Buyer beware!

What we have all noticed in supermarkets has been confirmed by Statistics Canada; for the period of 12 months ending in April, the price of food bought in stores has increased significantly. The average increase is 8.3%, but this statistic hides another reality; the price of some foods has increased much more. Such is the case of fresh vegetables (+26.0%) and fresh fruits (+16.8%), of which Health Canada recommends between 7 and 10 portions daily for adults. For these products, the consumer must absolutely compare prices in different stores, because differences are important and prices vary considerably from week to week.

The consumer must also be vigilant with respect to changes in product sizes, a phenomenon that manifests itself in recent years, but gains momentum it would seem. Thus, I have recently noticed that the large size of cheese bar of a well known brand has recently diminished from 600 g to 500 g... while its price increased.

Why abandon the Pontiac brand?

April 27 2009, GM announced that it will phase out the Pontiac brand as part of a restructuring effort to reduce costs. Is this decision wise? Consider this.

Pontiac is a grand and old brand to which millions of people were and are still loyal. Introduced in 1906 by Pontiac Spring & Wagon Works, it derives its name from the famous Native American Chief Pontiac (Obwandiyag, 1712-1769) who led a rebellion against British occupation of the Great Lakes (1763-1766).

Over the years many distinguished cars have appeared. Amongst other the Star Chief with its rounded shapes (1955), the Bonneville with its rear fins (1959), the famous Firebird (1967) introduced to compete with the Ford Mustang, the GTO (1969), the Gran Am (1973), the Trans Am (1985) descendant of the Firebird, and the two-seater Fiero Coupe (1985), to mention but these few.

I understand the necessity for GM to cut its costs; its survival is at stake. However, I believe that the same savings could be achieved while keeping the Pontiac brand whose value is not only sentimental and cultural, but economical; in fact, if GM abandons it, I would not be at all surprised to see investors propose to buy it.

Pontiac’s problem originates from the duplication of several models with the Chevrolet brand; this leads to excess costs as much for manufacturing than for marketing. Those costs could easily be reduced by eliminated Pontiac models for which a corresponding Chevrolet model already exists; doing so would reduce manufacturing costs. In addition, sales of Chevrolet and Pontiac product lines, now complementary, could be grouped under one banner, thus reducing marketing costs.

Obviously, Pontiac and Chevrolet models will need to be adapted to present economic and environmental requirements, and of course to customer expectations.

Are you a Pontiac fan? If so, I would really like to read your comments on the subject.

The economic crisis and the consumer

Around the planet, a vast majority of people have reduced their discretionary spending, both with regards to consumer goods, such as clothing, and for major purchases such as home appliances, a vehicle or a house. As reported in a Washington Post article, Economist Peter Morici from University of Maryland states that «What consumers are not spending on gas, they are not taking to the mall».

One could have indeed thought that the significant decrease in fuel prices could lead to a reallocation of the money saved to discretionary spending. However, let’s recall that the disproportionate increase in fuel prices has forced many consumers to cut everyday spending, food for example; it’s likely that the money they now save on fuel is first being allocated to a form of recuperation for basic expenses before being used on discretionary consumption.

In most parts of Canada and the United States, consumption is down. A Global and Mail daily Poll performed in the last week of November reveals that a majority of people plan to reduce their Christmas expenses. Although the sample was not selected scientifically, the survey nevertheless features 13 160 people. Of these, 68% plan to reduce expenses, a result that corroborates what one can observe in stores.

In the United States, «Black Friday», the day on which retailers traditionally turn from losses (red ink) to profits (black ink), has been disappointing. A Washington Post article reports that consumers only buy items on which they get an exceptional deal.

It would appear that things MAY BE different in Quebec… FOR NOW. Indeed, according to a survey unveiled on November 12, performed by Altus Géocom on behalf of the «Conseil québécois du commerce de détail» (CQCD – Association of Quebec Retailers), 64% of Quebecers say that they intend to spend as much as last year for their Holiday purchases; 7% of our citizens intend to spend even more. For my part, the GOOD news in all this is that these percentages are still lower than in 2007 when they were respectively 69% and 12%. There thus seems to be only 29% of us, 10% more than in 2007 thank God, who want to reduce their consumption for the Holiday season. I am one of those.

This denial of the crisis by many Quebecers was confirmed to me during an interview on Christiane Charette’s talk show on November 25th. I was amazed to hear callers say that the economic and financial crisis was amplified by the media to «scare people». I wondered what planet I was on. If those people are representative of Quebec's population, this may explain, at least in part, the results of CQCD’s survey.
Those reactions are rather shocking, considering what is happening elsewhere in Canada and the United States.

Bursting of the consumption bubble

This column is subsequent to two radio interviews broadcasted today, Tuesday November 25 2008:

• the first with host Christiane Charette on Radio-Canada (95.1 FM),
• the second with host Michel Gailloux on Radio Ville-Marie (91.3 FM).

The rise of luxury leads to excess both from the consumer and the producer. This is the central theme of «Consommation et luxe», a book published in November 2007. My analysis helps understand that buyers’ and sellers’ excessive behaviour is in fact partly responsible for the economic and financial crisis which started in the summer of 2007.

Various bubbles have developed over the last decades and they all ultimately erupted: technology, real estate, stock market ... we must now talk of a consumption bubble.

Hyperconsumption, a phenomenon which appear at the turn of the 20^th century, is characterized by:

• consumption focused more on pleasure than on image,
• an increase in the quantity of goods and services purchased,
• an escalation of luxury, «luxurization» in some way of goods and services offered.

This rise of luxury is easily explained by considering the motivations and behaviour of the consumer and producer.

From the consumer’s standpoint, it should be noted that consumption itself is inflationary, not the economic sense, but in the sense of an ever-increasing purchases, day after day, year after year. Abraham Maslow rightly said: «Man is practically always desiring something».

Luxury only exacerbates this impulse: Man always desires something… better. This translates into an inflation of features in goods and services. Take a car for example: if I just bought a car with power windows, an accessory my previous car was lacking, this feature is a form of luxury for me. However, the luxury effect is short-lived; when I buy my next car, power windows have become my «standard» and I will need to add another accessory or upgrade to a higher end car to satisfy my desire for luxury.

While the consumer wants to buy luxury goods and services, the producer is also enticed to sell such products, because the profit margin on those is much greater than on mid or low range products. Furthermore, investors’ demands ever hungrier for profits force companies to follow this path.

It’s an illusive path, as the main car manufacturers in North America can well testify, having originally built their respective empires selling affordable products to the middle class. In this industry, a financial ploy, leasing, has allowed dealers to retail, for some time, high end vehicles to people whose income level was insufficient to purchase this type of good. This business model was doomed to failure.

Current economic and financial conditions favour the bursting of the consumption bubble. Having suffered financial losses, perhaps lost his job, deprived of savings, no longer having access to easy credit and seeing payment options for luxury goods disappear (i.e. leasing), the consumer must curb his consumption.

This is true in all social classes. The difference between the richest and poorest is that the latter are even more deprived to the extent that some can not even buy the bare minimum.

Where is consumption heading in the coming months and years? I’ll answer this question in future columns.

National Do Not Call List

If, like a good many people, you are exasperated by unwanted telemarketing calls, a solution is now available. The Canadian Radio-television and Telecommunications Commission (CRTC) has established a National Do Not Call List (DNCL) ().

Since September 30, you may register your residential, wireless, fax or VoIP telephone number directly on the DNCL Web site. Your registration is valid for three years, after which you must reapply.

Consumption of financial products: Caution!

I wish to make it clear right away that what follows strictly applies to stock market investments. According to experts, Canadian banks are strong and amounts invested in bonds, bank accounts, guaranteed investment certificates and other similar tools are safe. If you are unsure about the nature of your investment, contact your financial institution or advisor.

The purchase of financial products is a form of consumption. Today, given the recent fluctuations of financial markets I want to share with you my experience with these products.

Despite my knowledge of economics, finance and investments, I do not pretend to be a financial expert. However, my business career taught me to exercise utmost caution in the management of moneys under my responsibility. My governance principle has always been very simple: «To manage my employer’s assets as cautiously as if they were my own, perhaps even more so. » And I take great care of our assets.

Let’s go back in time. At the end of August 2008, world stocks markets had already substantially declined; this signal and others before, was a clear invitation to sell stock investments on which a fair profit had already been gained. Yet most investors, I for one, have ignored this warning, anesthetised by the gains made, amongst others from 2004 up to summer 2007’s «subprime» mortgages crisis. We were all convinced of the transient nature of the crisis and confident in an eventual recovery in medium if not the short term: it was a mistake!

Worse still, between September 15 and 29, a Monday as «black» as October 19 1987, markets have alternated between gains and setbacks; most of us still have not considered protecting our backs. Yet, the most basic investment principles advise to sell a stock investment after garnering a fair profit, many arbitrarily set at 20-25%.

During this period, I must admit, however, to have followed our investments’ evolution on a daily basis and devised an exit strategy to protect the invested capital, plus a minimum net annual return which I then set at 3%. Our financial advisor, with whom I discussed this strategy, confirmed its merits, for us anyway.

Friday September 26, I long hesitated to implement my strategy... finally deciding to wait a little; reassured by the comments of American leaders optimistic about the approval by Congress and then by the Senate, of the proposed rescue plan, I once again entertained the illusion that recovery was imminent. I also found it a pity to sacrifice the huge profits achieved... on paper.

I regretted this decision all weekend. Sunday, I decided that, whatever the vote of Congress and whatever happened on financial markets the next day, I would liquidate all our stock investments, namely rather conservative mutual funds. That's exactly what I did.

Of course, with the brutal drop of the markets, 840 points for the S&/TSF in Toronto and 777 points for the Dow Jones in New York, our investment portfolio decreased by 5.2% that day. I am nevertheless convinced that this was the right decision.

Despite the huge virtual loss, since our gains were only on paper, we managed to preserve the invested capital, our main objective; subsequent performance analysis revealed that we had even averaged a 6.2% annual gain between March 31 2003 and September 29 2008.

Since last Monday’s collapse, the markets have significantly increased on Tuesday, and then slightly decreased on Wednesday. Thursday October 2, although the Senate approved a modified rescue plan, the S&P/TSF crashed again closing down another 813 points, while the Dow Jones lost another 348 points.

Markets may increase tomorrow, or decrease again; no one knows. They will wildly fluctuate for a period impossible to foresee. They could also collapse without warning. Such a volatile context calls for the utmost caution, particularly from small investors.

I therefore urge you to make a detailed analysis of your investments with respect to their nature, their performance thus far and the invested capital. If you've turned a profit despite all the cumulative losses, perhaps it is time to cash in? If you no longer turn a profit but have not yet suffered a loss, perhaps it is time to at least preserve your invested capital? Finally, if you suffered losses, perhaps it is time to cut those losses?

Most financial advisors will disagree with me and instead advise not sell in a period such as the one we now live in. But it’s YOUR, hard-earned, money; it’s up to you to decide what to do with it.

Analyze your portfolio and markets’ outlook for recovery, assess your risk tolerance, consult with a cautious and experienced financial adviser... then decide. All I did was telling you what I decided.

Also read «Mutual funds suffer record redemptions».