ATransforming Economy

It has been just a few months since I last occupied this space, and in some ways it seems like a different world. For one thing, gasoline prices have gone up about 50? per gallon since my last column. For another, Starbucks appears to be in far more trouble than it did at the beginning of the summer, having announced that it is closing 600 U.S. stores. Consumer confidence in the safety of the food supply has likely diminished as words such as “E. coli” and “salmonella” have been in an awful lot of headlines.

There have been other changes as well. Value-driven retailers are ascendant while higher-end retailers are having real sales issues. Wal-Mart changed its store logo. Newspapers and both broadcast and cable news programs increasingly have focused on bankruptcies, declining real estate values, consumer and corporate debt, and the increasingly fragile nature of the U.S. economy.

I take a couple of months off, and the world goes to hell in a hand basket.

These aren’t isolated incidents, nor are they individual but loosely connected events in what some might say is a temporary, aberrational point in our history. Rather, I think there is something more profound taking place—a kind of economic and political transformation that could have a seismic impact on how consumers and businesses conduct themselves. And I’m not alone in thinking that we’re in for what the great sportscaster Bob Murphy used to call “nine miles of bad road.”

During the summer, Information Resources Inc. (IRI) released a new study, “Competing in a Transforming Economy,” that essentially argued that regardless of whether or not the nation officially is in a recession, the U.S. economy is most assuredly undergoing a significant transformation that can be seen in increased prices, high unemployment and declining real estate values.

Among the key findings:

• “Escalating prices have bred exceptionally high price sensitivity, driving declining demand across multiple categories, growth in private label, trial of lower-priced brands and accelerated channel migration.”

• “Long-standing consumer purchase drivers, including convenience, and health and wellness, are losing some momentum; consumers are fore-going ultra-convenience, and some shoppers are unable to afford healthier foods;” and

• “Consumers are increasing purchases of basic ingredients and meal components due to reduced restaurant spending and are decreasing purchases of ‘non-essentials.’”

The argument that IRI makes is a compelling one. I don’t think the trade-offs are going away anytime soon.

It just feels like the world is changing. Culturally. Economically. Environmentally. Geo-politically. It just feels like the old assumptions are falling away, and that everything is in play, from how we work to how we travel to how we perceive our customers to what kind of world we are going to leave to our children.

The wrong approach, I think, is to try to find ways to push the world back to where it was just a few years ago. First of all, it simply isn’t going to happen; progress is, by its very nature, almost impossible to impede. (Gas prices aren’t going to ever see $3 per gallon again, and I’m not sure they ever are going to go down to $4 per gallon again.) The better reason to embrace all this change, to try to get ahead of it, is because it allows you to correctly position yourself and your company for the long road ahead.

Starbucks could have tried to wait out the current economic situation, thinking it was just a temporary recession, and shut very few stores. But instead, the company decided that the best path was to surgically remove the body parts that were impeding its growth and profitability, to choose short-term pain over long-term agonies. This isn’t just a matter of Starbucks worrying that when people are spending $4 per gallon on fuel, it is harder to spend $4 on a latte; it is a matter of trying to position the company correctly for the extended future and protect its brand equity, as best as possible, from any sort of erosion. (The question isn’t whether Starbucks should have made these moves, but rather whether it waited too long. We’ll see.)

No matter what kind of retailer you are, now is the time to look into the future to try to figure out how your business may be transformed by the cultural, economic, environmental and geo-political shifts that are taking place. If you are in the quick-service restaurant business, for example, and sales are down because people are trying to save money by eating at home, the issue that must be faced isn’t just how to reduce prices but also how to create a more compelling dining experience that is relevant to a changed consumer. And, conversely, if you are in the supermarket business and you are generating new sales from shoppers who aren’t eating out as much, it doesn’t make sense to simply enjoy the moment. You have to figure out how to keep people focused on all the various benefits of eating at home, not just the saving of a few dollars here and there.

I’ll give you an example. During the past month or so, I’ve been faced with the prospect of having to buy a new car. One of the options that I considered was a Mini Cooper convertible. I only was able to consider it for a little while, however, because it was impossible to buy one. Several dealers told me that they were sold out of the 2008 model, and would love to sell me a 2009—next March, when they finally come in. (I was, however, welcome to put down a $500 deposit to hold a 2009 convertible.)

Driving to and from the Mini Cooper dealer, I passed several automobile retailers that had very full lots, with row after row of SUVs that they are having trouble giving away. (As I write this, General Motors still is trying to figure out what to do with its Hummer division, which makes cars that aren’t just impractical but almost seem immoral in the current fuel crisis.) However, it isn’t like they were caught by surprise. Thomas L. Friedman wrote of the inevitability of high fuel prices several years ago in his landmark book “The World Is Flat.” And many of us can remember rising fuel prices and gas shortages from back in the Carter administration. We’ve always known that gasoline is: 1) a commodity with limited supplies (though we really don’t know how limited), and 2) a commodity for which there is increasingly greater demand not just in the United States, but in nations such as China and India.

But we ignored reality. We ignored the inevitable transformation that had to take place in the oil-driven economy, and now we’re paying the price. Some more than others.

Ask yourself. Do you want to be General Motors, trying to figure out what to do with its Hummer division? Or do you want to be Mini Cooper, which can’t make enough cars to satisfy the demand?

Not a tough choice, I think. You just have to be ready to transform your business to cater to a transforming marketplace.

This is a time of tremendous opportunity if we marshal our forces and collective intelligence and imagination and deal with reality. And even have the tenacity and temerity to think we can shape a better, more sustainable future.