Big Changes for Big Business
July 22, 2002
by Irwin Stelzer
Volatility obscures enduring trends. With everyone’s eyes glued to the minute by minute gyrations of share prices, basic changes in some of America’s leading industries have gone unnoticed. Start with three “A”s: autos, airlines, and apparel retailing. All have one thing in common: their basic structure is changing in response to consumer attitudes towards price.
The U.S. automobile industry now finds itself in the position of retailers who have trained consumers to keep their purses closed during the Christmas shopping season in anticipation of postholiday sales. In May, auto sales hit a threeyear low. In June they picked up, but were nevertheless 1.7 percent below yearearlier levels. The reason: car makers decided to see if they could continue to “move metal” without offering the generous financing and price packages that consumers have come to love. They couldn’t. Or at least most of them couldn’t—General Motors sold more cars and increased its market share at the expense of Ford and Daimler Chrysler.
But even General Motors, fearful of competition from foreign manufacturers, and worried by the fall in consumer confidence to its lowest level since just after the September 11 terror attacks, decided to reinstitute offers of 0 percent financing on some models, and cash rebates of $1,000to$4,000 on others. Ford, despite a 72 percent increase in the sales of its Land Rover division and a 63 percent jump in Jaguar sales, saw its total sales drop by 15 percent in June. So it is meeting GM’s offers with a variety of inducements of its own. Daimler Chrysler has no choice but to follow suit.
There is big money at stake. A zerofinance deal on a $20,000 vehicle saves the consumer $3,600 compared with fiveyear financing at 6.75 percent. GM picks up the tab. These are no oneoff promotions. Consumers have come to expect to get very good deals indeed whenever they purchase a car or truck. The Internet lets them shop for the dealer with the best offer on the specific model they want; the manufacturers have taught them that patience is rewarded with very big savings. If there are no bargains available in May, wait until June—or until the auto companies capitulate. Conclusion: the auto companies will never again be able to garner the profitpervehicle that they raked in before they taught consumers to huntandwait before buying. Price matters and the consumer is king.
So, too, when the consumer decides to fly rather than drive. The airline industry is likely to lose $4 billion this year. Red ink is not merely a postSeptember 11 phenomenon; it flowed before the terror attacks, it continues to flow even though the fear of flying has subsided, and is likely to continue to decorate carriers’ income statements in the long run as consumers call the tune and managers haven’t yet learned how to dance to it.
As with autos, so with airlines—price is the driving factor in changes that are likely to prove enduring even after the economic recovery now underway boosts traffic. The day when airlines could charge business travelers several multiples of the bargain fares offered travelers who are not timesensitive seem to be ending. The lowfare discount carriers have proved that they can profit by offering cheap fares to consumers willing to put up with a new form of “knees up”—tuck your knees under your chin in order to squeeze into your seat, and don’t expect any beer or champagne to ease the discomfort. These pointtopoint carriers have already forced the big airlines that operate on the hubandspoke system—feeding passengers into a central hub such as Chicago’s O’Hare, New York’s Kennedy, or London’s Heathrow, where they transfer to longdistance flights—to retreat from many shorthaul routes, or to slash prices. For example, Delta had to lower its roundtrip fare on the WitchitaWashington route from $1,667 to $461 to meet the competition of newcomer Airtran.
And now America’s premiere cutprice carrier is turning its attention to the longdistance market. Southwest Airlines, the only major U.S. carrier operating at a profit (it expects this year to be its 30th consecutive year in the black), has announced that starting in September it will serve the BaltimoreLos Angeles route, with its highest oneway ticket going for $299. United charges $1,127. This differential is simply too great for even the business traveler to ignore. Since the Baltimore airport is as accessible to travelers from Washington as is United’s hub at Dulles, there is little prospect that the bigger carrier can sustain its current fare structure.
Just as auto buyers surf the net for bargains, so do travelers. Just as auto buyers expect bargains, so do travelers. Just as the ability to control costs so as to meet consumers’ price expectations is now the dominant factor determining the future of the auto makers, so it is the key to what the airline industry will look like a few years from now. One thing is certain: it will not resemble today’s industry.
Nor will apparel retailing, a $166 billion business. Just look at the June figures for retail sales. The big discounters—WalMart, Target, Costco, Dollar General, and Kohl’s—reported gains in stores open for at least one year of 7.9 percent, 4.9 percent, 6.0 percent, 11.8 percent, and 14.8 percent, respectively. Meanwhile, department stores Sears, Federated, J.C. Penney, and May saw sales fall off, and Saks and Neiman Marcus eked out gains of only 1.2 percent and 1.7 percent, respectively, over last year.
This is no onemonth flash in the pan. The preference for discounters has changed for retailing for good. “Consumers are laser beamfocused on finding the best value,” says Emme Kozloff of Sanford Bernstein & Co. And Brand Keys, a New York marketing consultancy, surveyed 7,500 apparel customers and found that 57 percent say that brands and logos are less important to them than they were a few years ago.
So the consumer is king, whether he or she is driving, flying, or shopping. And his weapon is price—an insistence that he get real value for money. Oldline companies in the auto, airline, and apparel retailing industries will never again have an easy time separating customers from their money, or incorporating fat margins into their prices.
This article appeared in London’s Sunday Times on July 21, 2002, and is reprinted with permission.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.