BrainTrust Query: Should we be expecting deflation or inflation for 2009?
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?)