More bad news for those who are in the business of selling to consumers: September Retail Sales Reflect the Slowdown. Unfortunately, declining consumer spending is just one of the three alarming trends that, together, constitute “The Great Squeeze.” What’s The Great Squeeze, and how can you survive it? Here are our thoughts…
One of our customers basically predicted The Great Squeeze several months ago. He argued that consumer spending was destined to slow down (clearly, he was right). That’s bad in and of itself, of course, but — even worse — he predicted that this slowdown in consumer spending would occur just when the cost of inputs was on the rise. Indeed, we’re hearing this from lots of our customers these days: the cost of manufacturing is going up, particularly if you’re manufacturing in China (as most are). Why are manufacturing costs going up, even as the global economy cools down? First, wage rates are going up, particularly in Southern China, as more and more companies choose to manufacture there and the competition for labor goes up. Second, Chinese authorities are putting in place new regulations — and enforcing old regulations — that increase the cost of doing business in China. (These regulations are valuable, because they protect workers and the environment. However, that doesn’t change the fact that they increase the cost of doing business.) Declining consumer spending and rising cost of goods — this is a recipe for a sharp decline in profitability for those caught in the middle.
Of course, there’s more to the story. Evan Clark, in Thursday’s Women’s Wear Daily, highlighted the impact that the credit crunch is having on retail. Indeed, just as companies are facing declining profitability, they are going to have an incredibly difficult time getting the credit they need to pull through. Lower consumer spending, rising cost of goods, and limited availability of credit — this is The Great Squeeze.
The key to surviving The Great Squeeze is narrowing your focus. If you are trying to serve a broad set of customers with a broad set of products, you are going to struggle. You are going to struggle to stay close enough to your customers to know exactly what they’re going to spend money on. And you are going to struggle to stay on top of your supply chain and keep costs down. On the other hand, if you focus on a narrow range of customers, you will know better than anyone else what they will spend money on. And, if you narrow your product range, you can put all of your efforts into keeping costs down on a manageable number of products — either by improving your manufacturing processes, or by finding lower cost suppliers in new regions.
Narrowing your focus is scary, because you’re putting all your eggs in one basket. However, today, the only alternative to narrowing your focus is conducting business as usual — in other words, surrendering to The Great Squeeze.