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Vice Spending
April Vice Index Shows Strong Rebound

Vice Spending
April Vice Index Shows Strong Rebound

Andrew Zatlin



It was the storms. 

1

Last year, we saw a similar economic pattern in the first four months of the year: bad weather dampened play time in the first quarter, but once the storms passed, a spike in Vice spending ensued.  Bad weather dampened   spending in the first quarter, but then came Spring Break in early April.

It's very likely that most folks held back spending for two weeks until vacations started on April 3.  Not to offend, but kicking off Vice Spending on Easter would be in keeping with the original pagan Easter holiday customs, which celebrated the Spring Equinox with feasts and sex.

In any event, We see that pattern of spending echoed in various other mainstream data points like Retail Spending.    

2

But when we average that three-month period (the bar in green) it's basically the same level of spending..  Basically people have money, but they are waiting until after bouts of bad weather to end before they spend it.     We can see that especially in the bar and restaurant sector.     

Let's Get this Party Started

Party Time?  Oh my, yes.  If we dive into those Retail numbers, you'll see that the strongest growth of all retail components is going out and drinking. 

3

Official retail figures won't reflect the overall consumer spending sentiment because these figures don't include vacation spending.  Even though it was time for Spring Break time - when airfare prices are high and hotel vacancies are low -- the official data only counts in-store spending.  There isn’t a lot of in-store spending when folks are hitting the beaches of Cancun. 

So ignore mainstream reports of weaker-than-expected Retail figures: there's a good reason why hotels and recreation spots like Seaworld are reporting better than expected earnings. 

People are spending more on experiences and less so on products.

And speaking of spending on experiences, let's focus on Vice.

Hookernomics: A Nasty Flare up of Inflation.  But is it Contagious?

Over the holidays, we conducted a business survey of escorts.  The feedback was consistent: for the first half of 2015, escorts expected no inflation.  The key reasons: no jump in costs and no acceleration or deceleration in client spending.  No margin pressure and no demand driven pressure.

Premature extrapolation  This year, we noticed that more escorts were taking road trips.  In the business of Hookernomics, fishing in new waters is typically an indication of a business slowdown.  Fast forward to the second quarter, and prices are selectively moving up.  What's going on?

First, a March slump definitely seems to have been weather related.  A response to the weak start of the year.  Escorts hustled to generate the necessary cash flow.

This month, however, some escorts are testing the waters to see if the market will bear higher prices. 

Prices have increased by 10%.  The price jumps are very selective: mostly in the middle and upper tiers.  And it's sporadic, just as the previous month's road trips were sporadic.

The Why:  Raising prices is demand driven.  Client pockets are expanding....with unspent cash.    Or so some escorts seem to believe.  It's a not-so-shining example of the free market in action (even if it isn't anywhere close to free): suppliers are responding quickly to customer demand.

Will it last?  That depends on several factors:

Escort pricing power: College summer vacations are starting and that inevitably leads to greater escort supply.

Client discretionary cash flow: Are escorts correctly reading the signs and correctly perceiving fatter wallets?

Staying power: Client spending might be getting artificially pumped up: the spending budget grew only because of a one or two month weather delay.  Once the built-up funds suddenly get released in a burst of activity, demand will droop again, bringing down prices.

A head fake after all? 

There is a Spring Rebound underway in consumer spending. 

But it may lack sufficient stamina to last into the third quarter.

Big Tobacco turns Big Whacky Tobacky

Philip Morris is near the top of the world’s leading drug companies. 

As global tobacco consumption slows, Big Tobacco has sought alternatives like cannabis.

It's the equivalent of Seagrams going after Molson..  Tobacco and Cannabis are part of a lifestyle fit in smoking. 

And one often leads to the other.

Big Tobacco also brings some much needed advantages (in no particular order):

  • Political lobbying strength
  • Ties to farmers
  • Familiarity with the market dynamics of cash crops
  • Existing infrastructure to scale production
  • National branding
  • Quality control methodologies
  • Experience with extracting and mass producing the key chemical components (cannabis-laced food products already exist.  Fritos is already the unofficial King of Baked Goods; forget sour cream potato chips, they probably have teams working up how to put pot in Pringles.)

And Big Tobacco has been studying the cannabis opportunity for decades.

As part of the tobacco settlements a few years ago, millions of pages of documents were released by Philip Morris et al.  These documents revealed that Big Tobacco has been focused on the cannabis industry for decades. According to a study done by the Center for Tobacco Control Research & Education, since the 1970s, Philip Morris, RJ Reynolds, and BAT have:

  • Studied ways to affect decriminalization and legalization
  • Considered combining cigarettes and cannabis
  • Agreed that cannabis is not a threat to tobacco

The business potential was recognized quickly.  Philip Morris underwrote a study that concluded:

"marihuana (sic) smoking will have grown to immense proportions within a decade and will probably be legalized. The company that will bring out the first marihuana (sic) smoking devices, be it a cigarette or some other form, will capture the market and be in a better position than its competitors to satisfy the legal public demand for such products.

Switching from  Tobacco to Cannabis: A Health Benefit

Tobacco kills.  That's proven.  Conversely, there are no meaningful studies that demonstrate  cannabis is a health hazard.  True or not, cannabis is perceived as healthier.  In a 1976 memo to BAT, it was noted:

"If more restrictions are placed on tobacco and if the marijuana habit notches up further small advances in legality, many people may switch from one to the other in their search for a form of escape from our neurotic civilization. Marijuana supporters would claim that was a net improvement from the health aspect"  

Public Perception the Problem

A key obstacle: the public had been taught that marijuana was morally bad.  As BAT noted in 1980:

"At present the taking of many of these drugs is either medically prescribed or regarded as deviant behavior, but could be “socialized” like alcoholic drinking and tobacco smoking"

Philip Morris: The Best Cannabis Investment?

Cannabis Clubs are cute, but they aren't the future of retail. We already have dedicated stores for selling alcohol; they already sell controlled substances like alcohol and cigarettes. The novelty of cannabis will soon wear off, and with it the need for special restrictions.

And while the local 7-11 begins to sell joints, you-know-who will be producing them.

Not your small farmer but Big Tobacco.

They have the capital, scale, and market reach necessary to being a national market. They have experience getting mass quantities of a controlled substance (1) into the hands of millions of stores and (2) ensuring that taxes are collected and paid.

And they have been waiting for decades to do this.

The only thing stopping them is the current patchwork of legalization. If anyone has muscle and lobbying power at the Federal level, Big Tobacco does.

Gambling Limps Back

Nevermind the Vegas casinos reports from folks like Steve Wynn, who say that business is bad.  That's because Las Vegas depends on Chinese tourists, who are noticeably absent given corruption crackdowns. 

For a handle on U.S. consumers, the odds are better if we concentrate on local casinos.  The drive-in places, not the fly-in places. 

Just as Retail partially rebounded in March, so too did gambling.

4

For some reason, many people expected that the March Retail would rebound a lot stronger than it did.  This  made no sense given that storms also hit March pretty hard. 

But there was a partial rebound in Retail, just as there is a partial rebound in gambling.

What's especially interesting is the upticks occurred in areas hit hardest by the snowstorms: Connecticut and Atlantic City.  That just underscores the large pent-up desire and cash available to consumers. 

Which is a good sign for April.
















































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