Inflation? Worry about Deflation instead.

16 12 2008
John Lewis , Oxford St., London

John Lewis , Oxford St., London

It was announced today that the Consumer Price Index (CPI) fell by 0.4% from 4.5% in October to 4.1% in November. The CPI is the official measure of inflation used by the Government. The biggest factor for this fall is being attributed to the fall in crude oil prices. The average price of petrol was 95.2p. On the other hand, prices of fresh fruit and vegetables and non-alcoholic beverages is said to have risen compared to last year.

Although the drop is good news, the rate of inflation is still twice the official target of 2%. So, Mervyn King, the governor of the Bank of England put pen to paper and wrote a letter to the Government explaining why the rate of inflation had not hit the target. The governor of the Bank of England is required to write a letter to the Government whenever the rate of inflation is either 1% above or below the target and explain the possible action the BoE might take to solve it. However, Mervyn King feels that the next time he has to write a letter to the Government, it may not be about the reasons for inflation, but deflation instead.

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What are Inflation and Deflation?

Inflation is regarded to be a bad thing since it means a rise in prices, which is a bad thing for shoppers. Then, deflation must be a good thing, right? In the short term, yes it is. In the long term though, its a dreadful thing. To understand why a drop in prices is such a bad thing, one has to understand the meaning of the terms “inflation” and “deflation” and its causes. Inflation is the general increase in prices or, it is the decrease in the purchasing power of money. There are two possible causes; either the cost of production has increased, like the cost of raw materials or labour, or demand is out stripping supply. Take for example a rise in price of a NintendoWii games console. This may be due to a rise in the cost of materials and parts and workers who produce it. Or it could be that the number of units available is less than the number of people wanting to buy it, so the price goes up. Around Christmas, it is likely for the latter to be true. It wouldn’t be unusual around this time to find a NintendoWii on eBay at twice its retail price.

Deflation is the persistent decrease in prices. This happens when supply outstrips demand which could happen due to a surge in productivity. Or, like in the current climate, consumers rein in their spending which means that shops have to cut prices to entice customers to spend. If this happens a couple of times, it creates an anticipation of further cuts in the future. So, although consumers may have the purchasing power, they postpone certain purchases since they would be cheaper in the future. Its a self-fulfilling prophecy where consumers postpone their spending thinking that there would be price cuts, and sure enough, shops cut the prices to persuade shoppers to loosen their purse strings. Good news for shoppers, bad news for businesses. Businesses experience cash flow problems and their staff would have to accept a pay cut or even lose their jobs. So, debt becomes expensive because one owes the same amount of money, but has less income to meet it. Signs of deflation can already be seen on the high-street. Retailers are offering massive discounts, the likes of which are usually seen after Christmas, because they are desperate to clear their stock. And the consumers know this and know that further discounts will follow eventually.

It will be interesting to see how Mervyn King and the Government will go about coaxing the shoppers to spend their money.

Business Easy

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Cool to be Frugal

12 12 2008

piggy-bankAccording to Andy Bond, the Chief Executive of ASDA, its now becoming cool to be frugal and not so cool to be frivolous and wasteful. He feels that consumer’s shopping habits are changing and a new generation of shoppers who are thrifty are emerging as the credit crunch begins to bite even further.

So what does this really mean? It means that consumers will now focus more on products that offer them value for money and will aim to eliminate waste. Value for money doesn’t really mean something that is priced less or discounted. It is actually something that offers satisfaction and quality for its price. Consumers will increasingly try to differentiate their “needs” from their “wants” and think carefully if they really need something or do they just want it. For example, ASDA noted that consumers are beginning to shift from buying ready meals to buying ingredients and cooking at home. People are also beginning to mend or fix items rather than getting rid of them and buying new ones. Cobblers, for example, have seen their business increase since consumers are coming in to get their shoes mended rather than splashing out on a new pair. A quick search on Google Trends showed that visits to the comparison site moneysupermarket.com and myvouchercodes.co.uk which lists voucher codes across a variety of stores had more than doubled.

What’s really interesting is the 40% increase in the number of people who are ignoring best-before dates and consuming the product rather than throwing it in the bin once it is past its sell by date. Perhaps the increase has also something to do with the numerous reports on saving money on television featuring people who regularly consume food, as long as it looks fit, well past the best before date. Consumers are also freezing leftover food rather than wasting it and sales of bottled water and smoothies has also been said to have decreased since many are opting to fill tap water and eat fresh fruit instead.

It is important then that retailers spot this trend and adjust their business models accordingly in order to survive the downturn. Thrifty consumers would focus on long term value and would be willing to spend a little bit extra on an item that is likely to last longer than buy something cheaper in price which would also be cheaper in quality and hence not last as long. Rather than reducing prices on cheap Christmas stocking fillers that perhaps wont even last till next Christmas, retailers should instead focus on reducing prices on items that actually are of some use to the consumers. Also, thrifty consumers are less likely to buy items on impulse which retailers greatly depend on. So, businesses should make sure that they are really operating on a low cost model which aims to eliminate waste as that would be the only way that they would be able to offer low prices and good service at the same time.

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Retailers embrace VAT cut

2 12 2008

The cut in the VAT announced last week by the Chancellor initially didn’t receive the reception that he might have been perhaps hoping for. News reports, newspapers and websites were filled with comments against the idea of the VAT cut, some being funny, and some downright ironic. Most were along the lines of “10p saving! Whoopee!”

However, over the weekend, it looks like many retailers are whole-heartedly embracing the VAT cut. Not because they like to go through the trouble of having to change the prices and labels and the IT systems. But because it gives them another reason to slash their prices, much more than the 2.5% VAT cut. But, why do they need a something like a VAT cut to give them a reason to slash prices? Surely, they can do it without that.

Yes they can. And many, like M&S and Debenhams, did a fortnight ago when they had a one-day only “spectacular” sale. Having yet another “spectacular” sale nearly three weeks before Christmas would give the impression that they have a lot of left over stock which they are desperate to sell. Although many shoppers would flock the stores to bag the bargains, which many have been doing due to the ongoing sales, many would stand back and wait for the prices to drop even further – a clear sign of deflation.

Hence, the cut in VAT, although not significant on its own, has provided the retailers with a timely reason to slash their prices further, using the VAT cut as a “mask” for doing so. Some companies, however, like BT and Virgin Media have decided to pass only the 2.5% cut to their customers.

But, how do single price retailers like Poundland, 99p Stores, or numerous other independent single price retailers pass on the VAT cut to their customers? After the VAT cut, an item costing £1 would then cost:
117.5% = 100p (The VAT is already added to the final selling price)
1% = 0.85p
115% = 97.87p (new price)
Poundland wouldn’t be able to rename itself as 97pLand for a period of 13 months, and the slogan “Everything’s £1” would then be deemed misleading. The only other option is for such businesses to increase their profit margins, which is not a bad thing, but they cannot take the advantage of being able to advertise the fact that they are passing on the VAT cut to their customers. Or, they could sell products that they wouldn’t have been able to in the past, as it would’ve been priced above £1, but can now since the cut in VAT allows the price to be £1.





Spend, Spend, Spend

19 11 2008
christmas-shoppingAccording to recent figures from the British Retail Consortium (BRC), the value of total UK sales as of October 2008 were down 2.2% on a like-for-like basis as compared to last year. Food and Drink was the only sector to have shown an increase in sales. Consumers are cutting back and postponing purchases that are not needed and focusing on the wants instead. Buying patterns are changing as well since many now prefer to cook at home from scratch and are focusing on products that offer them value for money and are actually actively seeking out promotions, discounts and offers.

This is bad news for retailers who are desperately depending on Christmas sales this year more than ever. No wonder then that for many high street retailers, Christmas has indeed come early this year. Discounts and promotions which are normally seen after Christmas are beginning to make their way into stores at a high street near you- five weeks before Christmas.

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Leading the way is Debenhams, who is having a “spectacular” three-day sale, starting today, where many of the products are going to be 20-25% cheaper. But its Marks & Spencer who is receiving the most attention and media coverage for its “20 % off” sale for only one day-tomorrow. Other high street retailers are likely to join the battle to fight for every penny of the consumer’s disposable income this season. In the coming weeks leading up to Christmas, more and more such promotions will come out to entice people to come in and spend their money.

But, as Gillian Lacey-Solymar pointed out on BBC’s Working Lunch, these promotions are likely to happen on weekdays. This is because the promotions are meant to draw people into the stores, which they do anyways on weekends, and so there is no point offering them heavy discounts then if they are likely to settle for less.

It is highly unlikely that these promotions will have a huge impact since people will only buy it if they perceive it as value for money and more importantly, if it is on the top of their priority list. The truth is, people are still being squeezed by rising utility prices and high food prices. Also, almost every other day a well known business announces job cuts which is likely to make those still in employment worry about their security and hence, save every penny they can.

Undoubtedly, all these promotions are good for the consumers. But, offering such huge discount means that retailers are effectively cutting their profit margins, or sometimes even making a loss just to shift their stock. What this means is that in the long term, many retailers will not be able to sustain themselves and it will not be financially viable for them to operate any longer, and hence will go bust.

So what? Well, this would result in job losses, numerous suppliers losing their orders and so on. When the economy does recover, it will mean one less competitor in the marketplace and hence, less competitive prices.

So, in the short term, the promotions are good for the consumers, in the long term however, maybe not.

http://www.business-easy.blogspot.com





Drop in oil prices, but don’t be happy just yet.

27 10 2008

Prices of crude oil dropped from a peak of $147 a barrel in July to below $60 a barrel today. This drop in oil prices has sparked off a price war between, you guessed it, UK’s top four supermarkets-Tesco, Asda, Sainsbury’s and Morrisons. After trying to fill up cash strapped consumer’s shopping carts, they are now trying to fill up their cars. Prices of unleaded petrol fell to just under £1 per litre. The recent fall in the prices is due to the fear that the sharp increase in prices is likely to lead to a fall in demand and hence a fall in revenue.

However, this drop in prices is likely to be short lived. This is because OPEC (Organisation of Petroleum Exporting Countries), a cartel of oil producing nations, announced in the wake of the recent drop in prices that they would cut the production of oil by 1.5 million barrels a day by next month since they fear that their revenue will decrease because of the drop in oil prices. This, they hope, will lead to a decrease in supply and since the demand of petrol is likely to go up due to the decrease in prices, it will ultimately lead to an increase in the price of oil, which some experts estimate to be around $80 to $100 per barrel.


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Although it is immoral and unethical, the oil producing nations, in a way, have made a smart move by coming together and working for a common interest, i.e., to make as much money as possible, rather than against each other. Working together ensures that they can control the amount of supply of oil and hence also the price we pay. Oil is by all means almost a necessity which means that the demand is price inelastic; this means that the change in price does not have a huge impact on the level of demand. People still have to fill up their cars to go from A to B, transportation firms still have to fill up their trucks to transport goods and so do buses, trains and airplanes. Also, petrol and diesel have no real alternatives.

However, in a recession, demand is likely to be price elastic, which means that demand is sensitive to the price. So, the move to cut production may lead to a fall in supply, but the increase in prices might also lead to a fall in demand, which would give counterproductive results to what OPEC hope.

Cartels formed by companies are against the law, otherwise we would not have competitive prices and certainly no price wars between supermarkets since they would be busy colluding with each other and fixing prices.


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The value of Pound (£) has been falling against the Dollar ($). The benefit of this is that it makes UK businesses very competitive in foreign markets and allows them to import their goods at a competitive price. The flip side of this is that it increases the cost of importing raw materials of which oil is a part. It is likely that even this will increase the price of petrol and diesel we pay at the fuel station.

So, there is no reason to be happy about the drop in fuel prices since it is only temporary and more of a Christmas offer than a real deal.





Food prices rise by 8.3%

6 09 2008

It was reported this week by the BBC that food prices have risen by 8.3% since January this year. This is based on the figures from a survey carried out by Verdict Research specifically for the BBC.

A packet of ham, a pack of four croissants and a medium sized chicken were among the seven products whose individual prices had risen by more then 40%. Among the 13 categories into which all the products were classified, Meat and Fish rose the highest, by 22.9%, followed by Store-cupboard items and Fresh Fruits and Vegetables which rose by 15% & 14.7% respectively.

Inflation is also affecting the sales of organic produce which fell by 8.1% as compared to last year according to the analysts TNS. Families with low income are unable to afford the high price of organic produce and more people are increasingly switching to buying supermarket own-brand products.

Supermarket Sainsbury’s believes that most people no longer perceive supermarket own-brand products in a negative manner nor are they embarrassed of buying them and are beginning shift to buying own-brand products to help cuts their costs. According to Marketing Week, Sainsbury’s research showed that a minority of the people believed that the brand they bought reflected on them as a person. To make the most of the current situation, Sainsbury’s launched an ad campaign on the 5th of September called “Switch & Save” to encourage their customers to buy the supermarket’s own-brand products. The link to watch the new Sainsbury’s advertisement is given below.

http://business-easy.blogspot.com/

http://news.bbc.co.uk/1/hi/business/7597703.stm

http://www.marketingweek.co.uk/cgi-bin/item.cgi?id=62302&d=254&h=5&f=3

http://www.youtube.com/watch?v=6u-P9C2obec





$143 for a Barrel of Oil

30 06 2008

The cost for a barrel of oil reached a record level of $143 today (30 June). The direct implication of this is likely to be a rise in prices of petrol and diesel. But it is not only the motorists who are going to be affected, everyone will be affected either directly or indirectly. For example, consumers are already beginning to feel the pinch as prices of day to day items such as bread, eggs, cooking oil, etc are beginning to rise. There are different reasons of this inflation in prices of which one is the rise in fuel prices. The rise in fuel prices leads to an increase in transportation costs which is added to the price of the goods and unfortunately passed on to the consumer.

It is no surprise then that last week, discount stores Aldi and Lidl announced substantial growth in like for like sales. The weekend saw a “price war” between Tesco and Asda as they tried to lend a helping hand and attract consumers already struggling with rising fuel prices and energy bills by slashing prices of everyday items by as much as 50 percent in some cases. Consumers are increasingly beginning to shop around with some using price comparison sites like mySupermarket.co.uk looking for better deals rather than just relying on one retailer. Other retailers like Sainsbury and Morrisons are also reducing prices and might also be forced to join the war by reducing prices in order to retain their customers.

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