Affordability, not affordable luxury, key trend for next 20 years

Consumer demand

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SearsThe world changes, and successful companies and people learn to change with it.  That was the blog’s experience 20 years ago in one of ICI’s most profitable business.  As an executive team, we expected recessions to take place every 3-4 years.  But we began to realise we were being too cautious in our strategies, and missing opportunities.

So we changed our approach, and began instead to work on the principle of ‘stretch targets’.  After a while, we even stopped looking nervously over our shoulders for a coming storm – which never came.

That was our transition into the SuperCycle world of the Demographic Dividend, although of course we didn’t recognise its cause at the time.  As highlighted in chapter 2 of ‘Boom, Gloom and the New Normal’:

  • Between 1854 – 1982, the US economy was in recession for 35% of the time
  • Between 1983 – 2007, it was in recession for just 5% of the time – 16 months in 25 years

Now, today’s senior executives are having painfully to move in the reverse direction as they grapple with the world of the Demographic Deficit.  Stretch targets no longer reliably translate into dollars on the bottom line.

The world is thus moving ‘back to the future’.  Life becomes far more complex as lack of economic growth in turn leads to greater social and political pressure.  The key, just as 20 years ago, is to focus on developments in consumer markets, which can provide us with a valuable guide.

Retail giants Tesco and Wal-Mart first highlighted this change in the zeitgeist in July 2007.  Tesco’s then commercial director provided valuable early  warning of the Crisis ahead:

Consumers are more focused on value-for-money than they were a year ago.  I could see price coming up the agenda last year, although the talk was all about quality’, he added.  ‘Coming down the road is a tougher time, and that is why we are doing this now’”

7 years later, bigger and more far-reaching changes are underway.  So-called ‘hard discounters’, focused on cutting prices to the bone, are starting to dominate.  Tesco is now dedicating whole aisles in its stores to cut-price products, as an increasingly vicious price war gets underway in the UK.  We can only imagine what will happen when the wealth effect from the UK’s property bubble bursts.

The warning signs are clearly there when the CEO of the UK’s leading supermarket, reported yesterday:

“I have not seen a quarter’s like-for-like sales like this before, that I can remember.”

The US finds itself in a similar position.  It pioneered the concept of shopping malls in 1956, and their construction peaked in the 1980s:

  • Time-poor and cash-rich BabyBoomers valued the ability to go ‘one-stop shopping’ for their growing families
  • Today, the ageing Boomers are in the opposite position – they are time-rich and cash-poor

Troubled iconic store chains Sears and JC Penney are therefore closing shops all over the US.  And in so doing, they are threatening the existence of the malls themselves.  Malls without anchor tenants are not a very attractive proposition for shoppers, particularly when shop windows are filled with ‘To Let’ banners.

This change is not due to incompetent management.  Even giant Wal-Mart is facing similar profit problems at its Sam’s Warehouse chain.  While Japan’s Sony is battling slumping demand for televisions and personal computers.

Today’s senior executives therefore have to go through the blog’s transition process of 20 years ago, but in the opposite direction.  We must learn to expect continued turbulence in the external market.  And we must recognise that ‘affordable luxury’ is simply no longer affordable for most Western consumers.

Not only are the Boomers having to rely on pension income instead of salaries.  But today’s new graduates, the Class of 2014, have record high levels of tuition debt.  They each owe $33k each on average.  After adjusting for inflation, this is almost twice the level of 20 years ago.  So they also have less cash to spend.

Thus the decline in purchasing power is becoming a universal trend in Western consumer markets.  And it does not simply impact retailers.  As the New York Federal Reserve notes:

Young people with student loans are less likely to buy a house.  They are also less likely to have taken out car loans. They have worse credit scores. They appear to be more likely to be living with their parents.”

Affordability, not affordable luxury, will therefore be the sweet spot for the next 20 years.

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