January, 2001

From the Editor

Recession Proof?

There is a palpable concern that the economy may fall into a recession. The U.S. Federal Reserve Board took the highly unusual step of reducing interest rates between meetings and more recently, Alan Greenspan, chairman of the Federal Reserve, reversed his previous policy against tax cuts, thus falling in line with the new Bush administration’s explanation that tax cuts may be needed to keep the struggling economy from whirling into a recession.

As always, the cause of the current downturn is unclear and its severity is unknown. Higher oil prices are one culprit; the collapse of the dot-coms, which also affects those companies selling to these New Economy ventures, is another possible contributor to economic malaise. In addition, the so called “reverse wealth effect” may be kicking in. Under this theory, when stock prices were booming, people were happy to spend more as they felt wealthier, even if their actual income didn’t change. Now, with so many stocks so substantially off their highs, the reverse occurs and people feel poorer, pay off debt and spend less, even if their income is unchanged.

If there is a recession in the offing, how ought the deli industry respond? Well, to start with, a big yawn might be a less harmful approach than most. We are selling food after all. People have to eat, recession or not, and the economy would have to get very, very bad, going well beyond recessions of recent years, to get people to eat much less.

But what about all those high profit expensive items – prepared foods, high-end meats, smoked fish? Isn’t it likely that in a recession, such items would be crossed off shopping lists? Intuitively it seems to make sense, but our practical experience has been otherwise.

In the past, recessions have seen solid gains in sales of so called “luxury foods” at retail. Whether it is imported raspberries in produce or a nice smoked salmon in the deli, we haven’t seen sales collapse in past recessions. In fact, the opposite has occurred and business has increased for these high-end items.

If it is anything like the ones during the senior President Bush’s administration, a mild recession may have an effect that leads to changes in overall spending habits to the benefit of higher margin foods. In other words, if you still have your job (as most people will under any anticipated scenario) but there is economic uncertainty, you might hold off on a new house or a new car. You might even postpone that trip to Paris. But a recession may actually serve to increase the discretionary income available for small luxuries, such as great food.

What is more, though the tremendous growth of restaurant eating has been a sore point with retailers as they have battled for “share of stomach”, in a recession it is likely that the same phenomenon will provide a “cushion” for retailers. If a recession is so severe that it actually impacts people’s food budgets, it is likely that entertainment outside the home and eating out in general would suffer first. After all, if people aren’t inviting their friends and family “out” for dinner, they are going to invite them “over” for dinner, which means that a recession is likely to mean more business for retailers in general and for deli departments in particular. But even if people are going to buy more at retail, won’t they cook more from scratch and thus be less interested in already prepared items that delis sell at considerably higher prices than the price of the raw materials? It is very unlikely. First, if times are rough, people may work more hours, not less, and thus need more convenient foods. After all, if the primary wage earner gets laid off, he may have to accept a lower paying job and then work more hours or moonlight to compensate. Alternatively, a non-working spouse or spouse who just works part-time may have to go to work or increase to full-time to pick up extra dollars.

Besides, once lost, skills are not easy to regain and the population of the United States just doesn’t have the cooking skills that our grandmothers had. The notion that people who a week ago struggled to open the take out containers are going to suddenly acquire the ability to whip up their own carrot and raisin salad simply boggles the mind.

So in all likelihood, a recession will be either a neutral or a positive move for deli departments. But what if I am wrong? What if we do see a dip in deli sales? What is the proper response?

Well, redouble marketing efforts, of course.

All businesses experience times of greater and lesser prosperity. And surely it is a dream of all business people to capture the flush times but avoid the lean times. But over and over again, we have learned that this is more a dream than a business strategy. In fact, it is precisely those companies that invest most heavily during downturns that are in a position to ride the wave when good times return.

If we are lucky, the powers that be will make the right policy decisions and either head off a recession or insure that whatever downturn we do experience is both brief and mild.

For the deli department, however, the verities are eternal. So in good times or bad, we have to merchandise sharply, market generously, procure efficiently and manage effectively. This boosts sales and profits in lean times and flush. The focus on good operating procedures is the challenge. It also is more than enough to keep us busy, whatever the twists and turns of the overall economy.  DB