Back in January I presented the argument that chocolate was income inelastic and thus recession-proof.
Well, it seems that theory is a bit overstated. Swiss bastion of sweet-brownness, Lindt & Sprungli, has announced it is closing two thirds of its US stores. It seems spoiling oneself is not as big a priority as some would have us think.
A new age of heightening frugality is being heralded in numerous circles. This is certainly something we’ve been discussing around here for a couple of months. It is worth revisiting what this might mean for the strategies of firms.
Firstly, it is worth noting that simply chasing frugal shoppers is not a strategy in and of itself. There needs to more to it.
It would seem that the catch-all phrase frugal for a raft of different consumer behaviours, including:
– reductions in overall spending
– re-prioritisation of preferences
– pursuit of overtly cheaper products
– re-conceptualisation of some items as indulgences (and thus avoided by some and cherished by others)
As such, firms need to tread a very careful path. They must consider the extent to which their consumers have altered in terms of willingness to pay. They may need to adapt to having fewer customers and/or lower margins (as prices adjust downwards), new competitors (as perceptions and price points shift) and more successful substitutes.
Of course, not all consumers will act in the same way, so firms must navigate some confusing messages from the market. Sticking to one’s guns rather than sending a completely new message might work, as long as this behaviour is simply transitory. As noted earlier, certain firms are better positioned to make hay while the sun shines (or doesn’t) if their offerings are undoubtedly more miserly.
While it is an extremely difficult time for start-ups seeking financing, it is still potentially a very fruitful time for those who can come to market with ideas that appeal to this new and potentially pervasive mindset.
In a gratuitously nepotistic plug (the business is run by my cousin), perhaps a service like Rentoid, which connects renters of items, is well-suited to these times. So too might anything else that caters to shifting behaviours (e.g. price-comparison services, home-catering).
Now that the Aussie business scene is back in full-swing post-Xmas, we are starting to see more of the fall-out from the current economic downturn.
Following on from the closure of corporate menswear boutique Herringbone in December, it now looks like a few more fashion retailers are on the skids:
“This week Figgins Holdings, owner of 120 footwear stores nationally, said it would shut all four of its Evelyn Miles boutiques and its 43 Shoobiz stores. Already the luxury Australian shirting company Herringbone has collapsed, a Supre store in the city has closed and the cult denim label Ksubi has been reported to owe $8 million.”
Now, this may well reflect the shifting buying behaviour of cash-trapped consumer (i.e. income elasticity), or it may simply reflect a great media awareness of business failures. Irrespective, it does represent a change to the competitive landscape.
This may mean new competitive spaces have opened up in the Australian fashion retail scene. Perhaps we might finally see a few more international players enter the market (a Zara or H&M?).
As I discussed back in November, the big boys of brewing are not finding the international arena as bountiful as they’d hoped. More reports are coming in of declining (or, at best, plateauing) sales across a range of markets.
SAB Miller certainly seem to be taking some hits, as do Danish giants Carlsberg (hence me giving their elephant a calming hug).
What is unclear from these reports is whether the international players are hurting more than domestic rivals (where there are such). By rights the multinationals should be spreading their risks more effectively and have some cost advantages. But any cost lead may have been eaten up in acquisition premiums as they’ve spread their wings chasing international markets over the past decade.
That latest news piece seems to confirm the earlier November news showing consumers in emerging markets abandoning the amber nectar as they feel the recessionary pinch (i.e. beer seems more income elastic in such markets). This begs the question where these big brewers are going to find more market growth, given the very low growth in sales in the developed world. Maybe more high-end product.
Alternatively they might want to follow the lead of Australia’s third biggest brewer Coopers, who also happen to be the world’s largest producer of “home brew” concentrates (the core ingredient for making beer at home). They are reporting considerable sales growth at the moment. Looks like folks are chasing more crafted beers, but at bargain prices (or more positively, seek a more hands-on beer encounter).
The search for goods that are income inelastic (and thus recession-proof) continues here at International BS blog.
The Wall Street Journal wants to add premium chocolate to the list. They claim that sales of the high end stuff have proven very resilient in the US.
I’m not quite as convinced by this argument. They may be confusing the aggregate behaviour of consumers (i.e. greater discovery and awareness of the product coupled with incerased accessibility) with the actions of individual consumers. Each chocolate lover might be cutting back their spending yet new consumers sneaking in to the market might be pushing up the total revenue.
Irrespective, it would seem that being a Willy Wonka is still a better career option than a Henry Ford at the moment…
Thanks to Tom Osegowitsch for pointing me at this article.
International BS Blog 
