Tighter Budgets Lean Times
Not every economic downturn is created the same. This one is global and is occurring at the same time which has major ramifications for all industries. It is also the best time to gain market share for those willing to double or triple their efforts.
Take for example big box retailers like Costco and Walmart who are both still enjoying solid success despite the current climate. They have done this through a concerted marketing effort and accompanying message of low prices. By now everyone knows the bouncing yellow smiley face and many of you probably remember the cowboy version of the smiley face slashing prices. Walmart positioned itself properly going back several years during the good times. Back then lower prices didn't seem all that important as the economy was booming and people were flocking to stores like Target which was perceived as having a higher value.
Fast forward twenty four months to today. Target has announced major changes to both store expansion and to the credit portfolio their bank holds. They are tightening credit standards, lowering and eliminating limits all the while they are trying to get the message out that they are now the low price leader. A few years back they prospered being portrayed as the higher end retailer and they are now left scrambling to make customers understand they too are price competitive.
Costco is another interesting case. By providing massive amounts of goods at reasonable prices they have done very well and in many respects have been recession proof. Instead of promoting low prices they instead have promoted maximum value which was done by selling large blocks of goods at bulk prices. Whether or not the bargains are really there is still up to the consumer to decide which to this point they have by continuing to spend money in the stores.
These are two dramatically different approaches but they illustrated the importance of picking a message and sticking with it. Both brands have flourished and continue to prosper during difficult economic times by having a multi-year coherent message. The economy is going to have some historic lows and will continue to be extremely volatile over the next two years. Use this time to build your brand message and brand loyalty.
Oil Greased The Economic Tracks
The Nikkei has hit a 5 year low in early morning trading in Japan. An ocean away the ASX 200 was down over 4 percent and Topix was down close to 6 percent. The rout cuts across all sectors. The economic turmoil continues to slam the economies of the World.
This afternoon on a major business network owned by GE (hint hint) one of the on air reporters said his sources are telling him business essentially came to a halt on or about September 30th. Our sources within the marketing industry tell us much of the same with dozens of ASI suppliers and distributors reporting slow sales at recent trade events. Of course the figures released later this winter will show a growing industry in 2008 but those numbers can end up being about as accurate as the real estate numbers we kept hearing the last two years from NAR.
Media advertising budgets continue to be ravaged by the economic stall. Newspaper advertising sales are at decade lows with no end in sight as readership of the traditional print offerings has vanished. Online advertising sales continue to grow but for the big print publications it will likely not be enough to offset the losses. Compounding the problem is the demise of the US Auto Industry and as a result all of those weekend sales advertisements that helped support the bottom line.
Consumer confidence is falling by record amounts, car sales are terrible, consumer sales are terrible but hey we have lower gas prices! It is disgusting to see how far off the predictions have been for oil prices and oil consumption since the spring. One has to think it was deliberate manipulation, how can any expert have predicted $200 for oil and actually believe it wouldn't collapse demand? How can everything have changed so quickly in just 70 days that oil prices have fallen 50%? What are we doing to prevent such manipulation in the future? All the candidates talk about it but will any of them refuse the money from the oil lobby to protect the citizens?
The equity markets are bi-polar, up one day down the next to such extremes that in the last 40 days the market has been up or down by less than 100 points only three times. On Monday the market goes up and everyone is happy and talking about how it may not be that bad, by Wednesday we are back to hearing about just how bad the economy is now. The bottom line? Major corporations struggled for three weeks to fund operations. While they were searching their market caps were smashed eliminating one possible avenue. Budgets were slashed and expenditures cut. The immediate effects were not felt until the last week or two when businesses further down the chain noted lost sales. Retailers, car dealers and other front line businesses saw the initial shock instantly but it was tough to gauge as business has already fallen off in August. As business fell at an incredible pace organizations began laying off, cutting back hours and pay of staff. This process is accelerating now as we head into the crucial holiday season. A bust of a holiday season will put some retailers out of business including large national brands that were symbols of our success in the 1990s.
It is going to get much uglier before it gets better and it is going to happen quickly in the next few weeks. Oil prices are not falling because the oil companies decided we needed a break, they're falling because nobody is buying gas with 5% decreases in the last month versus the same month last year. That decrease is the result of commerce stalling and Bernanke and company are right in realizing we need another stimulus immediately or the long road down will be another Depression. Hopefully the assistance programs we have in place are enough to help but they will surely get tested barring an economic Houdini by the Federal Reserve and Treasury.
From this point on the discussion will mainly center around the ad specialties industry, products, businesses and trade issues.
Demand Destruction Not In Time To Stop Economic Destruction
Just a few months ago there were wide proclamations of fundamental support for oil prices approaching $200 or $300 a barrel by next year. It is probably somewhat ironic that one of the most frequent predictors of these oil prices was none other than Morgan Stanley, the same Morgan Stanley now reportedly in dire financial straits. As oil prices soared the monetary policies of nations were governed by the fear of inflation as the core price indexes soared on the back of big oil hikes. Unfortunately for everyone in the free world the inability or unwillingness of Treasuries world wide to loosen monetary policy through lower rates has resulted in a once in a lifetime global collapse.
With oil prices now dropping and global demand destruction in full swing we are seeing a precipitous decline in gas prices. Over the last two weeks a record drop has occurred with gas prices sliding down almost 20 percent. It is interesting to note that the gap between oil prices and gas prices still yields higher gas prices than would be historically supported at this price per barrel. Gas Buddy maintains a wonderful gas price survey graph that dates back years. Domestic demand dropped close to 4 percent in the most recently reported period but that seriously lags current market conditions. Probably the best indicator of the recent demand destruction is the weekly oil inventory report. This past week the experts expected very small increases in reserves. We were instead greeted by actual increases that were seven or eight times higher than the consensus. This all provides support to the idea that economic activity diminished by a magnitude commensurate with a serious recession at the end of September. Most experts seem to correlate the staggering decrease with the bailout crisis. Off the record reports from retailers reportedly show a massive drop in retail activity starting at the end of the month as consumers in shock over the financial crisis started hoarding their chestnuts. Car dealers have also reported foot traffic into dealerships fell by 50 percent or more and overall automobile sales plummeted 20-40 percent among the major manufacturers and not even Honda was immune this time.
One TV analyst likened the current price drop as a tax cut. That would be justifiable logic if consumers were accustomed to paying $4 a gallon over the last decade. Prices dropping back to the top edge of the price curve of the last ten years isn't a tax rebate it's pretty much no different than a tax and likewise had the same effect on the economy. Economic activity is going to be sharply negative in this quarter, perhaps as much as 4 percent lower when all is said and done in future revisions. How far into 2009 the recession continues will be dictated by what happens over the next week or two in the equity markets. Despite the proclamations of many pundits saying we have hit the bottom we clearly have not. As CNBCs Jim Cramer has discussed this recent crash is much different than previous historic crashes. This occured in what was still a growing economy. We are just now hitting the economic contraction after enduring several years of falling home prices and months of job losses. There is a lot of bad economic news to come and it is hard to fathom the market rebounding much on the back of terrible holiday season sales.
All industries in this country were hurt by the rampant speculation and inability of our government to reign in the invisible if not naked speculation that allowed for market manipulation. The airline industries were hurt so bad they had to raise prices, cut routes, cut staff and many of these airlines will never regain their financial strength. GM and Ford are subject to continual rumors of bankruptcy and mergers as well as Chrysler. Shipping giants are struggling as are major technology providers to the corporate sector. It's just starting to get bad now and all of these things have already taken place. The damage has been done and gas at $1.50 a gallon in a few months won't do anything to repair the irrepairable damage done to our economy by a few dozen organizations that manipulated prices and markets.
The next few years will be tough for this country. So much damage has been done and much of the blame is being shifted to the subprime crisis with no basic understanding that oil prices started the ball rolling this year to the overall slowdown that put us into crisis mode. Where are all the experts now arguing fundamentals should yield $200 a barrel oil?