The new normal?
America, the land of opportunity? On a recent visit to the USA, I ask a dear friend of mine about the impact of the current economic situation on business. America has always been a place where, through ambition and hard work, people could achieve whatever they wanted. Faced with the relentless bad news and uncertainty how was business reacting?
He thought for a moment and said "well this is the new normal and we have to learn to live with it." The new normal seems to be more cautious, more considered, less of "shoot first and ask questions later". So is this a good thing?
One of the principle differences between the USA and the United Kingdom is the attitude to business failure. In the UK a business failure is seen as a stain on the character of the businessman, I think this comes from a sense of dishonor to default on debt, or a fear of the debtors prisons that we once had in Victorian times. In the USA it seemed like the attitude was that you haven't learnt anything unless you have had a business failure or two.
Some businesses seemed to routinely go into Chapter 11, especially those who have strong cash receivables, e.g. airlines. During my visit we talked about Air Canada, who have filed numerous times in the last 20 years. In the UK this type of situation just doesn't happen to high profile companies.
The most obvious example of this in the UK is the retail industry, where long established retailers are failing, never to reappear. The next batch of failures will emerge on September 30. Why? Well most retailers rent there premises, and rent is paid on quarter days, March 25, June 24, September 29 and December 25. Under our insolvency laws if the business fails at the beginning of the quarter it can stay there until the next quarter day, and this makes the process of stock liquidation significantly easier.
The effect on consumers is that they know that prices in the shops will be held down with constant sales, as retailers struggle to survive. They put off buying and so a cycle of deflation emerges. The latest figures put inflation at 4.5%, but most of this is driven by government sales tax rises and commodity prices for fuel and food.
Combine this with consumers paying off debts at record levels and it is easy to see how the new normal will look. Margins squeezed and a much greater emphasis on service and marketing. Businesses that have survived so far will need to be very careful moving forward and the assumption that everything will be OK, needs a big dose of realism. Maybe this is something that our politicians need to understand as well?