There are some terms commonly used that may not be confusing but are not very clear. Unless these are understood it will be difficult to parley into the impact of the economic downturn on the sales of inferior goods. What are meant by recession and depression? A familiar joke says that recession is when the man next door loses his job and depression is when you are the victim of job loss. (Hayward, 2007)
Recession is measured by taking into account the quarters of the year rather than the entire year. On the other hand the depression is calculated as a drop in the GDP by 10% or even higher in the full year. Recessions generally happen more frequently than depressions. If the economy is diversified then the country recovers quickly from the shock. When GDP is negative for two consecutive quarters then it is said that recession has set in. Another word very commonly used in economics is regression. The dictionary meaning is to go back to a lesser developed period.
Economics being termed a ‘dismal science’ remains rather undecided on these terms because of various schools contradicting each other. There is no universal agreement. For instance the GDP might show growth but not so with employment. So recession might have retreated, as is being said currently in USA, but the problems in the housing sector and unemployment continues to be rampant and intense. (William, 2006)
The recession effects are invariably drastic. The purchasing power lies with the people and during times of recession they opt for substitutes that are cheaper considering their very survival is at stake. The majority of the manufacturing units cease production because of a fall in demand. This leads to the most common phenomenon in a recession – increase in unemployment caused by stoppage of manufacturing. Most of the companies retrench their staff and lay them off. The people who are jobless fail to find alternative employment.
The recession cycle comes to haunt the country again and again because of fear about the future. In USA the recent recession has led to a drop in manufacturing of luxury items and cars etc. Apprehending future declines the stock markets fell. Less growth means less profit and this starts off a cycle of fear. (Miller, 2008)
What is meant by inferior good? Goods whose demand goes down when the income of consumers increase are known as inferior goods. This is in contrast to normal goods for which the opposite applies – demand for normal goods increases when the income of consumers increases. Thus the first lot of good are termed inferior not because of quality but because of affordability. The use of inferior goods decreases when costly substitutes emerge offering variety and more pleasure.
An example of an inferior good is the inter-city bus service. It is cheaper than travel by air or rail but it eats up more time. When purses are slim bus travel becomes popular but when pockets are full with there being more money than time, the faster mode of transport is given preference. Other inferior goods are food stuffs like bologna, mass marketed beer, frozen dinners, hamburgers etc. But as earnings increase one is apt to buy more expensive, attractive and nutritious foods. (Minford, 2009)
There are also cultural and geographical connotations to the meaning of inferior good. In the Andes the potato is inferior good but in Bangladesh it is not so but rather expensive and the food for the elite who munch potato chips. Recently a list of inferior goods was made by scholars from Western Michigan University. It listed some common grocery items that comprised of imitation fruit punches, ice cream sold in pails, cosmic brownies and the like.
Thus we see in human society as in Nature one man’s meat is another man’s poison. The makers of luncheon meat SPAM can be referred to as an example. The word ‘spam’ is generally associated with fraudulent activity on the Internet but the producers of luncheon meat spell it with capital letters as SPAM. (Miller, 2008)
Hormel Foods Corporation based in Mower County, Minnesota is noted for its SPAM brand of luncheon meat – a Fortune 500 company. Despite the downturn Hormel is looking to the future. Earnings from grocery products and refrigerated foods improved by 9% and 7% respectively while special and international foods remained flat in 2009. Not only that – Hormel did not have to lay off anyone in Austin. Across USA it has 19,000 employees. 300 seasonal jobs were negatively affected but out of these except for 30 all returned to hold full time posts. Generally the growth of corporate jobs are by 40 to 50 posts but Eittenger is hopeful in 2010 the numbers would pick up again. (Bruno, 2009)
A new Hormel Foods plant was inaugurated in Dubuque Iowa on 31st January 2010. By the close of 2010 the number of employees is expected to rise from 80 to 200. It is the first new one that Hormel has built after a gap of some time lapse. It will produce grocery stuff also and thus allow for more diversification and growth. Hormel has also gone ahead a step by acquiring Country Crock brand of refrigerated side dishes. It will also foray forth into production of tortilla, salsas and more conventional Mexican dishes.
During the last decade it had purchased 10 to 12 business concerns. Commenting on this The company is not planning to immediately make more acquisitions but that does not cancel out future plans. The debt position is low and this gives cause for hope. (Terrones, 2009)
To increase sales – it being one of the targets for the current year, Hormel will opt for more aggressive advertising. Hormel is not the only benefiting from the downturn. Portland Business reported on few others. The auto repair sector increased business by 2.4% in the past one year while car dealers noted a fall of 9.7%. In the past twelve months home remodeling business went up 4.6% – those contractors dealing with electricians, plumbers and heating. But for home builders business went down by 5%.
In food stores the grocery shops showed a 6.7% increase in sales in the last one year while sit-down restaurants noted a decline by 3.9%.
Among the specialty schools the technical trade sections noted an increase in enrolments by 7.8% – it being 5.9% higher than 2007. (Shen, 2008)
The most surprising is the increase in Dentist’s patients by 7%. In 2005 it was 5%. Perhaps people need to grind their teeth during recession or again a tax matter might be the cause.
Certified public accountants saw during the past twelve months an increase by 10.2%. It has ranked among the top 20 sectors that have showed growth during this recession period. (Bruno, 2009)
Another surprise is the increase in business activity including sale of products in trade relating to personal care – skin care and hair salons as well as barber shops. Perhaps people need a diversion now that they can no longer splurge on vacations. Another theory that has tried to explain the impact of sales of inferior goods during a time of economic downturn is the Lipstick Theory or lipstick-effect. During times of uncertainty certain products will begin to sell more. After the terror attack of 9/11 the chairman of Estee Lauder, Mr. Leonard Lauder noted that sale of lipsticks had picked up. He explained that during troubled days when the women cannot indulge in luxuries like designer clothes and costly jewellery they satisfy their craving by opting for something less expensive like lipsticks. The theory has not been proved but the recent pick up of lipstick sales during the current crisis hints at this truth – it cannot be discarded totally. (Terrones, 2009)
There is no doubt that when days are tough people will stop spending on non-essentials. But they will hunt for less costly alternatives. Thus during an economic downturn the best placed firms are those that sell what is termed by economists as ‘inferior goods.’ These are the substitutes for originals that are no longer affordable.
Thus focusing on lipsticks instead of spa treatments could keep the business running – running handsomely. The same can be said about costume jewellery and budget meals that include simple stuff like rice and pasta. The restaurants are feeling the pinch of the recession but sales of recipe books have picked up with families beginning to enjoy once again the joy of home cooked food. (Bruno, 2009)
The recession has brought about remarkable success in the bicycle industry. The demand has become noticeable and attention grabbing. Shops across America are reporting strong sales. People are bringing out their old bikes and giving it a new touch. Apart from the gas factor it is the recession that has pushed up demand for bicycles. (Miller, 2008)
Inflation and unemployment are both increasing. Real wages have seen no gains in the last few years while the prices of essentials are rising. This fall in real income may have spurred the sale of bicycles. The bicycle can be termed an inferior good in the sense that as the income is falling the demand for the item is increasing. Bicycles stand for a radical cheaper way of commuting in the middle of high food and gas prices and weak dollar.
Although December 2009 has been as tough to retailers as it was all through the year overall sales however are not decreasing. Shrewd consumers have been seeing their money go far by changing their shopping habits. The sales are being lost for retailers not because people who were thinking of buying and then did not but because they bought other products – inferior goods that are not inferior in quality. The word ‘inferior’ in economics is not used as an aspersion. (Bruno, 2009)
BBC research shows that although other sales have gone down, the sale of baked beans have picked up by 22.6% last December in comparison to December 2007. People are choosing beans on toast a nutritional alternative to other exotic meals. So sales of bread too have picked up. In the bread sector the sales of the standard white sliced ones have gone up sharply. The latter is an inferior product. When people see their income rise they discard these for more premium ones like seeded loaves, baguettes and croissants. (Terrones, 2009)
The sale of champagne fell by 10% in December but drop in the sale of sparking wine was modest. This meant those who used to prefer champagne previously are now going for sparkling wine, whereas those who used to take the sparkler previously are opting out of it – hence the drop was slight. (Terrones, 2009)
Thus, it is evident that there is a definite pattern and it holds true for most products. The same holds true in regard to olive oil. Previously this was thought to be a luxury item but surprising sales went up by 6.5% in December in comparison to December 2007. (Minford, 2009)Why? Has this costly oil become a basic staple? Perhaps the people have become health conscious and not making cuts here or perhaps people are not buying costlier ready made dressings but preparing their own ones at home with olive oil as one of the ingredients. The olive oil factor also can be interpreted to mean that people are eating out less and staying at home and cooking. The bottom line is that anything dealing with simple living and doing it by you is sure to be a success. The recession is seeing the beginning of a stay-at-home socio economic scenario.
Bruno, O. (2009). Credit Availability and Capital Crunch: On the Role of the Heterogeneity of the Banking System. Journal of Public Economic Theory, 11(2), 251-279.
Hayward, J. (2007). The State and the Market Economy: Industrial Patriotism and Economic Intervention in France. NY: New York University Press.
Miller, MH. (2008). Financial Markets and Economic Growth. Journal of Applied Corporate Finance, 11(3), 8-15.
Minford, P. (2009). MONETARY POLICY AND THE CREDIT CRUNCH. Economic Affairs, 29(1), 89-91.
Shen, C. (2008). Credit rationing for bad companies in bad years: evidence from bank loan transaction data. International Journal of Finance & Economics, 7(3), 261-278.
Terrones, ME. (2009). What happens during recessions, crunches and busts? Economic Policy, 24(60), 653-700.
William, WW. (2006). The power of productivity: wealth, poverty, and the threat to global stability. LA: University of Chicago Press.