Surviving the recession
Since the credit crunch of the summer a recession seems likely. The online retail sector may indeed be booming, but it only represents part of the economy and the other bits of the economy are suffering from a twin dose of cost inflation and asset price deflation.
It seems clear from our work that the news is likely to hit worst the businesses that are doing a bad job. Some trends seems likely to protect businesses:
a) offering a good product with transparent pricing; b) developing a loyal customer base, with strong recommenders; c) offering well informed, responsive customer service; d) having management that understands both the businesses margins and the needs of customers and is responsive to both.
Pricing has to be transparent, because there is no protection from competitors who are one click away (or even on the same price comparison page). Loyal customers are important and recommenders even more so, because shopping decisions are increasingly driven by consumer reviews. Customer service is vital because service is a key driver of recommendations - and a key source of complaint. Service is the most expensive and low-margin part of most businesses, however, so management needs a very good understanding of the business’s costs in order to figure out clever ways of delivering maximum value to both customers and shareholders.
The transparency of information about brands and businesses online is a powerful encouragement for businesses to do a better job. It is like what Adam Smith called the “invisible hand” of the market. It helps consumers (and businesses) make better-informed decisions. It punishes the weak and the opaque.
Companies that will suffer during the recession:
a) businesses selling products who brand appeal is achieved by expensive marketing campaigns, but which have poor reliability and offer poor service; b) service businesses offering unquantifiable benefits around (e.g.) “branding”; c) businesses with high fixed costs in old world distribution models.
The key to prosperity is to use Net Promoters methodology to select stock in businesses with strong word of mouth support, reasonable capitalisation and positioning in areas of the economy where shocks in the value of real estate, fluctuations in the price of raw materials and of labour are less likely to be critical. In fact, I would look for businesses with:
a) low capital requirements; b) the ability to shift costs to lower wage areas; c) the ability to reach a global market with low distribution costs.
(Update Tuesday 4th 12:06)
The fact that Tesco has announced higher profits despite the slowdown bears out some of this thinking. They offer price comparison, have good Net Promoter Score rankings, do a good job of customer service and manage their business with a high understanding of where their costs sit. FULL DISCLOSURE: Tesco are a current client of Market Sentinel.
Add to Del.icio.us
Digg this
Add to reddit
Add to Y! MyWeb
+44(0)20 7793 1575
March 7th, 2008 at 11:57 am
A trend I’ve noticed (which may be local, but may also be national) is that employee earnings on average are about as minimized as they’ve ever been, statistically. The real scare in the market (housing, services, products) is that the majority of consumers are losing their buying power, and that factor is the “weakest link” in the economy today, so to say.
Consumers losing their buying power is obviously going to result in businesses losing their selling power, investors/stockholders losing their growing power, and lenders losing their collectables/recievables as a result. It also leads to more lender underwriting, and many “buyers’ markets” that are overpopulated with unqualified buyers; who then tend to overleverage everything they touch, miss payments, and foreclosure rates go up from there.
I think it’s really high time that the term “wealth” be redefined to modern standards. It’s not about the accumulation of money, it’s really about the circulation of it. The more goods and services are provided and exchanged, the more “wealthy” a community becomes as a result - because more revenue and more salary are traded off both ways.
Also, there should be an agreeable pricing range between most companies on products that ensure they remain profitable and above the “breakeven point” for companies that deal with them. Markup/inflation needs to remain at a healthy level for operations to continue for everybody, and all it takes is someone willing to burn their toes to mess it up for everybody.
It’s either that, or this entire new generation is going to have to deprivatize many businesses/practices, and offer a larger number of smaller operations, since income/living-within-means security is increasingly becoming a joke these days.
But this is coming from Bakersfield, CA; how many terrible Top 10 lists is it on? Cost of living. Foreclosures. Pollution. Drug trafficing. Who knows how many more, either? (Ironically, it’s a rather mellow place, too!)
The -only- thing in your report that I think should be disputed is “the ability to shift costs to lower wage areas.” In a roundabout way, “wages” are simply an investment in the market of consumer spending. Minimize that, and it will only minimize revenue as well. People don’t spend money they can’t make, right?
April 4th, 2008 at 10:53 am
You didn’t mention how the service industry suffers. Especially in the home improvement arena, the little guy [or girl] who owns their own home improvement business is suffering greatly, because people generally do not have the cash to fix up their homes - painting, remodels, etc. It’s not only those who offer expensive products or poor services - industries like ours that depend on people having “extra” fails when the economy suffers; especially when people begin to financially panic.