Inflation is a foreign issue for many young people, to a large extent they have lived through many years of falling prices. Let’s think about buying records, 20 years ago it was customary to pay a small fortune for an imported CD in stores like MixUp. Today many young people do not even recognize the brand, then iTunes came that allowed the purchase by song and with them iPods, a product that after its launch in 2001 has been reduced to a single model for Apple. Today it is impractical to buy songs, a monthly Spotify subscription solves all the musical needs of a person. In less than two decades the cost and concept of buying music disappeared. The same is true of almost every category, from transportation to sportswear, the consumer has seen a reduction in prices.
The use of supply and production chains in Asia helped lower costs, but also the focus on financial efficiency in purchasing areas. The CEOs came from the finance area and with them the procurement that improved prices and purchasing conditions in all areas of the companies. That era is about to end. Today, inflation has caused purchasing tasks to fail to fulfill its mission of reducing costs on a constant basis. This news is interesting for the marketing sector that has seen constant pressure to reduce prices, today an advertising campaign cannot cost the same as six months ago, not only the products, the pressures for salary increases have been felt throughout the supply chain.
Retailers and inflation
This is a great year to be a retailer, most of these companies have rental contracts of five or more years, their costs are quite stable, but the price of the goods they sell will go up. This increase will be transferred to the consumer, this implies that it will be a good time to be a physical store. It probably won’t be a store comeback versus the ecommerce but it will be better than the end of 2020. For the Boomers, inflation is a well-known issue, growing in the times of Miguel de la Madrid was enough to convince an entire generation of its harmful effects.
Outlets typically benefit from inflation, panic over a potential sales surge causes demand to skyrocket. In the long run the effects are not as good as consumers normally adjust their consumption (discount stores) to accommodate the effects of inflation. In other words, loyal consumers are lost due to the increase in prices.
Amazon will not necessarily benefit, the portal is not known for having the lowest prices, in the end, the cost of shipping has to be reflected and price is usually sacrificed for convenience. In a time of high inflation, these types of platforms will have to fight more to keep customers, the solution will be an increase in direct purchase of products to avoid price fluctuations.
Cars with inflation
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 chip supply and the industry’s obsession with not having inventories. Although semiconductors or chips have attracted the attention of media headlines, resin and steel have also been in short supply, according to an automotive industry consultancy Alixpartners a loss in the sector of 210 billion dollars is expected. The increase in prices of car brands is a reflection to mitigate this loss. But the problem is more serious in markets such as Mexico, as it is not so attractive to assemblers, the arrival of units is not the priority. It has also forced distributors to focus on higher priced products, fewer transactions but higher margin. The problem is already felt in the supply of cars below the limits of ductility or utility, today there are a fraction of models that meet the requirements of those that had 10 years ago. The same happens with tax subsidies such as tenure, which today cannot be met due to lack of price-compatible models.
The problem for the consumer in countries like Mexico is important, normally the goods do not return in price. Unlike a dynamic country like the US, in Latin America a price that rises never returns to its previous levels. 6 years ago a Jeep Wrangler cost approximately 450 thousand pesos, today its price reaches one million. The average transaction of luxury car brands went from 600 thousand pesos (approximately 30 thousand dollars) in 2019 to 800 thousand pesos or 40 thousand dollars a year and a half later.
The real risk is reaching stagflation implied by the acceleration of inflation coexisting with high unemployment rates. According to El Economista “Formally, it is determined that there is a recession when the Gross Domestic Product (GDP) decreases for two consecutive quarters. When the recession is accompanied by high inflation, the process is called stagflation; it is considered one of the worst possible economic scenarios due to the difficulty of handling and correcting it. “
Brands must be very alert to macroeconomic indices. Marketing actions must be adjusted day by day. Now more than one agency, several are needed as well as well-paid professionals prepared for one of the most challenging periods in recent years.