Posts Tagged: deflation

American Society / Economics — 0 Comments
24
Dec 09

Tis’ the Season for Deflation

Gold and commodities have soared. Economists are worried about the Federal Reserve’s creation of excess money.  Since we are in the middle of the Christmas season, I want to forward my views on deflation and inflation at “street level.”  This post will never earn me a guest lecturer invitation at Wharton or Harvard, but it is a look at what is really happening at street level.  Let’s call it the Single Malts I Like Every day (“SMILE”) Index.

A Trip to the Malt Shop

Visiting my favorite beverage shop in New York is always a revelatory experience.  Perhaps because of the large sales volume, New York retailers can extract large discounts from their distributors.  Some examples:

  • Lagavulin 16-year old – $47.99 (nationally $89.99, highest price $107)
  • Talisker 25-year old – $89.99 (nationally $267.23, highest price $420)
  • Oban 18-year old Limited Edition – $79.99 (nationally $139.99, highest price $154.35)

The New York Lagavulin wars are particularly instructive:

  • Nine months ago, my favorite store priced Lagavulin at $56.99.
  • A competitor priced Lagavulin at $54.99.
  • My store matched the price.
  • Later my store dropped the price to $49.99: and
  • On my most recent trip my store dropped the price to $47.99.
  • In researching this post, I found a New York –based on line site selling Lagavulin for $45.46 (NY delivery only).

Talisker, Lagavulin and Oban are Diageo (“DEO“) products, a major scotch producer (Johnny Walker, J&B, Classic Malts, etc).  Despite a weak dollar, Diageo is having difficulty selling premium whiskies and is heavily discounting.  Remember that these scotches target a “luxury market” consumer supposedly impervious to the current recession. Apparently that is not the case.

Street Level Deflation

I also noticed diminished foot traffic walking around mid-town New York in the midst of the Christmas shopping season.  Lord and Taylor at 3 PM on the afternoon of the 17th of December looked empty. Broadway shows at the TKTS booth were available at half price for almost all Broadway shows.  High end restaurants now regularly have specially priced prix-fixe menus for both lunch and dinner.

Even coffee is affected by deflation.  Dunkin’ Donuts originally priced its premium coffee at $10 per pound.  It has run a perpetual sale in its shops selling two pounds of coffee for $12.99.  There are few retailers who can maintain premium pricing, and many are resorting to deep discounts.

Finally, I strolled the 47th Street jewelry district.  I like to call this glittery block between Fifth and Sixth Avenues the “Street of Dreams.” Again, there was little foot traffic, the stores were empty and sales people looked bored.

Inflation or Deflation?

My gut instinct is that deflation is prevailing.  We have a consumer economy predicated on purchases of luxury, non essential goods. Plasma televisions, laptops and single malt scotch whiskies are hardly the necessities of life. OK, strike that, maybe Lagavulin is a necessity.  Food shopping at my local Shop Rite store, I noticed a pile of 42 inch plasma televisions on sale for $329.  At the same time the store was marking down a famous French premium cheese from almost $10 to $2.99.  Certain staples may temporarily rise in price, but it looks like consumers have “pulled in their belts” and will only buy even premium goods at heavily discounted prices.  That spells DEFLATION.  I guess just take advantage of the discounts and SMILE.

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American Society / Economics / Technology — 0 Comments
7
Oct 09

Is the Internet Deflationary?

In the early-1990’s Arthur Andersen Consulting visited our company and put on a small demonstration of the power of the internet.  This was at the beginning of the browser era.  Netscape had simplified the ability to go online and Yahoo had started its search engine.  For demonstration purposes, Arthur Andersen created a search program to find the lowest price for the Top 50 compact discs.  Brick and mortar stores and Tower Records, one of my favorite locations for music shopping, were selling the Top 50 CDs for about $14.  As I remember we searched online for a 1993 Mariah Carey Album, Music Box, and the search engine came back with prices ranging from $8.95 to $16.  CDs are the ultimate commodity; that is, they are uniform, shrink wrapped and need little service (just return the CD for an exact replica if it arrives damaged).  The winning bidder on the search was a no-name distributor in Nevada who was cheapest, even including shipping.

The Internet as a Deflationary Force

I had an “Aha!” moment.  The internet was the ultimate force of deflation.  In economics, price is a function of information. The internet made price information available to everyone simultaneously and in real time.  Why would I spend more than $8.95 for the CD?  Do I care who sells me this CD? Am I going to need a lot of after care for the CD?  Do I care if the seller is in Nevada or India?  All I want is the CD at the lowest price.

On the retailing side, the game changed as well.  I don’t want a large brick and mortar store, too expensive.  How do I win the new retailing game?  I need to buy in bulk from the record company to obtain the lowest wholesale price. I need the lowest cost warehouse space, the cheapest packing and shipping and little or no returned merchandise.

If this model works for CDs, it works for all standardized manufactured goods from cars, televisions and home goods to running shoes and clothing.  This puts enormous pressure on the entire supply chain to produce the lowest price goods.  FedEx and UPS and high speed telecommunications via the internet enable manufacturing and shipping from anywhere in the world.  Labor and capital are now squeezed in totally new ways.

This natural evolution of the internet unmasked true price information in services, as well.  With the click of a mouse, consumers can now see the real and hidden pricing on everything from travel (Priceline, Travelocity, Expedia) to mortgages (Quicken Loans, Lending Tree) to insurance (IntelliQuote, Insure.com).   The consumer can also utilize online professional or customized services such as law, medicine and tax preparation.

Deflation is Inevitable

The Federal Reserve and Treasury’s attempts to offset the deflationary effects of massive credit destruction are sailing straight into the headwinds of the new internet driven deflationary force.  Despite the cheerleading on CNBC, many consumers and retailers are suffering their own personal Great Depression.  Every consumer dollar counts and consumers now must avoid impulse purchases and become savers.   Inevitably, they need to migrate from the pleasant surroundings of the local shopping center to lower cost, no frills internet commerce.  Judging by the growth in Amazon sales and the decline in traditional shopping centered retailers’ sales this trend is well under way.

Implications

Do you want to hold a 30 year mortgage on the Mall of America or the Garden State Plaza?  Do you want your law or medical practice in an expensive office building in mid-town Manhattan?  Do you want to be a pension fund holding signature shopping malls and expensive office space? The specter of declining real estate values and lower profit margins for traditional retailers does not bode well for the equity markets or the chimerical economic recovery.

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