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Jerry Lockspeiser: Confused by the economy?

Published:  27 May, 2022

First Brexit, then Covid, and now a major war in Europe. The economic landscape has been knocked from side to side, then up and down, and is now lurching in the most unpredictable fashion. Managing business strategy in these circumstances is extremely tough. If dealing with known unknowns is hard, facing unknown unknowns is extraordinarily challenging.

It would be easier to understand (but not better) if the economic landscape was logical and linear. In a recession you know where you stand. Everything goes down, making it easier to predict what might come next. Whether we are officially in a recession or not, many have never experienced doing business in times like these.

Brexit, Covid and the war contain many of the immediate causes of the UK’s economic circumstances but underlying long term issues also play a part. Nor are we the only ones to feel the pain. Rising inequality across the globe, the failure to deal with the reality of climate change, and the tardy response to living within the planet’s resources all contribute to the contradictory and confusing nature of the economic landscape.

The half glass full approach says that in every crisis there is an opportunity. Some win, some lose. While it is hard to find any real winners from Brexit, there were both winners and losers from Covid – off trade wine sales being amongst the former, along with Government selected PPE suppliers. What will the future bring?

Confusing contradictions

On the one hand city centres from Leeds to London are rammed with people enjoying a night out – some parts of the on trade are clearly benefitting from the post-Covid return to socialising with friends. On the other, millions are having to choose between eating and heating; an elderly woman in the north of England travels around on the bus all day to keep warm, unable to pay the cost of warming her home.

On the one hand Inflation is heading for 10% and the real value of wages is falling fast. On the other, the UK has followed the USA in having more jobs available than people unemployed.

UK unemployment is now lower than it has been since 1974, almost 50 years ago; in the USA there are five million more jobs than unemployed people, with 1.8 jobs per unemployed person. The biggest number of vacancies in the USA are in education and health, followed by professional and business services. Similarly In the UK, there is a massive shortage of trained people to fill vacancies in the NHS. The problem is not just a lack of people to fill less skilled jobs – such as pickers for the seasonal fruit and vegetable sector – but trained professionals across the board. Understaffed restaurant owners pay ever higher wages to attract or retain staff – if they can find them at all. Classical economic theory tells us that higher wages without higher productivity increases inflationary pressure.

The confusing situation of an economy heading rapidly towards the rocks while having lots of jobs available is partly explained by the absence of Europeans who went home after Brexit; partly by people from outside the EU deterred from coming here because of the hostile regulatory system; and partly by the number of older people who have left the workforce post Covid. But this is not the whole story, nor UK specific. Inflation is racing across Europe and the USA, averaging around 7%, with unemployment low too.

Delving behind the statistical average, the UK’s Institute for Fiscal Studies noted that inflation was 10.9% for the poorest households while only 7.9% for the richest. Those with the least to spend suffer most, those with deeper pockets suffer least. Plus ça change, plus c’est la même chose. Aside from the moral inequity, this may prove a critical point for segmenting business strategies as the economic crisis unfolds.

The return of thrift

The Trajectory partnership describes itself as “ ..a team of strategic insight and foresight experts that help organisations understand how the world is changing”, and says: “We strive for a world in which the future is better understood, better planned and less feared.” Its recent research shows that household confidence is now at a lower level than they have ever measured before.

Combined with the stark reality of a rapidly rising cost of living, the organisation sees consumers across the board cutting back on their total expenditure and simultaneously shopping around on and offline to find cheaper products. While sales decline in the main supermarkets, discounters Aldi and Lidl have seen growth, in turn leading competitors such as Asda to introduce cheaper ranges or use the ‘Aldi price match’ tactic. According to Nielsen, the discounters overtrade in wine with 23.4% market share, significantly higher than their share of other categories.

Trajectory found that consumers are deprioritising environmental issues when making purchase decisions, a trend that doesn’t augur well for the sustainable sector. Worryingly, Trajectory suggests that as economic woes worsen, the trend to thrift is likely to grow and grow. BWS prices were, on average, almost 6% higher in the first three months of 2022 compared to pre-Covid 2019. They are likely to rise further as the effects of the supply chain cost increases are passed on. According to Nielsen, a 1% growth in BWS prices generally produces an average 2.8% decline in volume.

How should businesses respond?

In previous decades, when times got tough the multiple retailers did relatively well. We should again expect them to be more resilient than the independent sector. They have bigger reserves, greater scale, more power, and a broader customer base. To meet the trend to thrift it would not be surprising if the supermarkets focus on customer loyalty and footfall above margin expectation, spurred on by the desire to stop the discounters racing away with the prize. In wine, this could see a return to higher volumes at the £5 and below price level.

At the same time, consumers who have better incomes and are used to buying more premium wines may continue to do so, especially if the psychology and insecurity of thrift makes them turn away from big ticket items. People may treat themselves to a decent bottle of wine if the Caribbean holiday, house extension or new car are on hold until times improve. This may create increased sales opportunities in both on and off trades.

While the mass market trend is full of gloom, it would be an error to forget that the wine market is highly diversified. One size does not fit all.

Brand opportunities

How to respond to tough economic times often comes up for discussion during business courses. The knee jerk reaction to declining sales and reducing profits is to retrench and cut costs. This usually leads to a reduction in resource in the business, leading to a further loss of sales and profitability, leading to more cost cutting, and so on downwards until there is nothing left.

The counter idea is to increase sales and marketing spend to grow your way out of the crisis. The cake may be getting smaller, but the brave try to ensure they get a bigger slice. This takes nerve and smart thinking but carries the prize of not only surviving but strengthening market position.

Brands are in pole position when times are tough. People generally stick with things that they trust, which give them confidence and where they perceive value. Wine has struggled over the decades to create strong brands relative to spirits and non-alcohol sectors. Mass market wine brands such as Yellow Tail, Casillero del Diablo and Barefoot may be weak in brand power compared to Smirnoff or Johnny Walker, but they are in pole position to provide reassurance to wine drinkers in times like these. The same is true of much smaller volume wine brands in a particular niche or market segment. Whatever the market position, if consumers feel an attachment and value because of what the brand represents for them, prices do not have to be cut and sales can be increased through smart thinking and good work with retailers.

I recently experienced a great example of how to build your brand when things go wrong. This was a retail rather than product brand, but the approach behind the story is transferable to anything.

I had booked a lunch table for eight at the east London restaurant Silo. This is a brilliant place with sustainability and quality in its DNA – based on concepts of zero waste, respect for people, planet and animals, using local produce, making an amazing array of their own products, and with the fixtures and fittings made by upscaling products destined for the bin. The food is exquisite. The lunch was to celebrate a friend’s birthday. When I told him about Silo he was super excited to be going.

Three hours before we were due to be at the restaurant they called to say a technical fault meant they couldn’t open that day. My heart sank. But having apologised, the caller immediately told me she had found a solution and booked us a table at another restaurant in the area belonging to friends of theirs. She said it was excellent and not far away so we went, relieved to have an alternative arranged.

While we sat looking at the menu, a waitress arrived with a bottle of single estate Prosecco. When I pointed out that we hadn’t ordered it, she said that it was a gift from Silo for having let us down and to wish us a lovely lunch.

Will we rebook at Silo as soon as we can? You bet. Great, honest, thoughtful customer service. Solved our problem and made up for it. That’s what living your brand values looks like.

Jerry Lockspeiser donates his fee for this column to The Running Charity who work with homeless young people in the UK.