Author: JamieMcIntyre

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Jamie McIntyre is the founder of the 21st Century

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Is the World in a Race to Zero? By Jamie McIntyre By JamieMcIntyre

  in Business Management | Published 2012-12-17 04:18:24 | 381 Reads | Unrated


Also published on: http://www21stCenturyNews

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The newspapers have been busily reporting the decline of Australian retailing for most of 2011, but is it due to more than declining retail confidence writes Jamie McIntyre

Billabong shares took a hiding recently due to falling sales. Harvey Norman has been struggling for some time along with other major retailers such as David Jones and Myer.

Even market darlings like JB Hi-Fi are beginning to struggle to maintain sales. Many Australian retailers in 2011
went bust.

Globally, we have seen that for some time US consumer spending has been in the doldrums and Europe is entering a severe recession.

So why is the lack of consumer spending in retail markets taking such a huge toll on the world economy?

Save vs. spend vs. restructure

The reliance on consumer spending has propped up western civilisation for the past decade, but since the 2008 Global Financial Crisis the consumer has decided to save rather than spend.

However there is something much larger going on that is disguised as poor retail sales. This is an overriding trend more significant than just a downturn that may reverse in a few years.

A major restructuring of businesses and the entire economy is occurring. It is a trend that is going in only one direction and has predictable consequences. It is a pattern that appears to be creeping up on society, yet most are oblivious; despite it having massive consequences for all.

It will affect the way we consume and the way many generate a living. It will see increasing unemployment and a jobless recovery with significant consequences.

What we are experiencing is ‘the race to zero’. Have you noticed that most things are becoming cheaper? Plasma 42-inch TVs these days can be picked up for only $600. They were $3,000 a few years back – $5,000 a few years before that. Five-night holidays to Phuket, Thailand are being sold for $228 on daily deal sites, when again they were being sold for thousands of dollars not so long ago.

How many retail items do we buy from China that are cheaper than ever?

Bunnings Warehouse has built an empire on cheap imported products largely from China. Their business strategy is modeled off Home Depot in the United States: sell products at a fraction of the cost than small hardware stores and grow bigger by importing cheaply and eliminating the number of staff required.

McDonald’s is a longer-term example of an empire built on lowering product prices. Then we have companies including Google who provide services for free (search engines) and have reshaped the advertising industry in the process.

Facebook has trodden a similar path. Once again, this is a free service and likely to be listed in 2012 for a value of around $100 billion. Groupon, the largest daily deal company was listed recently for $15 billion. Groupon offers 50% discounts in almost any product or service and has becoming the fastest company in history to reach a billion dollars in sales.

The tech switch and the consequence

So what pattern is this highlighting? Technology combined with constant competition and consumers switching to shopping online have caused this rapid race to zero in the pricing of goods and services.

Constant price decreases are being sought after to attract customers, and it is largely thanks to the internet and cheap labour in China that it has become possible.

Even financial service industries have been affected.

Insurance and broking fees for buying and selling shares have all declined; cost of delivery drops rapidly by eliminating the need for businesses to employ multiple personnel.

However the trend can’t continue forever. Consumers are winning in one sense because they have seen the cost of many imported goods drop with many bargains to be had by internet shopping where retail outlets with high labour costs simply can’t compete.

Here is the inherent problem: many companies continue to go broke because they can’t compete, meaning unemployment rises.

And even those that don’t go broke develop online business models that require small staff numbers, compared to high labour costs for businesses such as retailers and manufacturers.

This trend will lead to jobless recoveries. This means that when Western economies start to recover, not enough jobs will be created to replace those that have been lost. Many of the new growth companies don’t require and/or can’t sustain their prices if they require too many staff.

For instance, Facebook will potentially be valued at $100 billion when it lists in second quarter 2012.

Yet it employs only 3,000 staff. Companies in other industries with equivalent turnover often have 30,000 to 50,000 employees.

These new types of companies will see the eradication of many jobs. The old science fiction fable that computers would replace humans (creating high unemployment) is becoming reality due to the rampant discounting of consumer goods and services.

Innovation in reducing costs via either the internet or cheap labour (i.e. products made in China or employing cheap labor like McDonald’s) can only reduce cost of goods to a certain point where eventually everyone loses.

Consumers win in the short term with bargains, however a consumer without a job won’t even be able to afford those bargains.

Social engineering

Is the natural process of restructuring that people who lose their job move to more efficient jobs elsewhere in the economy? Perhaps, it is. However, is this movement enough or is the race to zero eliminating many jobs that will never be replaced elsewhere? Hidden unemployment will no doubt rise as people give up looking for work.

This trend turns the innovative into wealthy people, but at what cost? Though there is something to admire in the re-emergence of dotcom companies like Facebook, Google, Groupon, LinkedIn and Zynga, as well as the massive discount stores like Bunnings that benefit from China’s cheap products or McDonald’s that benefits from cheap youth labour, there is no doubt there is a downside: it will decimate companies, industries and jobs in the process, creating more rapid change than ever.

The problem is many consumers have little capacity to deal with change, which means there will be unsettling times to come unless people develop the capacity to be able to handle uncertainty and actually profit from it.

Looking ahead

The race to zero could mean entire industries are wiped out within years. Apple iTunes’ success reshaped the music industry while wiping the profits of record companies and hundreds of thousands of jobs in the process. These jobs were never fully replaced elsewhere in the economy.

So this social restructuring has created a big conundrum: will the benefits for consumers receiving lower-priced goods, outweigh the elimination of so many jobs in our economy and the rapid structural pains that will occur?

And will the constant competition eliminate the profits of business, making more of them unviable? We live in interesting times.

Jamie McIntyre is the founder of the 21st Century Group of companies and CEO of 21st Century Education. He is also bestselling author, successful entrepreneur, investor, sought after success coach, internationally renowned speaker and world-leading educator.

Jamie McIntyre is the founder of the 21st Century Group of companies and CEO of 21st Century Education. He is also bestselling author, successful entrepreneur, investor, sought after success coach, internationally renowned speaker and world-leading educator.



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About the Author

Jamie McIntyre is the founder of the 21st Century Group of companies and CEO of 21st Century Education. He is also bestselling author, successful entrepreneur, investor, sought after success coach, internationally renowned speaker and world-leading educator.