It's been over two months since the research trip to the United States. Let's summarize and share the findings. First, let's talk about the issue of inflation:
Current Inflation Situation: Core CPI Up 20%
The core Consumer Price Index (CPI) in the United States has increased by approximately 20% compared to pre-pandemic levels, equivalent to an annual compound growth rate of 4.6%. This increase significantly surpasses the pre-pandemic level of around 2%.
In addition to the rising housing prices, wages, and automobile costs, I also experienced an increase in food and service prices during my trip. For example, Starbucks: A medium-sized latte, which used to cost $3.30 before the pandemic, now costs $5.50, marking a 66% increase. In fine dining restaurants, gratuities have significantly increased from a 10% starting point to 18%, and when combined with the rise in menu prices, dining out has become 1-2 times more expensive than before.
During my stay in the U.S., I ordered takeout twice. One time, I ordered Starbucks coffee, which cost $5.75, but with various fees, the total came to $13.51, including a service fee of $3.27. On another occasion, I purchased household items worth $17.60, and additional fees amounted to $5.30, with a service fee of $3.30, making it equivalent to nearly 20% of the value of the items purchased.
Housing Prices/Rent and Labor are Key Drivers of Price Increases
Among the major factors driving the increase in core prices, housing prices/rent and labor are two significant direct/indirect factors. Unlike energy, food, and automobile prices, these two factors are relatively prone to rising and less likely to fall, especially when it comes to labor costs.
Housing Prices and Rent
The new tenant rent index was generally increasing at an annual rate of 2-4% before the pandemic. However, there was a significant increase before the pandemic, and currently, compared to pre-pandemic levels, it has seen a cumulative increase of 24%, equivalent to an annual compound growth rate of 6%.
The median home sale price in the United States has increased from $330,000 before the pandemic to $430,000, marking a 30% increase. In the Northeastern region, the median home sale price has risen from $470,000 before the pandemic to $920,000, representing a 95% increase.
Labor Costs
In the leisure and hospitality industry, the average weekly wage has increased from around $430 before the pandemic to the current $545, representing a 27% increase. The average annual growth rate has reached 6%, significantly surpassing the pre-pandemic annual growth levels of 2-3%.
3.inflation is beginning to ease, but the impact is far from over:
目前看下来至少有以下3个通胀后效应：
In industries where labor costs are a significant part of the expenses, businesses with high efficiency gain a clear advantage.
Let's take the restaurant industry as an example. Apart from the cost of ingredients, the two major expenses are labor costs and rent. Consider two restaurants, one with high labor efficiency (Restaurant A) and the other with lower efficiency (Restaurant B). Even if all other factors remain the same and we adjust for the pre-pandemic and post-pandemic average bill amount and labor costs, the gap between the two restaurants may widen after the pandemic.
Regarding the average bill amount, even though menu prices have increased by 20% overall due to inflation, customers may opt for relatively cheaper items, so the increase in the average bill amount may be lower than the overall inflation rate. Here, we assume a 15% increase.
Concerning labor costs, let's assume that the efficient restaurant (Restaurant A) requires 10 employees for one store with two shifts, while the less efficient one (Restaurant B) requires 12 employees. In the scenario of a 25% increase in wages, the increase in labor costs will be higher for the latter restaurant.
The result is that, with the same rent and other expenses, Restaurant A's single-store operating profit margin remains around 20% and the absolute amount of operating profit per store increases. On the other hand, Restaurant B's operating profit decreases, widening the gap between the two.
Rent and New Restaurants
After a significant increase in rent in a relatively short period, it becomes challenging for new restaurants. If a new or relatively weak brand wants to catch up with a market leader by offering similar products and opening restaurants in close proximity, it may face difficulties due to high rent. Even if it achieves the same scale of single-store revenue, gross margin, and labor efficiency as the leader, it may still be unable to catch up due to the widening gap in rent costs.
For instance, the well-known Mexican restaurant chain Chipotle has a rent cost ratio of only 5-6%, while its competitor Taco Bell's ratio is around 20%. Chipotle's single-store revenue is significantly higher than its competitors, ranging from $2.5 million to $3 million per store, while its competitors typically hover between $1 million to $2 million. Additionally, Chipotle's absolute rent levels are low, with monthly rent of less than $6 per square foot, compared to an average of $20 per month for malls in the United States. Even in a central area of New York, Chipotle's rent is $17 per square foot.
Chipotle's lower rent is partly due to long-term leases.
These are just a few examples of how rising costs, especially in labor and rent, can have a significant impact on businesses and industries, leading to disparities in profitability and market competitiveness.
Following a similar logic as discussed earlier, assuming that the new brand has the same single-store revenue and labor efficiency as Chipotle, with all other expenses being equal, the only difference is in the rental cost, where the new brand has higher absolute rental costs and experiences a 25% increase post-pandemic. In this scenario, the gap in single-store profitability between the two will widen after the pandemic.
The scenario of rising rental costs, especially in the hotel and vacation rental industry, presents a significant challenge for newcomers and additional supply. Property costs are a major component of investment and expenses, and they play a crucial role in determining ROI (Return on Investment). Existing supply benefits from inflation as room prices increase due to early property acquisition. With normal occupancy rates, ROI improves. However, new supply faces significantly increased costs, which rise at a higher rate than room prices. Coupled with occupancy rates not fully recovering to pre-pandemic levels, this results in a noticeable decrease in ROI attractiveness for new entrants.
The Average Daily Rate (ADR) has increased by 20% compared to pre-pandemic levels, but the occupancy rate has not fully recovered yet.
U.S. Hotel RevPAR, Occupancy Rate, and ADR Data
After the pandemic, initial hotel investments have increased by varying percentages, ranging from 10% to 70%.
Labor costs have increased significantly, rising by 28% compared to 2019.
Drawing on Bernstein's calculations, post-pandemic ROI has declined for hotels in different market segments, with most experiencing a decrease ranging from 1% to 3%."
The above figures represent the ROI for branded hotels, which enjoy a higher ROI due to brand premiums, higher occupancy rates, lower capital costs, and greater operational efficiency. If we look at the ROI for independent hotels, it is generally less than 3%.
For vacation rentals, the situation is similar, with property costs accounting for as much as 40-50%. Due to a 20-30% increase in property prices and a rise in mortgage interest rates from 3% to 7%, the ROI for the same property may be more than 10% before the pandemic and -20% after the pandemic.
With declining ROI for new supply amid expectations of lower future inflation (i.e., room prices cannot be expected to continue rising rapidly), marginal new supply will continue to be constrained.
The global hotel pipeline has not yet returned to 2019 levels, with the share of global branded hotel pipeline steadily increasing to 80% (similar for under construction data), while the supply growth rate for global branded hotels remains in the low single digits.
In a situation where the ROI for new supply is declining and supply growth is limited, it means that as long as demand remains strong, existing players in the market can expect good profitability. Brands or platforms with relatively high ROI that can expand against the trend will be particularly strong in this scenario.
With labor costs increasing, services that can replace or assist people are likely to become more valuable.
Before the pandemic, the per capita GDP in the United States was $65,000 per year. In 2022, it reached $77,000, and it's expected to be even higher in 2023. In contrast, the global per capita GDP is less than $13,000, and China's is around $12,000.
In a scenario where per capita productivity and wages are high, and there are opportunities to replace or enhance human labor, the potential value creation can be substantial. For example, through SaaS (Software as a Service) or future AI copilot technologies, if productivity can be increased by 30%, the potential value creation per person would be around $24,000. Even if a portion of this value, say 1-10%, is extracted, it still represents $100-$2,500 per person. If this technology can impact hundreds of millions of people, it translates into a market worth tens of billions to several trillion dollars.
Furthermore, with the value of human labor increasing by 25% or more, the market size expands by an additional 20-30% on top of the existing market size due to increased value creation.
The specific thought process and logic, please refer to the article titled "Exploring the Pricing Space of Various AI Copilots." I won't repeat it here.
Wages have gone up, and people's time has become more valuable. Services that save people time are also more valuable. Take food delivery as an example: with an average wage increase of 25%, tips have risen from 10% to 18%. Food prices come in two scenarios. In one scenario, consumer costs decrease while keeping the unit price of the food unchanged. In the other scenario, to maintain the same dining experience, food prices increase by 20%. As a result, customers end up paying 10-15% more, with service fees accounting for a larger proportion, increasing from the previous 26% to 33%.
Apart from the increase in food prices themselves, another significant increase (which cannot be avoided by downgrading) is the delivery driver's fees. This reflects the time value that Americans place on purchasing the time of delivery drivers. Non-farm business employees' hourly wages are significantly higher than those in the leisure and hospitality industry. After the pandemic, while hourly wages in the leisure and hospitality industry are still lower than the overall non-farm business sector, the rate of increase in wages is higher than the latter.
Hourly Wages in the United States: Customers paying for the time value of delivery drivers
Since 2019, the proportion of in-store dining at limited-service restaurants has decreased from 23% to 14%, while the proportion of takeout has increased from 10% to 18%.
For full-service restaurants, in-store dining has decreased from around 85% before the pandemic to 55-60%, while the share of takeout has increased from 5% to around 25%.
Prices have gone up, and those who can offer higher value for money choices will significantly benefit.
In the overall context of rising living costs in the United States, providing more affordable choices can also lead to significant benefits. China's excess manufacturing capacity and the significant increase in prices in the United States have allowed companies like TEMU and SHEIN to help sell goods from Chinese factories/businesses that lack sales capabilities and customers to overseas markets, including the United States, while offering American consumers more affordable product choices. TEMU and SHEIN have also benefited from this.
Compared to department stores, discount retailers, and cosmetics specialty stores, TEMU and SHEIN offer significantly cheaper prices (UBS Evidence Lab).
TEMU and SHEIN typically price their clothing at $10 or less, while the majority of Amazon's clothing items are priced between $20 and $50, with only 20% priced below $20.
The prices for best-selling T-shirts on SHEIN (top), TEMU (middle), and Amazon (bottom) are as follows:
Affordable products have gained favor among American consumers, and users of TEMU and SHEIN have experienced significant growth. Currently, their Monthly Active Users (MAU) surpass those of Esty and eBay.
Search interest in SHEIN and TEMU has significantly surpassed that of fast fashion.
China International Capital Corporation (CICC) predicts that TEMU's Gross Merchandise Value (GMV) is expected to reach $15-20 billion globally and $9+ billion in the United States this year, with the company only starting to build its GMV from Q4 2022, in just over a year.
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