulatory challenges. The bank, which has for the past four years been operating under two regulatory reprimands, called consent orders, must resolve these problems for the decrees to be lifted.

In one place, for example, the analysis cites "insufficient compliance risk management skills” among staff directly dealing with such issues. The sections of the analysis seen by Reuters did not address why Citi had not been able to fix these issues. They were laid out in a December 2023 spreadsheet tracking Citi's progress on various aspects of the consent orders.

Separately, four sources familiar with the matter said the situation was further complicated when CEO Jane Fraser launched a massive exercise in September 2023 to simplify the bank, firing thousands of people and reducing the number of management layers there.

In the process, some staff involved in issues related to the consent orders were also let go, according to the sources.

Reuters could not independently determine whether the layoffs set back the bank's overall efforts to resolve the consent orders. Without providing specifics, Citi denied this, saying that "cherry picking numbers will paint a misleading picture."

"We continue to invest heavily in talent and training to ensure we have the right people and expertise in critical areas such as data, risk, controls and compliance,” the bank said in a statement. It added that it proactively assesses "the evolving skills needed so that we can hire" and enhance skills accordingly.

In response to questions posed by Reuters, Citi said further that it has invested billions of dollars in its "transformation," a project to address risks, controls and data management – issues raised in the 2020 consent orders from the U.S. Federal Reserve and the Office of the Comptroller of the Currency. The analysis seen by Reuters was done in response to the Fed’s consent order.

Citigroup said it had about 13,000 people dedicated to the project to overhaul its controls and systems, with thousands more supporting the effort across the bank. The bank has about 229,000 employees overall.

The Federal Reserve and the Office of the Comptroller of the Currency declined to comment.

CEO Jane Fraser has said previously that resolving Citi’s regulatory problems is a top priority. Regulators have said the bank's widespread risk and data flaws they have identified speak to its financial safety and soundness. The bank was put in the penalty box after it mistakenly sent nearly $900 million of its own funds in August 2020 to creditors of cosmetics company Revlon.

In July, the Fed and the OCC once again reprimanded and fined the bank. The OCC said Citi had “failed to make sufficient and sustainable progress” in complying with its consent order. The OCC also required it to enact a new quarterly process to ensure it devoted enough resources to meet compliance milestones. As of mid-July, the plan had not been agreed with regulators.

Last month, the company announced its technology head Tim Ryan would take on data management efforts alongside Chief Operating Officer Anand Selvakesari.

HARD PROBLEMS

The bank's analysis shines a light on why the problems are proving to be intractable. In one section, for example, the bank said its staff's technical skills, including on data governance -- policies that set out how data is handled -- needed to be improved. But then it also noted that when it came to data governance, its training curriculum did not sufficiently address "skills identified as needing enhancement."

It also identified areas such as data analytics and digital literacy as needing improvement.

For critical roles in compliance, the bank found it had not spelled out the skills that were needed to succeed. It also said it did not have an adequate assessment of whether employees had the right skills sets for those functions.

Citi did not comment on the specific issues raised in its analysis.

CITI LAYOFFS

The sources familiar with the bank's operations said Fraser's layoffs led to the removal of some of the people involved in regulatory work.

In risk management, for example, the bank laid off or redeployed 67 people out of a group of 441, according to a Citi document that lists some of the roles affected in one of the rounds of layoffs.

Some of the sources said the layoffs disrupted work because employees feared for their jobs and loss of managers at times meant lack of direction. But Citi challenged this view, saying it was careful to not let the layoffs affect work on consent orders.

"The facts speak for themselves, but cherry-picking numbers will paint a misleading picture of the significant resources dedicated to this effort," the bank said. "Our approach was disciplined and methodical, and prioritized protecting our ability to deliver on our regulatory commitments and accelerate this important work."

Source: The edge markets

The war on inflation is not over, but judging by the data, some battles have been won. In August, the annual rate of inflation was 2.5 percent in the United States and 2.2 percent in the eurozone. Core inflation, which excludes energy and food, was 3.2 percent and 2.8 percent in these areas respectively. Money printing has been brought under control and the proportional rise in prices has slowed since June 2022 in the U.S. and October 2022 in the eurozone. Central bankers have always claimed that their goal is low inflation (about 2 percent), rather than stable purchasing power for the dollar and euro. By that metric, success is in sight.

Moreover, the public is calm, expecting slowdowns in the price indexes before long. Most people are not aware that inflation has major redistributive effects, and that the low- and middle-income earners usually get hit. But workers realize that inflation ends up eroding their purchasing power; homeowners worry when rising nominal interest rates make their mortgages heavier; and pensioners know that under high inflation the real return on safe securities such as bonds drops to zero or turns negative. 

That said, big government and part of the business world have other priorities and possibly other plans. The 2 percent inflation target may not be the true target.

Red lines for monetary expansion

Governments traditionally like generous monetary policies in general, and money printing in particular. They believe that by increasing the money supply – for example, by manipulating interest rates – they can create economic growth, while newly printed money can be used to buy treasury bills, thus allowing policymakers to finance public expenditure “for free,” without resorting to taxation or private savings.

But things have changed. After the major blunders of the past couple of decades, the “print what it takes” mantra has now been replaced by the “prudent monetary policy” slogan, where “prudent” means that monetary policy should be as generous as possible without unleashing a rate of inflation judged intolerable to the electorate. This shift raises two big questions: What delineates the red line for monetary expansion, and how can policymakers ensure they do not cross this line? 

Both the U.S. and several European Union governments are currently in need of generous monetary policies and inflation support. This demand is not a recent development; as mentioned above, governments require additional revenue to manage public deficits.  They also benefit from low interest rates that reduce the cost of borrowing and debt-servicing and boost private investment and debt-financed households’ consumption. Governments also need inflation to rein in some key expenditure items in real terms (such as state pensions), reduce public indebtedness in real terms, and possibly enhance debt sustainability (the debt-to-GDP ratio).

There is no objective way to determine the point at which monetary profligacy becomes alarming, but it takes time – at least two years – before monetary policy fully translates into consumer price inflation. People’s unease depends on their short-term debt-servicing (interest rates are often linked to inflation) and on how much they depend on capital income (including pensions). Of course, the latter effect is larger in countries with older populations. In this light, government action can take three different paths, as described in corresponding scenarios.

Scenarios

Most likely: Gradual easing

Less likely: Defining boundaries 

Somewhat less likely: Abandoning prudence

Source: GIS

What does your research show about global trade patterns?

Why has the center of gravity of global trade in goods remained in Asia?

And trade routes to and from Europe aren’t growing?

Why haven’t changes in supply chains or deglobalization had a bigger effect?

What are the implications of this for the logistics and shipping companies you cover?