Now everyone is thinking how to get good investments in times of inflation. On September 30, 2021 I wrote how Inflation would become the ultimate marketing challenge in 2022. I was not wrong, cars have risen significantly, not just new ones, the used car market is on fire. Much of this effect is due to the lack of supply of chips and the industry’s obsession with not having inventories. Daily consumer goods, food, household goods and now gasoline are on the rise. Inflation is the most unfair tax for the middle and low socioeconomic class, the products of the basic basket may be maintained artificially by the hand of the government, but everything else skyrockets. Let’s think beyond the pantry, school fees, security services and private health are in a process of increase. These three are the most important expenses of the middle and lower class, the lack of basic services from the government: security, good education and health have to be paid for by a large majority of Mexicans.
Luxury brands don’t benefit either, let’s take a very particular car as an example, Audi’s popular A4 went from $514,900 in 2017 to $794,900 in 2022, an increase of 54 percent. The same effect is reproduced in luxury watches, houses and even trips. Car brands have justified this problem by the lack of product and certainly consumers fight to buy what they can find. But the story does not end well when it comes to inflation. Price increases are rarely accompanied by wage increases and the only real effect is the accumulation of resources in a small number of leading companies in each category.
The best investments in times of inflation
Just listen to Warren Buffet, the legendary American investor “The best businesses during inflation are the businesses you buy once and then don’t have to keep making capital investments later.” Instead, “a brand is a wonderful thing to own during inflation.” The logic is simple, businesses based on intellectual property are the best investments in times of investment, in this sense it would seem that a world based on metaverse investments like Facebook could be a wonderful investment. For Buffet, investing in real estate is also recommended since it implies a unique investment that saves or gains value in the future.
However, the average consumer does not have access to these vehicles and levels of investments in times of inflation. In this sense, inflation means that the options to compensate for inflation are less and less, let’s think of an Uber driver, gasoline goes up, but the payment of consumers will not do so in the same proportion, the same thing happens with an operator of rappi. For brands it is a huge problem since purchasing decisions will be based on price and not brand. This supports the argument in my last column that firms that don’t invest in 360-degree omnichannel marketing will disappear from consumers’ frame of reference. Price is the most important factor at the moment, among the best-selling car brands in the country in 2021, the ones that grew the most were those of low-priced offers, for example Suzuki, which accumulated growth of 27.2 percent, Renault of 10.6 percent and SEAT with 39.3 percent according to INEGI figures. All of them have one factor in common, 360-degree marketing campaigns and low prices. If there was any doubt, General Motors, an iconic brand from the 1990s, was down 15 percent.
Effects of inflation on consumption
The consumer does not like inflation for reasons that go beyond price, purchase decisions are forced in a time of constant increase. To write this column I phoned an Audi Agency to ask about inventory. The seller shared with me that he had 4 vans with a unit value of 1.6 million pesos available for immediate delivery. The next day at 9 in the morning he called me to tell me, “I already sold two in cash, if you don’t hurry up by noon I won’t have any.” I’m not sure that’s true, but he certainly used the scarcity and price gouging speech. The same happens in smaller things, the traditional store where I buy fruit every week he told me “take lemon because next week it will go up”. Of course, the gas station staff did the same. We are in a spiral of price increases and shortages. A moment of danger for brands, the worst for those who want to save on marketing. This is a huge problem in Mexico, the country’s collection approach in this six-year term has been to squeeze service companies, the share of GDP in that sector has plummeted. Brands during the pandemic were made small to survive, now inflation will reduce them to products “price driven“. What the government has to understand is that the domestic market is at risk and with it the economic commitment of the six-year term. Rampant inflation is not convenient for anyone, but the most affected is the current government and let’s not talk about the one that follows.