Tuesday, February 10, 2009

Consumers Want Low Prices, the Economy Needs Price Increases

Our continued economic woes and inability to restart the economy have led us to an interesting conundrum. The cost of goods and services is increasing beyond the level of high end goods. It is hitting consumers where it hurts - in everyday needs and expenses.

As a result, expendable income for many people is dwindling daily. Most consumers are severely tightening their budgets, saving what they can and seeking low prices where ever they can. Retailers and vendors, as we have seen, are responding with lower prices, demand pricing and more, doing their best to capture or re-capture what they can from the dwindling consumer pool. We have had many interesting discussion over the past couple of months about these various pricing strategies and how they are working in different industries.

As the LA Times recently reported: ("Shoppers are in the market for lower prices")
"Supervalu CEO Jeff Noddle discusses how the economy is affecting the grocery business."

"People are buying more private label products, they are using more coupons, buying cheaper cuts of meat and they are stocking up during promotions. Basically, shoppers are doing all you would expect them to do in a period of inflation and a down economy. This has probably cost us 1% of our sales.

"Last year was the biggest year for food inflation in nearly two decades. Energy and grain prices were blamed for the increases, but now that they have sagged can we expect manufacturers and food producers to lower their prices this year?

"I think we will see the rate of inflation go lower as the year progresses. In the interim, though, it's kind of a battleground with manufacturers right now. We are pressing for a reduction in prices. We are pushing hard.

"I don't think the economy has felt the whole impact of the job reductions and layoffs yet, and as it continues to soften the manufacturers will have to be more aggressive with prices or promotions."

Normally, cutting prices would be a good thing right? Cost of goods would be going down and consumers would be buying more. However, now economists fear the effects of record costs of goods coupled with price cuts and reduced spending. Further price cuts from struggling retailers, economists say, can at this point only do more harm than good.

As CNNMoney.com reports: ("Warning: Falling price zone ahead")
"Deflation has become the No. 1 fear of a growing number of economists, who worry that lower prices will further hurt the economy"

"Rarely has the potential for lower prices been so scary.

"While many cash-strapped Americans would welcome paying less for what they need to buy, many economists now say the possibility of deflation, or lower prices, is the greatest threat to the U.S. economy.

"And more deflation warning bells are ringing.

"On Thursday, the government reported that the Producer Price Index, which measures inflation on the wholesale level, fell on a year-over-year basis for the first time in five years.

"The Consumer Price Index, the government's key inflation reading, is due out Friday. Economists expect a decline in overall prices for the month of December.

"Some economists are forecasting the first year-over-year drop in the CPI since 1955. As recently as July, the CPI was up 5.5% over the previous 12-months.

"Economists worry about deflation because it is a sign of the ever-weakening demand for products. But it can also be a further drag on economic activity by cutting into the willingness of both businesses and consumers to start spending again.

"Businesses worried that the price of their products may continue to drop would be likely to cut back production. That can lead to additional plant closings and even more job losses. And even consumers who don't lose their jobs are likely to delay purchases, particularly of large-ticket items, if they think lower prices lay ahead."

So, what to do pricers? Further decrease prices and cut profits even more to try and capture what's left of a dwindling consumer spendable income pot? Of course retailers are going to do what they need to for survival. But can manufacturers continue to cut costs and keep their doors open? Even giants like Wal Mart are starting to feel the pinch and cut jobs. And how much more can the economy handle? What are the keys to pricing in a downturn? More commentary soon, EM

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