STORES Global Powers of Retailing 2009 - (Page 42) 2009 global powers of retailing The result will be high prices for a prolonged period—at least until high prices motivate energy consumers to radically change their demand patterns. This will happen—but not for several years. What does this mean for retailers? High energy costs influence retailers at both the demand and the supply end of the equation. On the demand side, relatively high energy prices mean a shift in consumer behavior. In the United States and Canada, it will likely mean the purchase of smaller more fuel efficient vehicles. Globally, it will mean greater consumer sensitivity to distance when planning shopping and leisure trips. It will also mean more expenditure on products that improve energy efficiency in the home. On the supply side, higher energy prices could change the nature of retail supply chains. In the past two decades, global supply chains were designed to take advantage of low transport costs and low wages in emerging countries such as China. Now that transport costs are growing, and as wages rise in China, it will make sense for retailers and their suppliers to diversify their supply chains. Some production will shift out of China and toward locations closer to end consumers. What follows is a detailed look at how the current economic outlook is affecting various regions and countries and what it means to retailers. Asia Pacific There is a saying in international economics: “If the United States sneezes, the world catches a cold.” That is, if the U.S. economy slows down, a number of economies around the world feel the effects. Nowhere is this more relevant than in Asia, a region that has become one of the biggest suppliers of manufactured goods to the United States. However, over the past few years, many experts postulated that the old adage no longer applied, that Asia had “decoupled” from the U.S. economy. Asian economies, they asserted, were growing on their own steam and did not rely on the United States. With the current financial crisis, this thinking has been shown to be wanting. The Asia Pacific region is now obviously suffering from contagion brought on by the U.S. fiscal crisis. That is, modern economies seem to be not only connected by trade, but also through complex financial pathways. The contagion has hit Asia Pacific equity markets especially hard, causing significant volatility. Some central banks in the region have sharply cut interest rates and lowered bank reserve ratios. But these actions seem to have had no effect. Risk spreads, an indicator of how risky countries or companies are perceived to be, are reaching new peaks. The malaise has started to extend into the real economy with industrial production numbers falling in recent months. So what is next? Asia will continue to suffer as the slowdown in the United States and Europe deepens and GDP growth will likely be subdued for the next couple of years. Australia, as an exporter of commodities, will take a particular hit because of falling commodity prices. Central banks will most certainly continue to reduce interest rates as well as cut reserve ratios; they have been lucky because inflation has started to show signs of tapering off as commodity prices cool. Governments will also chip in with some amount of fiscal priming. However, there is a limit to what can be done - although the Chinese government has a huge amount of money at its disposal, governments in emerging economies generally don’t have unlimited budgets. It is likely that neither central banks nor governments will be fully effective as this is a crisis of confidence more than anything else. The Japanese situation in the 1990s is a prime example of this scenario, where neither fiscal nor monetary measures worked because consumers had lost their faith and refused to spend. There is little doubt that China’s economy is now slowing. Export growth has diminished in real terms due to the slowing U.S. economy and the rising value of Chinese currency. As a consequence, industrial production is decelerating. On the other hand, inflation seems to be under control, providing room for the Central Bank to continue easing monetary policy. The government is also using fiscal policy to stimulate demand. The end result will be slower growth but not a recession. In addition, while exports will suffer, consumer spending should be relatively stable, helping to keep retailers in a strong position. Europe There was a point in time not long ago when Europeans reasonably thought that they would avoid any serious consequences from the economic troubles in the United States. That time has passed. Today, Europe’s financial system is reeling from the same troubles that began in the United States with a bursting housing bubble. Although the word bubble cannot be used to describe the housing markets in many European countries, the U.S. bubble nevertheless had a contagious impact on Europe’s financial institutions. First, many European banks were caught holding the troubled assets at the core of the crisis. This necessitated write-offs that reduced capital and caused a decline in the availability of credit. Second, the credit crisis in the United States, which entailed a dramatically increased cost of capital as banks re-evaluated risk, spread to Europe. Bank lending to other banks declined dramatically leading to a near collapse of the financial system. As the U.S. government undertook massive economic intervention, so did the governments of Europe. Most significant was the initial decision of the United Kingdom to inject capital into banks in order to recapitalize them and make them capable of lending. Other European governments followed suit. As of this writing, the crisis is still in effect and it is unclear how quickly normal credit conditions will be restored, how much more government intervention will be necessary, and to what extent the crisis will have a serious impact on overall economic activity. What we do know, however, is that Europe’s retailers will feel some negative impact, possibly severe. G42 STORES / January 2009 www.deloitte.com/consumerbusiness http://www.deloitte.com/consumerbusiness
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