Brand growth will beat deflation

To challenge a fear raised in The Economist about deflation, this week I’ll step out of mainstream food and clothing retail to discuss the automotive retail sector.

While falling prices raise the spectre of a 1930s type depression, improvements in productivity, and the consumer “tumbledown effect” will accelerate brand growth in automotive, and embed new lower pricing as the norm.

Worldwide every month, retail sales stats show topline marginal gains or marginal falls, but if we strip out the automotive category, invariably the figures show quite healthy gains – or flat line at worst.

The auto retail industry (cars and motorcycles) is reading like a Tale of Two Cities at present, just as in the department stores and grocery sectors. “It was the best of times, it was the worst of times, it was the age of wisdom.”

It’s quiet in Mercedes and BMW showrooms at the moment but it’s busy at Kia and Hyundai. Harley and BMW motorcycle dealers are not buzzing, but we’re seeing more and more Hyosung motor cycles on the streets.

I’ve previously introduced the “tumbledown effect” in retail where, to find a bargain and save money, shoppers are entering stores they’ve previously never visited. They’re shopping down to look for quality with a better value-for-money offer. Car and motorcycle buyers are doing the same: entering showrooms they’ve never visited before.

We are going into these “new” shopping environments with low expectations, but being pleasantly surprised by the experience. The “tumbledown effect” that is driving sales growth at Walmart in the US or Target, Big W and Aldi in Australia is also keeping production lines buzzing at Korean, Taiwanese and Chinese car and bike plants.

In the near future, Australians will be buying cheap Chinese cars like Lifan and Chery for the first time. The new attention the low-priced automotive brands are receiving is accelerating their consumer acceptance and therefore brand growth – and new market growth – at a pace that would have been impossible in the good times.

But the perceived need for a bargain is leading us to challenge our pre-conceptions around the second largest purchasing decision most of us will ever make.

It’s not just the price (even though these brands are 15 to 30 per cent cheaper than the benchmark model in each sector). It’s never just about price. They may be represented by a smaller range, but they’re sold by knowledgeable people committed to their brand. The showrooms are well presented, the sale process is easy and the product functional, reliable and easy to use. Price may have been the drawcard but other factors must stack up to close the sale.

So why is The Economist concerned about deflation? The fear is that the fall in the consumer price index to near zero is being driven by slashing margins and not from improved productivity. Simplistically, that takes us into a spiral of falling profits, falling wages, job losses and more price-drops.

We have had the ability in many quarters to drive productivity but, due to easy credit, haven’t needed to.

But those brands whose products have had to be manufactured at low cost, in order to enter new markets and sell at low prices, are now reaping the rewards of that discipline.

I believe we’ll now see the established players adopt manufacturing techniques of this kind – supporting new simpler models at better prices. Genuine productivity will filter through, creating lower prices to shoppers by lowering cost in the whole of the manufacturing and distribution network.

Rather than deflation, expect to see a surge in profitability for the new entrants, a crash in profits for the established, and then a smaller range of genuinely new and exciting models at very attractive pricing.

 

 

In his role as CEO of CROSSMARK, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia, NZ, the US and Europe. His international career in sales and marketing has seen him responsible for business in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands. CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.

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