Obama's Policies and the U.S. Consumer -- Page 2

Labor Costs Rise
Unions played a big part in the success of President Obama's candidacy, and the president seems to want to return the favor. In addition to the increased funding for the Department of Labor, which appeared to be an afterthought in the Bush administration, the president has come out squarely behind the Employee Free Choice Act. This gives retailers a high degree of heartburn. Larger retailers that depend on cheap labor to help keep prices low--such as  Wal-Mart (WMT),  Target (TGT), and  Home Depot (HD)--may be at risk of losing a big part of their edge over competitors.

A reinvigorated Department of Labor could be a headache, but the threat of successful unionization (made more possible by the Employee Free Choice Act) is particularly concerning to these companies and their investors. Throw in a minimum wage hike, and you're talking about substantially higher labor costs. Wages comprise the bulk of operating costs for retailers, and cheaper labor is a major reason why Wal-Mart has been able to maintain a low cost structure that has given it the means to dominate individual categories like toys and food. Today Wal-Mart is the nation's largest grocer and its low prices are enabling it to continue to build market share against supermarkets, as consumers prioritize price in these tough economic times.

Should Wal-Mart become unionized, the company would likely either have to raise prices to cover increased costs and lost productivity (and risk ceding market share to rivals), or keep prices low and sacrifice margins. This would be a significant boon to the nation's already-unionized grocery stores, such as  Kroger (KR) and  Safeway . If the union bill passes in its current form (which we think is unlikely, at this point), we would have to reconsider moat ratings for most grocers.

Ultimately the Employee Free Choice Act may pass, but it's anyone's guess what the final bill will look like. Given that even some Senate Democrats are publicly expressing concerns about the impact this bill could have on a struggling economy, it could either die quietly, or end up watered down to the point where big-box stores could continue to successfully keep unions at bay.

How It All Shakes Out
When it comes to the consumer, we think the Obama budget signals tougher times ahead for the upper middle class and above, but it's not clear that low- to middle-end consumers would see much of a net benefit. Tax relief and more government financial support (such as health care) should help their pocketbooks and sentiment. However, these benefits may be offset by rising prices for energy and basic necessities. If spending increases from low- to middle-end consumers are only moderate, and the more affluent spend significantly less, we would be concerned about products and retailers that rely on discretionary spending--including luxury retailers such as  Tiffany , high-ticket goods like cars, and even everyday products from moderately priced specialty retailers and department stores. We would still feel pretty good about prospects for CPG companies like  PepsiCo (PEP) and  Proctor & Gamble (PG), but there is certainly the risk that consumers will continue to trade down to lower-end brands or private-label brands.

We believe the threat of greater unionization under President Obama's labor policies would bode very poorly for big-box retailers that have large workforces, lower wages, and likely have large targets on their backs from unions. Unions consider Wal-Mart the biggest prize, but Target's wages are similar to Wal-Mart's and plenty of others would not feel safe in the type of environment where unions are emboldened. The only likely beneficiaries of this policy would be the unionized grocery stores.

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