Page 126 - Accelerating out of the Great Recession

DEFENSE FIRST

Businesses should not expect a quick return to precrisis
levels of spending. Several major macroeconomic trends have
affected consumer behavior in the downturn, and they will con-
tinue to have an impact through the slow upturn.
First, unemployment, which has risen dramatically in many
countries, will increase as more companies respond to the
prospect of low growth, and will likely stay high for some time
to come. And of those still working, many have shifted to part-
time jobs. Second, substantial deleveraging will continue—par-
ticularly among consumers as they pay down debt. Third, con-
sumer credit will remain difficult to obtain, as financial
institutions continue to cut back credit card issuance and other
loans while raising fees.
With this as the context, what should companies be doing?
Cut Prices—Once a Cost Advantage Is Achieved

Consumers are expecting highly competitive pricing. With the
consumer price index entering negative territory in the United
States and the euro zone countries, price cuts are now the
norm.
Looking to the medium term, though, there is a greater risk
of inflation. Although BCG’s survey of business leaders found
that only 52 percent of respondents believe that inflation will
occur in the short term, 73 percent think that inflation will
appear over the medium term. For companies subscribing to the
belief that the risk of inflation is high in the medium term, the
case of McDonald’s in the 1970s demonstrates how acting early
to reduce costs pays off over time. After reorganizing its supply
chain in the 1970s to reduce costs, McDonald’s was able to
reduce prices in 1978, a year when its competitor Wendy’s
increased prices by 14 percent to cope with inflation.

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