We’ve commented before about Netflix and its business model.  We’re not a big fan of Netflix’s core business model, and we think it has only a few more years left it in at most.  In the age of fast downloads, it simply does not make sense to mail DVDs back and forth.  (Netflix also has an on-demand movie download service, which has promise.)

At any rate, while Netflix’s original business model is well on its way to obsolescence for digital media like movies, it may yet have potential for “old economy” industries.  The New York Times had an article about two young Harvard MBA graduates who started a “Netflix type” web business that rents designer dresses: “Haute Couture, Available Through the Netflix Model.”

This is an interesting idea.  It has long been possible to rent high-end women’s dresses for events (and men’s tuxedos too, of course).  But there has never been an online mail-order site for it.  The Times writes,

Rent the Runway is a recession-era twist on the Internet rent-by-mail model, which has been used for things like textbooks and video games in addition to movies. Unlike those utilitarian items, however, the dresses offer a touch of Cinderella — on a budget….

Rent the Runway is betting that its shop-by-Web convenience and the appeal of its top-quality fashions will persuade women across the country to rent a dress for a special occasion without trying it on beforehand.

It will be interesting to see if this business prospers.  It’s difficult to buy (or rent) clothes without trying them on.  This is hard enough for a standard pair of jeans, let alone tailored clothing.  Fashion is also a notoriously fickle industry.

At any rate, we’re not so much interested in this particular business as in the larger trend it could represent.  Recessions are a time of vicious creative destruction in which old business models are destroyed and new ones created.  It would be ironic if Netflix’s core business failed yet inspired copycats that revolutionized other industries.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

“People respond to incentives, although not necessarily in ways that are predictable or manifest,” write Levitt and Dubner in their new book Superfreakonomics.  “Therefore, one of the most powerful laws in the universe is the law of unintended consequences.”

Their book, which is a sequel to their surprise bestseller Freakonomics, is a great series of case studies on unintended consequences and, on a higher level, understanding consumer behavior.   It’s surprisingly one of the funniest books I’ve read in years.  I found the book so entertaining, I pretty well put my life on hold this past weekend to finish reading it.  (My rapid reading of the book was, in itself, a beneficial unintended consequence of my recent buying of my Amazon Kindle.  The convenience of owning a Kindle has enabled me to read much faster and cover a lot more material.  Don’t underestimate the benefit of having a portable library in your briefcase.)

Some of the book’s chapters are better not mentioned in this blog (a large section of the book is dedicated to analyzing the economics of prostitution, calculating the marginal costs and benefits added by pimps, among other topics).

Below are some of the tamer subjects covered Read the rest of this entry »

In recent posts, we’ve pretty well beaten to death the topic of e-book readers like the Amazon Kindle, but this is a significant technology trend that stands to make major revolutionary changes to large segments of the economy, so we figure one more post won’t hurt.

The Financial Times reported today on the Kindle’s adoption by some forward-thinking American universities: “Electronic Books Kindle Learning at US Universities.”

As part of a pilot program, Amazon is making its Kindle DX (large screen) readers available to a hand full of universities at a deep discount, and the universities are in turn making them available to students in certain programs for free.  Read the rest of this entry »

The Wall Street Journal had several good stories last week that fit some of the long-term themes we’ve been discussing in this blog.  We’d like to pass some of these along here:

“Waiting for the Next McMansion to Drop”

The Wall Street Journal’s quarterly survey of housing-market data in 28 major metro areas shows sharp drops in the number of homes listed for sale across the country. But the potential supply of homes is far larger because banks are likely to acquire significant numbers of foreclosed homes in some areas, notably Las Vegas, Atlanta, Detroit, Phoenix, Miami and other parts of Florida, and Sacramento, Calif., over the next few years.

“Signs of Recovery Don’t Extend to Jobs”

U.S. states and regions continue to see their economies slowly improve, but employers across the country remain skittish about hiring, according to two government reports released Wednesday.

 

Even as manufacturing output and the housing market stabilize, the unemployment rate tops 10% in more than a quarter of the states, the Labor Department said Wednesday.

“Wall Street Soars Above Main Street”

Wall Street is back. The stock market is up 50% from its March lows.…  But Main Street isn’t enjoying much of a recovery. Employers are still shedding jobs, producing profits by cutting costs rather than increasing sales. The official unemployment rate is at 9.8% and widely expected to cross 10% before turning down. Raises are scarce for those with jobs.

I say this mostly in jest, of course.  Though I did start to wonder this weekend when I couldn’t find a parking place at the local outlet mall.  Patrons were parked in the grass, behind the dumpsters, and on the medians — which was odd given that it wasn’t a holiday weekend, the Christmas season is still a few weeks away, and there were no major sales to speak of.

The weak dollar has had its benefits for South Florida.  Though the local economy has been in the tank (one of the worst in the country) the relative weakness of the dollar has encouraged foreign tourists to frequent the area’s many high-end outlet malls.  But this past weekend, it was only the familiar Chicagoland and New Jersey snowbird accents that could be heard.

Even stranger was the fact that this increased mass of people were pursuing a diminished stockpile of goods that are now selling at much less attractive prices.  The phenomenal sales of a year ago are no longer to be found, and neither is the selection.

So…is this is?  Is the recession over? Read the rest of this entry »

The Great Recession has wreaked havoc across industries with very few exceptions.  Still, there have been a few bright spots.  Today, we read in the Financial Times about two very different companies that are both doing quite well, at least relative to their peers.

British airline EasyJet (the no-frills Southwest Airlines of the UK) reported that it’s passenger numbers rose at the fastest level in five months in September.  Year-over-year traffic is actually up 5.3% — not bad during one of the worst economies since the Great Depression!  Irish low-cost competitor Ryanair also posted good numbers, but British Airways continues to struggle.

So, in an environment where fewer people are traveling for both business and pleasure, we see those that do travel switching to lower cost alternatives.  EasyJet says that some of its increase in passenger traffic is from business travelers who are “trading down” to cut costs.

It’s not too surprising that cheaper alternative are doing well in the downturn.  But it is quite surprising that demand has remained so high for certain luxury goods.   High-end handbag maker Hermes still has a waiting list of two years for some of its purses.   In the worst recession since the 1930s, there are still people willing to pay $7,000 and wait 2-3 years for a handbag — and enough of them to justify the opening of new stores and hiring of new staff!

So what is the secret to be gleaned for aspiring entrepreneurs from these two very different stories?  We wish we knew.   At the very least, we can say that one size does not fit all.

For the mass market, it comes down to price.  The common man looks to stretch his dollar as far as it can go in a downturn.  For wealthier consumers, perhaps it is more about perceived value.  At any rate, it is certainly refreshing to see a few companies doing well in what has otherwise been a horrid year for the retail and transportation industries.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The funeral industry was long viewed as being the most recession-proof industry in the world outside of basic staples like food.  As Ben Franklin told us, along with taxes, death is the only real certainty in life.  But in this most unusual of recessions, even the business of burying the dead is suffering.  Consider this headline from today’s FT: “Death is certain, but it is far from recession-proof.”

The FT writes,

However grand or modest, everyone must have a funeral and publicly listed “death care providers” offer a way to profit from nature taking its course.

Yet even this $15bn a year business has not been recession-proof. Operating earnings of the four largest vertically integrated operators of funeral homes and cemeteries fell by between 10 and 38 per cent over the past six months, compared with a year earlier.

The FT tells us that survivors of the deceased are not the ones pinching pennies.  It is the deceased themselves, while still alive, that are cutting back on prepayments.   There is an entire sub-industry dedicated to prepaying future funerals and investing the proceeds.

At any rate, the Great Recession has only exacerbated a much bigger and more significant trend:  there are fewer people dying.   This is great news, of course (unless you’re a funeral director).   But it has nothing to do with Americans living longer or being healthier.

As you might expect, demographics provide the answer.  We are currently experiencing a “death trough.”   The Boomers are still far too young to be meeting their Maker en masse.  At the same time, the bulk of the Greatest Generation (the World War II generation) has already left us.   This means that the generation now in their golden years is the much smaller Silent Generation, the generation that was too young for WWII but too old for Vietnam.

Fewer people born means fewer people to die — and less business for funeral operators.

The funeral industry will have another decade or two of tight conditions.   But when the Boomers begin to enter their 70s and 80s, business should boom again.

Will many Boomers, reminiscing about their hippie past, opt to be cremated and have their ashes scattered at Woodstock?  Maybe.  But the Boomer generation is so large, it won’t matter.  Even if a smaller percentage of Boomers opt for traditional burial, the shear number of Boomers will insure that business will be good.

In life, the Baby Boomers have been the proverbial “pig passing through a python,” making fortunes for marketers smart enough anticipate what they will buy next.  And the same will be true in death.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

There is near consensus in the press now that the recession is ending, and the leading economic indicators seem to reinforce this.  Of course, the indicators are skewed by money supply growth and the stock market; other “real” measures are far less conclusive.  (See Ritholtz blog.)

My view continues to be that, yes, the economy is improving, but no, it’s not going to return to pre-crisis levels of growth any time soon.  In the “New Normal” economy, we will have to get used to more modest levels of growth.

And until the numbers confirm a new trend in the economy, I continue to watch for anecdotal evidence.  Which is why this headline caught my eye: “US Credit Card Defaults Rise to Record.”  Bloomberg writes,

The U.S. credit card charge-off rate rose to a record high in August, as more Americans lost their jobs, Moody’s Investors Service said on Wednesday, in another sign consumers remain under stress.The Moody’s credit card charge-off index — which measures credit card loans that banks do not expect to be repaid — rose to 11.49 percent in August from 10.52 percent in July.

The index resumed an upward trend after declining in July for the first time in almost a year, vanishing hopes of stabilization in the industry after record high credit losses.

Unemployment is a lagging indicator, of course.  So, it could be that credit card defaults are also lagging the recovery trend and that we will see marked improvement in the charge-off rate in the months ahead.  I remain skeptical, however.  Until we start seeing more concrete signs of improvement (that preferably do not involve government bailouts), the media reports of an improving economy should be taken with a healthy grain of salt.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Dennis Gartman, of the eponymous Gartman Letter, is fond of saying that all economic information of any importance is initially anecdotal, and I agree completely.  Formal economic stats are good for identifying trends, but they are next to useless in identifying turning points.  For these, you need a real “boots on the ground” perspective: What are people buying at the mall?  How full is the parking lot?  Are they ordering that extra bottle of wine at dinner?

This brings me to a new economic indicator:  my mother in law.   Every guy knows he has to listen to his mother (and perhaps even more so his wife’s mother), but few think to use them as an economic barometer. Read the rest of this entry »

The Census Bureau issued a press release yesterday that included this passage:

 ”The U.S. Census Bureau announced today that real median household income in the United States fell 3.6 percent between 2007 and 2008, from $52,163 to $50,303. This breaks a string of three years of annual income increases and coincides with the recession that started in December 2007.”

While our research focuses on predictable changes in the desire of consumers to spend based on their family life cycle, we recognize that employment and earnings are the main drivers of consumer spending.  Meaning that if you are not working, or if you are working but earning less, then you have tremendous pressure to spend less.  With real median income down over 3.6% in one year and unemployment near 10% on the narrow U-3 and over 16% on the broader U-6, it seems impossible that we will get a resurgence in consumer spending any time soon, even if the demographic trends of predictable spending were not negative.