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Read the story! You decide!
The Big Mac Index so described by the Economist has seen the price of McDonalds burgers more than tripled in the 40 years of reporting. And they are still in the business of selling burgers to the masses!
What is this index? The Big Mac Index published since 1986 measures the cost of a Big Mac in different countries and indicates the difference in purchasing power parity between them.
How did McDonalds do it!
McDonalds generic competitive and growth strategies are designed to maximize efficiency, minimize costs and ensure profitability. Its pricing strategy includes price bundling along with psychological pricing that encourages customers to buy more products. Its a formulae for success as profits indicate.
A different approach is used by another mega US retailer. Their strategy aims to keep prices steady following a business model, described by the company’s finance boss as ‘arrogantly simple’, to hook shoppers by offering high-quality products at the lowest prices.’ The company attributes its enduring success to this approach.
What’s your Business model? What Strategies do you use to be competitive!
During this period of inflationary pressures and price increases running a successful Business is challenging for most, whatever your industry.
You may be one of them, a small Business owner, faced with the rising costs of doing business. Increased costs for supplies, commodities, labour and energy. How do you tackle setting price points that keep customers happy while still maintaining reasonable profit margins. It's push - pull economics!
For example, a recent news headline ‘price hike on the menu for Aussie pub classic’ suggests possible further price increases to menu favourites Burgers, nuggets and chicken fillets. This follows as a major poultry producer warning of higher production costs that will need to be recovered.
Similar sentiments expressed by a local hairdresser, saying he was forced to absorb rising costs to avoid passing them onto his customers and possibly losing them as price can be the difference between someone coming to his salon or going somewhere else. He cited increased cots of electricity, rent, products and superannuation, and is the hardest time we've ever known at running a business.
Are there any answers, solutions!
Yes, consider these Strategies.
Look at margins: Most retailers boost profits by marking up prices. Short term cost impacts can be managed thru margin initiatives, but these need careful planning to avoid losing customers. Engaging with your customers is critical during these times
What does it take!
Is there a secret recipe?
No secret but there is a recipe. It's a mix, by combining the ingredients of experiences, wisdom, little gems, mistakes and lessons learned that make successful relationships in marriage, Business or both!
A secret recipe! Add these 8 Ingredients.
- Have a Vision, Belief and Goals. Share your dream with loved ones and your associates to bring it to fruition, and make it a reality! Be an entrepreneur of your ideas, add passion, commitment, creativity and innovation. Think Blue Sky and dream Utopia!
- Develop your Pitch. To get buy-in and attract partners you need to promote, sell and clearly articulate your dream. Keep your message simple, avoid jargon, frills and whistles!
- Build relationships on strong foundations: Develop trust and build bridges and bonds with partners by finding common ground and mutual interests. Together, develop a roadmap, a guide to know where you, your Business, and your partner are going, how and what it takes to get there.
70 years the history:
In 1970 interest rates started at 5.88%, moved up to around 7%, (with a 30year mortgage rate 1971, 7.3%). Then in 1974 jumped to 10.38% for the first time in Australian history. This rapid inflation was due to oil shortages in 1973 & 1979. Rates remained around that until 1980 while inflation rose to 18%.
In the 1980’s the Reserve Bank increased official rates to nearly 20% to fight the asset price inflation prevailing at that time. The record high rate of 17.5% was set in January 1990. Australia slipped into recession that lasted until late 1991. According to the Treasurer of the time, ‘this is a recession that Australia had to have’ – Treasurer Paul Keating, November 1990.
A series of events created this situation.
- The International Stock market slump of October 1987 saw markets crash around the world. It started with interest rates rises in Japan and Germany, that pressured US rates to jump creating a huge selloff of US shares. Global share prices fell around an average 25%, but Australia slumped to a 40% decline. Of the OECD economies 17 of 18 experienced a recession in the early 1990’s.
- In Australia the Labor Party came into power in 1983. Under the Hawke-Keating government it shifted the Labour Party from its traditional allegiance to economic protectionism, and moved to deregulate Australia’s financial industry. The role of trade unions was also restructured and the rest is history!
- On reflection, speaking in 2006, Ian Macfarlane, former Reserve Bank Governor, said ‘The recession of 1990-91 was dominated by financial failure. In most cases, it was the fall in asset prices that meant that loans could not be repaid, thus transferring the distress to financial institutions.
Mortgage rates remained high until the end of 1990’s, when they levelled off to 6.5%.
Since the early 2000’s rates remained in the 4.5% to 8% range.
Since 2009 we have seen modest inflation and record low interest rates. The record low of 0.10% in November 2020. A situation that gave consumers greater spending power that for some has become a way of life.It comes as no surprise recent inflationary pressures, cost of living increases has dramatically impacted this cohort, particularly mortgagees. .
And here we are today!
The probing questions raised by many!
the following offers answers and explanations.
For some, the recent inflationary pressures came as a surprise, an unknown phenomenon while for others, those who experienced high inflation in the early 70’s to late 90’s, it was a return nightmare. Like me you may recall those challenging times and bad dreams.
- So, what is Inflation!
‘Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over a given time.’ This includes commodities such as food grains, fuel, transport and utilities like electricity. And not to forget services for healthcare, entertainment, and labor.
It will be experienced and viewed differently, positively or negatively, depending on your circumstances, and rate of change.
The Consumer Price Index (CPI) is the indicator used to measure the percentage change in the price of a basket of goods and services consumed by households.
Simply said, the economic cycle and the interest rate cycle are intertwined and in theory, interest rate changes should follow the economic cycle. For example, The Reserve Bank raise interest rates to slow down the economy and avoid inflation when the economy is growing rapidly, and inflationary pressures are increasing. The situation we are currently experiencing.
- What does it mean to Households, Consumers, Businesses
Cost-of-living pressures, rising prices of everyday goods and services, and declining purchasing power of the dollar are putting a strain on average households, stretching their budgets. As monetary policy responses kick-in, home buyers, mortgagees face increased interest rates and repayment, while renters have higher costs as housing investors pass on their borrowing expenses. Housing costs are at a new high for a number of reasons, including limited stock (demand and supply tensions).
- Is inflation something new? No!
Australia’s inflation history since the introduction of the CPI can be broken down into four main phases: (i) The initial post-war recovery and the ‘Korean War boom’; (ii) the disinflationary period from 1953 to 1972; (iii) high inflation from 1973 to 1990; and (iv) the period since the introduction of inflation targeting by the RBA.
- Snapshot: the Inflation Rate in Australia averaged 4.89 percent from 1951 until 2023, reaching an all time high of 23.90 percent in the fourth quarter of 1951 and a record low of -1.30 percent in the second quarter of 1962.
- What does it look like!
This time last year we covered the burning issues of cost-living-pressures, high inflation and consumer confidence!
12 months on, here we are still battling and countering the effects of price increases that are impacting our lives. Discretionary spending now is the way forward for many. This habit is reflected in a recent headline, 'cost of living bites down on West Australians' with comments 'the community is broadly attempting to rein in spending, or at least choosing where to spend their money' (West Newspaper). Yes, whether consumers or small Business operators, no one can escape these pressures.
What's changed?
The good news is our inflation has been coming down, a sign that tighter financial conditions have dampened upward pressure. But be aware of the Reserve Bank's position, announcing it is ready to act as needed. Increase or decrease, it's a wait and see, a situation keeping many on edge. Not so happy are mortgage holders arguing they are still hurting by the increased interest rates and struggling with everyday expenses.
For others, although household budgets are under pressure, and some travel plans are on hold, many are still willing to enjoy their treats, taking staycations, Gym memberships, grabbing that morning takeaway coffee and dining out. Smashed avocado is still on the menu! and entertainment, live concerts are also popular. The summer holiday break and new years resolutions seen as driving this spending.
This trend supports the more resilient industries, hospitality, beauty and fitness. These Business in return provide employment opportunities for a mostly casual workforce, with many of these taking on more than one job to ease household pressures. This now described as the 'poly-employment' trend.
Other good news!
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