Another Sign of Changing Times

I have expressed the view before that one of the major problems over this last decade is a total lack of innovation in terms of consumer products and consumer services. Apple will shortly launch another upgraded iPhone, the eighth iteration and whilst there will be product ‘tweaks’ one has to wonder, as far as real technical innovations are concerned, why ?

The commercial reason is pretty obvious, they want more money and knowing that they cannot defy gravity in terms of sales volumes forever, want to milk the situation for as much as they can for as long as they can…BUT.

Mirror Image

The global financial crisis of 2007/8 came about because the global markets had become used to a constant flow of ‘deals’, an ever expanding opportunity to make money, there was a sea of money looking for suitable investment ‘homes’. Unfortunately, new and genuine investment opportunities had largely dried up, the physical world moving considerably slower than the electronic paper one. The consequence was twofold, price inflation on stocks, property and other assets driven purely by what people were prepared to bid competitively on plus the creation of fictional assets such as “sub prime mortgages”.

What happened next is now very recent history which 10 years further on, we are still living with the consequences through enforced ‘austerity’ but what is important to remember is that up until it happened, all “The Establishment” thought everything was going along fine. If you had raised an objection to them then, you would have been dismissed as some “left behind old fool who doesn’t understand”, pretty much as EU Leavers are dismissed by that same class of people today, people who always maintain that they “know better” but in fact rarely do. There is a BBC video clip on this to do with the collapse of Northern Rock worth looking at to get the flavour of the events: https://www.youtube.com/watch?v=5tSfyElp43U

We have today a mirror image of those days except instead of there being a shortage of “investment opportunities”, it is a dearth of genuine new products and services for the public to buy and this will have a significant impact on the world economy in due course, even shortly.

Although not obvious to many people who tend to think of ‘business’ as meaning huge companies and projects like Crossrail, building huge aircraft carriers, software giants like Google, Facebook, Amazon, motor manufacturers and so on, at the heart of their activities there is only one engine for success and failure which they all serve and that is what you and I buy at the retail level. Perhaps more importantly than that, retail sales are also the engine for generating tax revenue because taxes levied at the lowest consumer level raise far more taxes than those levied on the rich or even business.

Retail is King

Let me explain my meaning of ‘retail’. It obviously covers physical shops, stores and shopping malls but it also encompasses on-line shopping, restaurants, pubs and car showrooms, in other words any outlet where we as individuals make “discretionary” purchases. The reason I use “discretionary” is to indicate a choice in whether we buy or not as opposed to basic food shopping and paying for shelter via a mortgage or rent which are necessities.

Take Crossrail as an example, its purpose is to transport people into and out of London for employment, entertainment and shopping, if those activities don’t happen, there is no need for such expensive infrastructure projects. Both business in terms of generating profits and governments in terms of raising taxes, are wholly dependent upon retail sales, a drop in sales means a drop in profits and taxes raised so retail sales matter.

The Price Problem

In simple terms there has been a race to the bottom as far as prices are concerned and this has been going on for a very long time. I first became aware of this decades ago during the 1970s when dealing with well known ‘High Street’ chains and food/grocery sales, the margins by which I mean the difference between the price the consumer pays and the cost to the retailer, were very slim indeed. The only reason that it worked was a combination of two things, the cash flow because whilst you could never leave the store without paying for your purchases, the store’s suppliers didn’t get paid immediately and there was a money game to be played there. Secondly to this was high volume throughput, lots of sales, repeat sales at that and you had a very profitable store based business.

The only company to buck this trend on food sales and still does to this day, was Marks & Spencers who focused not on price but on providing consistent quality and customer service. Oddly whilst people think of M&S as a place where they buy knickers and socks, the truth is that high quality food sales have added more profit to the bottom line than textiles for many decades.

The main problem with downward price pressure is that unless it is accompanied by real gains in productivity via investment in smarter, faster ways of doing things, is that it will depress the real value of wages if you still employ the same number of people to do the work. The result is that whilst you may have relatively speaking “full employment” in an economy, the actual spending power of the consumer is not increasing and may well be declining in real terms which brings pressure to lower prices even more.

In the UK we have seen the consequences of this in terms of the success of Lidl and Aldi two low price supermarkets of German origins who have successfully learned to manage a simplified supply chain based on offering far fewer product lines than their Tesco, Sainsburys etc competitors do plus with lower staffing numbers per store. In other words, they are bringing into that market real cost savings on their operating costs by “working smarter” as an ‘upstart disrupter’ of that market but the question is: “Is it clever and sustainable ?”

The answer at the individual company level is that it is clever in the sense that it has looked at the way the market worked and shaped an opening based mainly on price to carve out a substantial market slice whilst forcing the existing marketplace players to modify their behaviour. In a direct parallel, this is what Easy Jet and Ryanair did to air passenger transport except in their case, they actually expanded the market as opposed to just taking away market share from existing competitors.

In terms of manufactured goods, the West long ago shifted industries wholesale to lower wage economies such as in the Far East and China in particular, the only manufacturing retained can largely be defined as high value by price and high skill by nature. The only exception to this has been in motor car assembly where it often makes greater economic sense in some markets to import sub assemblies but assemble the finished product ‘locally’ using as much automation as possible. Of course in the end, rising wages in what were formerly “cheap” economies combined with the workforce in ‘consumer economies’ being keen for jobs and therefore willing to accept more efficient ways of working, means that eventually things could go full circle. However, low prices and low wages could still be a major problem.

An Upcoming Crisis

Whilst things may change in due course we do have an immediate crisis which will impact the global economy and sales of mobile phones and cars. Both these days in the UK at least, are mainly bought not on their retail price but are financed on a monthly payment plan and this has major implications for both products.

The immediate problem for both lies in market saturation and this is easier to illustrate in terms of motor cars simply because sales growth has been driven by 3 year personal lease financing. What this means is that within certain annual mileage limitations, in return for a monthly payment of say £250 you get to drive the thing and at the end of the time, you have paid for roughly 50% of the cost of the vehicle. You can then just hand it back and start again or, you can pay the other half and own the vehicle outright, I suspect very few people actually do this “buy out” because as a method of car purchase it wouldn’t make too much sense better to have gone for a conventional loan in the first place.

The main incentive for this is that it often means that a consumer can get to drive a brand new and far more expensive car than they could if they were repaying a loan on the full value of that car. However as a scheme it has one big inbuilt problem which is that the monthly contract price is struck on the basis of there being a given amount of residual value in the vehicle at the end of three years. What happens if the market becomes saturated with second hand ex-personal lease cars that exceeds demand within that market ? Obviously the value of those vehicles will fall significantly and somebody, finance companies or individuals will have to make up the shortfall thus sucking money out of the retail economy.

But there is another factor at play which could make things considerable worse a lot quicker than people imagine, the “next technology” which in the case of personal transport is likely to be hybrid/electric cars plus the arrival of driverless cars which are not personally owned. The former would solve the pollution problem, the latter traffic congestion in major conurbations. Now whilst these two things are not immediately imminent, they are not that far away and could start to have a major impact within 5 years or so and in the process, seriously undermining the value of existing vehicles.

Because car ownership is not a big priority to me, I am still driving a 15 year old Honda Civic and in a conversation with a friend of mine we were speculating exactly what car would I buy today if I were to buy a new car. It is not a daft question if you think about it for a moment and dismiss the thought of another car that would give me 15 years motoring, I doubt that I would still be driving then but do think about the basic technology. If I bought an existing electric or hybrid car, we can be certain that in just 5 years time the technology would have improved so much that today’s version will be obsolete and therefore, pretty valueless. Equally if you spent say £30-40,000 on a modern conventional engined vehicle, you would need to be prepared to write that amount of cash off because in 5 years time it will only be worth scrap value.

Smartphones

When it comes to smartphones there is another variation on the same theme. Phones physically don’t last as long as cars nor cost as much so even if you were just looking at a replacement cycle for them, the “Trendy Wendy s who must have the latest” apart, the majority market is probably on around a 3-4 year refresh cycle with market saturation for completely new sales having been reached a few years ago in most Western countries. There is the question of coverage and data speeds but that is progressing and is unlikely to hinder sales/usage going forward.

However the real threat to mobile sales lies in there being an insufficient flow of new and desirable content because above all what has ‘made’ the smartphone such a successful device for the majority apart from the odd ‘geek freak’ is not the thing itself but what it gives the user access to, Facebook, Twitter, Social Media generally, photography as well as ‘old fashioned’ text and phone calls. The commercial threat for the businesses that rely on it is that people get bored with it and that it transforms from a desirable object into just an essential commodity product.

It would be difficult to imagine that the smartphone as a device will disappear but not too difficult to imagine that for many users the particular brand will become less important as the device fades into being seen as a commodity product. What I mean by this is to suggest that the device itself will become more like a watch sure, for some people like having a Rolex watch, they will want a flash cash smartphone that costs “loads of money”. But for the majority of users just as in their day, a watch is a watch that tells the time, the phone could become just a device that connects you to what is important to you, your content, the content you like or simply because having one confers convenience benefits such as banking, checking in at airports, paperless tickets for events etc.

Economic Impacts

I moved from the London area over 13 years ago and on numerous trips by car back up to the South East from Somerset, I noticed that the traffic, never light has seemed to have got a lot worse. Initially I suspected that this might be more an impression bought on by a combination of increasing age and less familiarity but I was doing myself a disservice, traffic is a whole lot worse to the extent that there are far too many cars on the roads and driving is far more of a chore. Against this scenario and most certainly for urban dwellers, an alternative to owning a vehicle would be obvious. Why have the responsibility for a lump of metal and plastic sitting beside the road which is only used at best for 2% of the time when an Oyster Card would cover all your transport needs ?

Before anybody questions this, I do speak from practical experience having lived in London for the best part of 10 years not owning a car and relying on public transport and largely a mountain bike. When I was younger, driving through Central London was not a problem and mostly great fun but I gave up on that over 20 years ago, parking was way too expensive, congestion made it too time consuming and dumping the car on the outskirts and using public transport by far the quickest way to get around.

The advantage of self driving cars will be that like train routes they will likely initially be introduced to drive on specific point to point routes but unlike trains, they will not need expensive infrastructure to implement because the roads already exist. This will probably be accompanied by a ban on all private cars driving into city centres and eventually car ownership by city residents will be banned being replaced with a “Travel All Modes” transport subscription which will be verified by displaying, yes you’ve guessed it, a barcode on a mobile phone. Visitors will be able to buy time limited travel rights on a daily or weekly basis. Eventually as control systems evolve, door to door shared transport booked electronically will become the norm along with accurate journey times and connections to other transport options.

All of this will have major economic impacts especially on jobs though in time, new ones will appear as the changes open up new and as yet unimagined opportunities. However and along the way there will be quite a number of ‘losers’ as well as new ‘winners’. I can remember someone I was in discussion with back in the 1970s when we were talking about alternatives to the internal combustion engine, he maintained that if such a thing emerged, the oil producers and motor manufacturers would quickly ensured that it got buried because it would threaten their profits.

Today though things are rather different, a combination of the acknowledgement of climate change combined with a global drive for greater efficiency has seen a considerable decline in the power of “Big Oil” and motor manufacturers are just keen to survive with the only big new market China which has major environmental problems, likely to control both their access to their market and control the types of product imported. In other words, the balance of power has moved significantly away from the producers to the benefit of consumers including their representatives in government.

It is odd to think that the basic idea of replacing outright purchase of items like cars and phones with a monthly payment plan has prepared the consumer market for the very next step, not “owning” but just “using” something to achieve a personal benefit be it in terms of transport or communications, the world is turning…

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