This might be our favorite headline of the past year: “Free ketchup off the menu as companies stay focused on costs.”

The article relates the story of a Houston, Texas hamburger joint that charges 15 cents per extra packet of ketchup.  Some other examples of Spartan cost cutting:

Across Houston, this downsizing has taken many subtle forms. Some pizza delivery companies now ask take-out customers if they want crushed red pepper and Parmesan cheese with their orders, instead of just throwing them in the bag. Some have started giving customers just one napkin, instead of a stack.

Dentists who before the downturn gave customers fluoride treatments as part of their annual cleaning are charging $30 (£18) extra for the cavity prevention.

The New York Times also had an interesting example of changing pricing and spending patterns: “The sky used to be the limit for the price of designer jeans.  Now the sky is falling.”  It appears the bubble in jeans prices has officially burst.

The NY Times writes,

The $300 pair of designer jeans is now, courtesy of the recession, the $200 pair of designer jeans…  Like any commodity that becomes overpriced, there eventually comes a market correction. And denim’s day of reckoning was long overdue…

But the denim bubble has burst, and only a handful of such extravagantly priced jeans remain at the jeans bar…   During the modern gilded age, the spiraling prices of designer clothes had more to do with driving profits than the actual design or construction of a garment. Designers found they could charge a lot for the perception of prestige. Dresses and suits and handbags were priced like cars, and consumers didn’t blink. But with jeans, it just felt more obvious that some kind of game was being played; the basic elements, after all, had not changed substantially in decades: five pockets, cotton, some rivets.

Oddly enough, even with the price implosion of the ludicrous designer jeans market (isn’t the whole point of jeans comfort and the idea of simple ruggedness?), total sales remain high.  As the Times continues, “though average prices were down 1 percent, according to the research firm NPD — the pricing shift is reflective of a broader reset taking place in luxury stores.”

We like the term “pricing reset,” and we think the writer is on to something there.  We have our own word for it: deflation.  When demand falls, so do prices — and profits.  At any rate, we are not completely bearish on the luxury sector.  The Baby Boomers are now in their 50s — a prime age for many luxury purchases.   Demand in emerging markets has also proven to be robust.  Still, the recession did a fine job of taking some of the froth out of the luxury market.  The well-to-do might still spend some of their discretionary income on the finer things — but absurdities like $600 blue jeans will likely not make the list.

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

Ernest Hemingway must be spinning in his grave right now.  Two Spanish towns south of Madrid have had to cut back or cancel their annual bullfights — and the accompanying running of the bulls through the streets — for lack of funding.  A summer in Spain without bullfights is like a summer without sangria — unthinkable!  But the global recession has bitten Spain hard, and Spanish cities are facing funding crises not too different than those in California.  (Read FT Article)

Spain — like California, Florida, Arizona, and Nevada — had a major housing bubble in the mid-2000s that saw the country’s economy become dominated by homebuilding.  When the housing market died an inglorious death (alas, it didn’t die bravely like a well-bred Spanish fighting bull…), an enormous hole was left in the Spanish economy — and in local government budgets.  When Spanish towns rein in their spending on their annual summer fiestas, you know the straits must truly be dire.   But, as the FT article explains, when a town owes back pay to 800 municipal employees, it is rather difficult to justify spending $700,000 on a party.

This situation is reminiscent of the Los Angeles Lakers recent NBA championship.  The Lakers won their 15th championship in June — second only to the Boston Celtics — but the city of Los Angeles couldn’t afford to throw them a victory parade (see Reuters article).  Of the decision, Reuters wrote: “…such a celebration could cost the city $1 million or more at a time when city leaders, faced with a deep budget deficit, were contemplating worker layoffs and cuts in services.”

City officials are right, of course.  When you can’t pay your workers, you have no business funding a party.  But it sure does make life in a recession a lot less fun.

Charles Sizemore, CFA

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

In more evidence of its size and scope, the recession continues to ravage professional sports — affecting everyone from Joe Sixpack fans to the players and owners themselves.

In February, we wrote “Now the Recession Has Hit the NFL” and “Bailout Culture Spreads to…Basketball?”  And in the months that have followed, the economics of the sports business have only gotten worse.   The mighty New York Yankees had to cut the prices of their seats behind home plate — by half!  $2500 tickets in the Yanks’ brand new stadium have been selling for $1200.  The Pittsburgh Pirates have turned to promotions worthy of Wal-mart or Dollar General — “Buc” Night, a play on the Pirate’s nickname in which tickets and concessions cost a single dollar.  On the NFL front, we saw rumors that the original owners of the Dallas Cowboys cancelled their season tickets, citing the costs.   (Hey, the new Cowboys stadium cost more than a billion dollars…Jerry Jones has bills to pay!)

But in a true sign of crisis, we see that the recession is starting to hit the players. Read the rest of this entry »

A headline in today’s Wall Street Journal caught our eye today: “Debit-Card Use Overtakes Credit.”

The Journal writes, “The surging popularity of debit cards largely reflects the growing use of plastic by American consumers.  Credit and debit card purchases of retail goods and services vaulted past cash and checks in 2003.  Now the recession is giving many consumers second thoughts about their credit cards.” Read the rest of this entry »