October 27, 2008
BrainTrust Query: Should we be expecting deflation or inflation for 2009?
By Bill Bittner, President, BWH Consulting
This holiday season, as the retail operations departments are dealing with the (hopefully) holiday rush, the headquarters staff will begin working on the 2009 budgets. Most retailers end their fiscal year in the quiet sales period of January through March, and begin putting together their expectations for the following year. The military is fond of saying that “no battle plan ever survived the first shot of war” and budgets have the same challenge but most companies still go through the process as they build a perspective of the future. Today’s uncertain macroeconomic environment and the government’s response make this upcoming year’s budget preparation particularly challenging.
There are two major forces at work in our economy that will have opposite effects on the outcome. On one hand, we have the economic slowdown, initiated by the rise in energy costs, which had begun prior to the credit crisis and threatens to reduce demand. At the other end, we have the various government programs that are easing available credit, propping up asset values and introducing stimulus through direct payments. Budget preparers have to begin their forecasts by deciding how these macro forces will affect the retailer’s customers and operating costs.
Potentially, these forces could lead to inflationary or deflationary pressures.
I think 2009 is going to show a dichotomy of outcomes. I believe the “economy shoppers” are going to be stressed, but there are going to be more of them as unemployment rises and the availability of credit dries up. At the other end, the truly wealthy shoppers will continue to spend money but not as ostentatiously. “Gluttony” will fall out of style and high end spending will be focused on the home, personal entertainment, travel, etc. For the vast middle, it will become a “value proposition” and consumers will have to set priorities. Quality and practical goods that are functional and clearly superior will be the preference. Products that promise to reduce other costs (even large screen TVs) by making the home a focal point will be popular.
So how should retailers react? Obviously, it depends on your market but I would put emphasis on making it easier for consumers to spend in your store. I think the government actions are going to make a lot of money available but that banks and general lenders are going be less willing to give it out. This means retailers may have to carry more of the burden by offering to carry more of their customers’ charges. Retailers who have avoided frequent shopper programs may want to consider them, combined with some kind of consumer credit program that enables more spending.
Ultimately, I think the beginning of 2009 will see deflationary activity as energy costs decline and lower raw material costs flow through to finished goods. But you can’t avoid the impact of all the government intervention forever and by the end of 2009 you will see inflation begin to creep in and prices start to rise.
So how should a retailer prepare their 2009 budget? Very carefully!
Discussion Questions: How should budget planners react to the current and projected economy? Will their customers and suppliers be affected more by deflation or inflation? (Oh yeah, and did I mention the Presidential Election?)
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The question–infaltion or deflation–is like BWH’s website proclaims, whether you are a lion (inflation) or a zebra (deflation) you better wake up and start running your playbook.
Public companies and retailers are now focused on increasing sales and profits. That puts an emphasis on increasing prices, hoping higher prices will compensate in part for fewer unit sales, and hopefully that will add to more profits. While both inflationary and deflationary factors will interplay in the months ahead, I’m of the disposition that inflation will be the greatest near-term threat.
History is a teacher and recent history suggests that at least in the short term, the counter measures deployed to shore up the economy have done little to stem the current downturn in the economy. The market is still erratic. Deflationary pressures will prevail for 2009 as previously mentioned due to the rising cost of goods and fuel. Private labels will benefit and traffic patterns will wane. Look for an overcompensation to correct.
Economically, there will be little long term difference in who the next president is, try as you may to politicize it. Short term, each will have their own unique effect on the stock market. The question is, what is being invested in?
We are operating under the most unique circumstances in modern history. I don’t think there is a playbook for these times.
I’m preparing for inflation. Simple economics tells us you cannot just print off trillions of dollars to bail out failed businesses without an inflationary effect. Too many dollars chasing too few goods. Now is a good time to buy gold, homes, and stocks because they should be a hedge against inflation down the road. Bad time to be putting cash under the mattress or investing in low interest bank CDs.
Of course, the real answer is “it depends.” Walmart? Panera Bread? Safeway? Urban Brands? They’ve all got a lot to look forward to this year, but for the most part, I agree with Marc Gordon above: plan for the worst.
There are absolutely NO signs of positive consumer movement, especially with the reality of a new debt “bust” looming before us as well. Best thing to look forward to is new leadership, and even that “depends.”
We are going to see both. We will see deflation with respect to inventory value. Inventory is worth only what you can produce by selling it to another. Houses, electronics, clothing will be sold for less in 2009, especially that inventory that is held over from the holidays. We will experience inflation as we move further into 2009 as oil prices again escalate. We have seen recently what oil related inflation can do to our economy. However, it is possible that high oil prices could save our economy, in the long run. If oil related transportation costs become so oppressive that importing manufactured goods from SE Asia becomes expensive, then we can expect to see the establishment of domestic manufacturing to take the place of “expensive” imported goods. We may need some regulation to keep the majority of these new jobs out of Mexico and central America. It does present an opportunity, if our leaders are smart enough to take advantage of it.
Smart companies use downturns as an opportunity to improve relationships. Retailers need to use this one to learn as much as possible about their customers. When actual capital is short, customer information becomes valuable and competitive comes from it. When consumers start spending again, be their number one choice.
In my dealings, all upcoming seasonal buys are affected by the current situation. Christmas, Valentine’s, Spring/Summer and BTS have all been pared down. I’m seeing a strong focus on value oriented consumables and the expansion of discount categories. I’m also seeing expanded private label sections. All this this would indicate that the consumer will be even tighter with the wallet in the next 18 months.
My own opinion is, even if we see a recovery soon, consumers will be psychologically scarred and will still reign in spending. Won’t really matter if its inflation or deflation at this point. Retailers will need to focus on the consumer to get them to spend (sounds pretty obvious but as the good times rolled in the past, merchandise mixes and planograms have become stale and complacent). Image and the value proposition is what will drive customers back to retail.
Inflation will be our biggest enemy in the months and years ahead. While energy prices are temporarily going down, not only will this not last but the effects of high energy costs are already “baked into” our food prices. Everyone has been raising prices to offset higher costs and will not reduce those prices when costs abate or reduce. The huge amount of funds dumped into the economy by the Fed will certainly have an inflationary impact on our economy with no relief on the horizon. The prospect of a totally Democratic controlled government will escalate spending, entitlement programs, higher taxes and will further weaken our economy in both the short-term and the long-term as well. Is it any wonder that so many Americans have a “bunker mentality” right now? Retail spending, I believe, will be very poor this Christmas season and at least the first half of 2009 as well.
If we have an Obama presidency with a Democratic Congress, we will most likely see an inflationary period, if history is any teacher.
In historic economic terms, a combination of higher overall taxes (regardless of who pays them), reduced foreign trade from protectionism, and reduced productivity (assuming card check is passed and big box retailers get unionized) always produces inflationary pressures. Think Jimmy Carter, not Bill Clinton.
If we have a McCain presidency with a Democratic Congress, it is a toss-up, inflation or deflation.
I think what we should expect to see is stagflation. This is a combination of inflation, slow economic growth and rising unemployment. I fear that retailers will attempt to increase sales by providing their own lines of credit. I hope they are wise enough to require more than a driver’s license and another credit card as a qualifier.
We may not like the credit crunch, but we will all have to expect lower margins to get this economy back on track. Our grandparents used to say, “A penny saved is a penny earned.” Our generation has lost sight of that concept and not only do they spend more than they make, they have credit debt our parents would have had heart attacks over.
This is a wake up call for our country and people are starting to figure out that they need to save. Time to live within our means.
We’ve only seen the beginning of this. Our transition from buy-anything-on-credit to buy-what-you-can-afford will be dramatic and lasting. The good news is that we’ll have a new President-elect in a little over a week, and he can provide fresh assurance that thoughtful and measured planning is underway.
2009 will be a recessionary year with deflationary pressures. Inflation occurs during high demand years, not decreasing demand (which is what we have) and market interest rates that are falling or flat. Inflation is a sustained rise in prices, not a decrease in prices.
This one is tough to call. A year ago it would have been crazy to speculate that oil prices would top $145 a barrel during the summer, with huge inflationary ripple effects at the gas pump and elsewhere. A few months ago it would have been hard to foresee oil prices dropping over 50% even if you assume there was a speculative bubble. So it’s hard to use a crystal ball about such a key driver of other costs in the marketplace.
There is also the conflict between a couple of different market forces. Use the airline industry as an example: They have added fees and other hidden charges to offset the rising price of fuel, and I don’t expect these fees to disappear simply because of lower oil costs. On the other hand, the classic theory of “supply and demand” suggests that retailers and service providers are going to be more competitive to stimulate any sort of reaction from consumers in the coming months.
I would say this is a classic example of “hope for the best and plan for the worst.” Creating a budget for the retail industry in this type of market should be cost driven rather than sales driven. Taking into account break-even points, rising overhead, and payroll, should be major considerations about projected sales. As important as sales are, I do believe that the first half of 2009 will be a time of lower margins due to lower prices and higher costs.
Deflationary pressure should be the overriding factor in budgeting for 2009, but one of the objectives in this type of economic turmoil is to shake out those with business models and execution issues that are weak, but to also give those retail models that are best in class to become stronger. The objective will be about how to create a shopping experience that is focused on value, assortment and engaging the consumer in whatever retail category to become a stronger player in the long term. Those who cut costs or spend margin without a clear objective may not survive.
My answer is inflation.
Look, these are trying times for Americans and American business. We are experiencing changes in the economy that we have not seen for a while. Consumers are afraid as many see their 401Ks and other investments seemingly sink without the clear understanding if the money will return. It is a fact that sensible people do not contest and when consumers are worried, business should be too.
However, as worried or concerned as we all may be (both individual and business) we would be wise to keep our calm. America has been through difficult times before. We always recover. We have experienced difficulties of every sort, yet we have always endured and prospered.
We are a nation of thinkers, doers, and achievers. We will find a way out this time too. Thus business should not allow fear and bothersome stories further damage business by slashing budgets. Rather prudence must be employed to make intelligent decisions and to keep investing for the future. After all, how bad would it be when the turn-around does happen if one has stripped away their business through budget cuts and not be ready for the uptick? Let’s keep investing in American business and in American people. As we do so, adjustments will be made both personally and in business but in the end our economy will win and so will Americans.
I just finished a meeting with a major retailer and find this to be pretty relevant:
The holiday season will indeed show a dichotomy of outcomes for inflation vs. deflation, keeping in mind also that most of what appears on the retail shelves has already been cost committed one way or the other. What concerns me is that retailers are putting pressure on suppliers to cut costs–as if the suppliers have extra inherent profits to cut as well. In most cases, that’s not so. Ironically, if suppliers can’t afford to do business then jobs will be cut, which means consumers won’t shop. I think we all need to calm down and stop over reacting to the point where we will hurt the economy all by ourselves.
In the short term, costs are pretty well established, although the drop in oil prices is going to help out in freight expenses. Still, any pressures that do occur will likely be on prices as retailers compete to maintain market share. As we get further into spring, I would expect that the strengthening dollar will have translated into more cost easing on imported products. By next fall, all of the stimulus may have an inflationary effect, if the recession turns out to be shorter and shallower than expected.
But there’s a lot of ifs there. I believe that in this environment, you have to plan prudently. I don’t believe it’s prudent to plan an increase if the current trend has been a decrease, even if the comparables seem favorable. I mostly work with smaller, independent retailers, and I have advised my clients to remain cautious until the customer clearly signals she is ready to spend more, to not plan an increase until an increase occurs. To plan otherwise is to unwisely increase markdown risk, and imperil margins.
The frequent response I hear in back is that if you don’t plan for an increase, you won’t get an increase, but there are very few categories right now that look like there might be breakout increases on the horizon. More commonly, any potential increases appear to be fairly modest, and in most every case additional inventory simply isn’t necessary in the short term to capitalize on that potential. Most small and independent retailers can run an increase of a few percentage points over plan for the several months necessary to increase inventory levels.
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The question–infaltion or deflation–is like BWH’s website proclaims, whether you are a lion (inflation) or a zebra (deflation) you better wake up and start running your playbook.
Public companies and retailers are now focused on increasing sales and profits. That puts an emphasis on increasing prices, hoping higher prices will compensate in part for fewer unit sales, and hopefully that will add to more profits. While both inflationary and deflationary factors will interplay in the months ahead, I’m of the disposition that inflation will be the greatest near-term threat.
History is a teacher and recent history suggests that at least in the short term, the counter measures deployed to shore up the economy have done little to stem the current downturn in the economy. The market is still erratic. Deflationary pressures will prevail for 2009 as previously mentioned due to the rising cost of goods and fuel. Private labels will benefit and traffic patterns will wane. Look for an overcompensation to correct.
Economically, there will be little long term difference in who the next president is, try as you may to politicize it. Short term, each will have their own unique effect on the stock market. The question is, what is being invested in?
We are operating under the most unique circumstances in modern history. I don’t think there is a playbook for these times.
I’m preparing for inflation. Simple economics tells us you cannot just print off trillions of dollars to bail out failed businesses without an inflationary effect. Too many dollars chasing too few goods. Now is a good time to buy gold, homes, and stocks because they should be a hedge against inflation down the road. Bad time to be putting cash under the mattress or investing in low interest bank CDs.
Of course, the real answer is “it depends.” Walmart? Panera Bread? Safeway? Urban Brands? They’ve all got a lot to look forward to this year, but for the most part, I agree with Marc Gordon above: plan for the worst.
There are absolutely NO signs of positive consumer movement, especially with the reality of a new debt “bust” looming before us as well. Best thing to look forward to is new leadership, and even that “depends.”
We are going to see both. We will see deflation with respect to inventory value. Inventory is worth only what you can produce by selling it to another. Houses, electronics, clothing will be sold for less in 2009, especially that inventory that is held over from the holidays. We will experience inflation as we move further into 2009 as oil prices again escalate. We have seen recently what oil related inflation can do to our economy. However, it is possible that high oil prices could save our economy, in the long run. If oil related transportation costs become so oppressive that importing manufactured goods from SE Asia becomes expensive, then we can expect to see the establishment of domestic manufacturing to take the place of “expensive” imported goods. We may need some regulation to keep the majority of these new jobs out of Mexico and central America. It does present an opportunity, if our leaders are smart enough to take advantage of it.
Smart companies use downturns as an opportunity to improve relationships. Retailers need to use this one to learn as much as possible about their customers. When actual capital is short, customer information becomes valuable and competitive comes from it. When consumers start spending again, be their number one choice.
In my dealings, all upcoming seasonal buys are affected by the current situation. Christmas, Valentine’s, Spring/Summer and BTS have all been pared down. I’m seeing a strong focus on value oriented consumables and the expansion of discount categories. I’m also seeing expanded private label sections. All this this would indicate that the consumer will be even tighter with the wallet in the next 18 months.
My own opinion is, even if we see a recovery soon, consumers will be psychologically scarred and will still reign in spending. Won’t really matter if its inflation or deflation at this point. Retailers will need to focus on the consumer to get them to spend (sounds pretty obvious but as the good times rolled in the past, merchandise mixes and planograms have become stale and complacent). Image and the value proposition is what will drive customers back to retail.
Inflation will be our biggest enemy in the months and years ahead. While energy prices are temporarily going down, not only will this not last but the effects of high energy costs are already “baked into” our food prices. Everyone has been raising prices to offset higher costs and will not reduce those prices when costs abate or reduce. The huge amount of funds dumped into the economy by the Fed will certainly have an inflationary impact on our economy with no relief on the horizon. The prospect of a totally Democratic controlled government will escalate spending, entitlement programs, higher taxes and will further weaken our economy in both the short-term and the long-term as well. Is it any wonder that so many Americans have a “bunker mentality” right now? Retail spending, I believe, will be very poor this Christmas season and at least the first half of 2009 as well.
If we have an Obama presidency with a Democratic Congress, we will most likely see an inflationary period, if history is any teacher.
In historic economic terms, a combination of higher overall taxes (regardless of who pays them), reduced foreign trade from protectionism, and reduced productivity (assuming card check is passed and big box retailers get unionized) always produces inflationary pressures. Think Jimmy Carter, not Bill Clinton.
If we have a McCain presidency with a Democratic Congress, it is a toss-up, inflation or deflation.
I think what we should expect to see is stagflation. This is a combination of inflation, slow economic growth and rising unemployment. I fear that retailers will attempt to increase sales by providing their own lines of credit. I hope they are wise enough to require more than a driver’s license and another credit card as a qualifier.
We may not like the credit crunch, but we will all have to expect lower margins to get this economy back on track. Our grandparents used to say, “A penny saved is a penny earned.” Our generation has lost sight of that concept and not only do they spend more than they make, they have credit debt our parents would have had heart attacks over.
This is a wake up call for our country and people are starting to figure out that they need to save. Time to live within our means.
We’ve only seen the beginning of this. Our transition from buy-anything-on-credit to buy-what-you-can-afford will be dramatic and lasting. The good news is that we’ll have a new President-elect in a little over a week, and he can provide fresh assurance that thoughtful and measured planning is underway.
2009 will be a recessionary year with deflationary pressures. Inflation occurs during high demand years, not decreasing demand (which is what we have) and market interest rates that are falling or flat. Inflation is a sustained rise in prices, not a decrease in prices.
This one is tough to call. A year ago it would have been crazy to speculate that oil prices would top $145 a barrel during the summer, with huge inflationary ripple effects at the gas pump and elsewhere. A few months ago it would have been hard to foresee oil prices dropping over 50% even if you assume there was a speculative bubble. So it’s hard to use a crystal ball about such a key driver of other costs in the marketplace.
There is also the conflict between a couple of different market forces. Use the airline industry as an example: They have added fees and other hidden charges to offset the rising price of fuel, and I don’t expect these fees to disappear simply because of lower oil costs. On the other hand, the classic theory of “supply and demand” suggests that retailers and service providers are going to be more competitive to stimulate any sort of reaction from consumers in the coming months.
I would say this is a classic example of “hope for the best and plan for the worst.” Creating a budget for the retail industry in this type of market should be cost driven rather than sales driven. Taking into account break-even points, rising overhead, and payroll, should be major considerations about projected sales. As important as sales are, I do believe that the first half of 2009 will be a time of lower margins due to lower prices and higher costs.
Deflationary pressure should be the overriding factor in budgeting for 2009, but one of the objectives in this type of economic turmoil is to shake out those with business models and execution issues that are weak, but to also give those retail models that are best in class to become stronger. The objective will be about how to create a shopping experience that is focused on value, assortment and engaging the consumer in whatever retail category to become a stronger player in the long term. Those who cut costs or spend margin without a clear objective may not survive.
My answer is inflation.
Look, these are trying times for Americans and American business. We are experiencing changes in the economy that we have not seen for a while. Consumers are afraid as many see their 401Ks and other investments seemingly sink without the clear understanding if the money will return. It is a fact that sensible people do not contest and when consumers are worried, business should be too.
However, as worried or concerned as we all may be (both individual and business) we would be wise to keep our calm. America has been through difficult times before. We always recover. We have experienced difficulties of every sort, yet we have always endured and prospered.
We are a nation of thinkers, doers, and achievers. We will find a way out this time too. Thus business should not allow fear and bothersome stories further damage business by slashing budgets. Rather prudence must be employed to make intelligent decisions and to keep investing for the future. After all, how bad would it be when the turn-around does happen if one has stripped away their business through budget cuts and not be ready for the uptick? Let’s keep investing in American business and in American people. As we do so, adjustments will be made both personally and in business but in the end our economy will win and so will Americans.
I just finished a meeting with a major retailer and find this to be pretty relevant:
The holiday season will indeed show a dichotomy of outcomes for inflation vs. deflation, keeping in mind also that most of what appears on the retail shelves has already been cost committed one way or the other. What concerns me is that retailers are putting pressure on suppliers to cut costs–as if the suppliers have extra inherent profits to cut as well. In most cases, that’s not so. Ironically, if suppliers can’t afford to do business then jobs will be cut, which means consumers won’t shop. I think we all need to calm down and stop over reacting to the point where we will hurt the economy all by ourselves.
In the short term, costs are pretty well established, although the drop in oil prices is going to help out in freight expenses. Still, any pressures that do occur will likely be on prices as retailers compete to maintain market share. As we get further into spring, I would expect that the strengthening dollar will have translated into more cost easing on imported products. By next fall, all of the stimulus may have an inflationary effect, if the recession turns out to be shorter and shallower than expected.
But there’s a lot of ifs there. I believe that in this environment, you have to plan prudently. I don’t believe it’s prudent to plan an increase if the current trend has been a decrease, even if the comparables seem favorable. I mostly work with smaller, independent retailers, and I have advised my clients to remain cautious until the customer clearly signals she is ready to spend more, to not plan an increase until an increase occurs. To plan otherwise is to unwisely increase markdown risk, and imperil margins.
The frequent response I hear in back is that if you don’t plan for an increase, you won’t get an increase, but there are very few categories right now that look like there might be breakout increases on the horizon. More commonly, any potential increases appear to be fairly modest, and in most every case additional inventory simply isn’t necessary in the short term to capitalize on that potential. Most small and independent retailers can run an increase of a few percentage points over plan for the several months necessary to increase inventory levels.