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Life in a zombie economy

"This was not a normal recession and we are not experiencing a normal recovery. The winners in the resulting zombie economy will be the lowest cost producers, the capital rich and the agile."

Mark Thomas
The Times, page 33
26 April 2011


After Lehman Brothers collapsed in September 2008, government interventions around the world prevented a catastrophic meltdown in the global financial system and enabled a recovery in almost every major economy.

Unfortunately, the excesses of the boom and cost of those interventions — about 25 per cent of global GDP — left most Western countries with a zombie economy.

Banks, governments, companies and consumers are struggling to survive and cannot drive growth. Banks are still not lending; Bank of England figures show almost continuous contraction since late 2008. Many governments are facing unsustainable levels of debt to GDP and austerity is gaining ground in response.

Companies are still not investing and consumers are still in no position to spend — nor will they be for some time. Those consumers need to reduce leverage (UK household debt is about 110 per cent of GDP) and deal with heightened uncertainty from unemployment at around 8 per cent and the looming impact of government cuts.

Finally, they face declining real disposable income, which has fallen for the first time in 30 years.

This, therefore, is not a normal recovery. We are facing anaemic growth and far more volatile economies. Even before the natural disasters in Japan, the list of potential disruptions to global growth was longer than ever seen before. This amounts to a recovery that feels like a recession, and a heightened risk of double dip.

In this new environment, the spoils will go to companies that best meet the challenge of the zombie economy. There will be three types of winner: the lowest-cost producers, the capital rich and the agile.

A key part of the challenge is the zombie consumer, whose behaviour has changed semi-permanently in response to this new world. The British Retail Consortium monthly survey for March showed that total sales fell by 1.9 per cent from a year earlier, the most severe cut in high street spending in 16 years. Demand for new cars was down 20 per cent in January and high street giants are openly struggling. Dixons has issued a profit warning and HMV plans to close stores this year. Even John Lewis warned that the VAT increase, rising unemployment and public sector spending cuts would have an impact on consumer spending. In response, the department store is trying to attract cautious customers by scrapping its 28-day return period and replacing it with a "neverending" refund.

Consumers’ responses can be categorised into four Ps: prioritising what is really necessary, often trading down; postponing major purchases where possible; paring down the value of purchases where possible; and pouncing when bargains appear. These four Ps to a large extent determine who will win and who will lose.

Lowest-cost providers, such as Poundland, are the natural beneficiaries. They need to invest to maintain cost advantage and should see continued gains in market share if they do.

Most companies cannot attain the lowest-cost provider’s position: if all their efforts are in the direction of cost reduction, they have picked a fight they can only lose. For these companies, the message is blunt — reinvent or die. There are two ways to reinvent: change where they compete or how they will win.

In choosing where to compete, while many companies have focused on new and emerging markets, there is also the option of targeting new segments in existing markets, for example, the newly cash-conscious, as Waitrose did with its Essentials range.

In deciding how to compete, the trick is to meet the needs of the zombie consumer. To help them to prioritise, companies are providing affordable luxuries and focusing on the basics. The trend for companies from wine-makers to fashion designers to offer "bridge lines" as an entry point is an example of this approach.

To help them to postpone major purchases, companies have been very innovative. Many carmakers now allow drivers to use a car without having to own one. PSA Peugeot Citroën, the French carmaker, recently launched a partial ownership scheme that lets customers choose their mode of transport and prepay for transport "units" in the same way as they would for airtime on a mobile phone. To help with paring down, many retailers have introduced "value lines". And several businesses have sprung up to help consumers to pounce when bargains appear — for example, Groupon with its discounted coupons.

The zombie economy has another feature: higher levels of volatility. In a more volatile world, capital — which we used to see as a commodity, freely available when needed — has become a weapon. Defensively used, it can give a company time to weather unexpected falls in demand or margin pressure; used offensively, as Warren Buffett’s Berkshire Hathaway has done, it can turn a crisis into a buying opportunity.

This was not a normal recession and we are not experiencing a normal recovery. The winners in the resulting zombie economy will be the lowest cost producers, the capital rich and the agile.

Mark Thomas is a business strategy expert at PA Consulting Group.

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