Meet Your Toughest Competitor for the Next 10 Years

Your toughest competitor for the next 10 years isn’t going to be a rival brand, a new channel or a new technology.  It’s the suddenly massive US household debt.  The pain it will put Americans through as they divert spending to hack down their card balances will rob you of sales far more effectively than could any competitor.  Here’s why – and how smart companies are preparing.

About once a quarter for the past five years, our own Joe Dion would walk into my office glowering at a chart a lot like the one below.  The blue line on this chart represents US consumer debt as a percentage of GDP, and Joe was the earliest person I know to vocally warn that the logical end point of all this debt would be a rupture in our financial system along the lines of what we’ve recently experienced. 

This week I’d like to share why we think you need to view the HHD number as your biggest competitor for the coming years, and adapt your business appropriately.

How did it get this bad?  The last decade’s borrowing frenzy is an interesting story, but it happened largely in the background of our national consciousness until the financial meltdown in Q4 ‘08.  (This American Life did an excellent wrap-up of the bank collapse – and how it relates to consumer debt – which I recommend.)
   
The story starts slowly.  Household debt stayed pretty steady at under 50% of per capita GDP for most of the 20th century until the 80’s, when it started to climb.  In recent years it rocketed out of control, and the consequences caused our economy to shudder.  In a very real way, the global economic meltdown of the past year is a direct result of unhinged consumer borrowing hitting the red line. 

In fact, US household debt is currently over 100% of per capita GDP, a level which we frequently hear economists regard as unsustainable.

Unlike consumer confidence or some other wishy-washy indicator, this one won’t change just because a few news cycles go by.  Consumers might be shaking off the confidence-rattling effects of our economic crisis, but the fundamental causes have yet to be addressed.  Americans have to make monthly payments on vastly more debt than they did in years past.

Household debt cannibalizes sales.  Twice.  So, American families are groaning under the weight of their payments.  How does this impact you?  The combination of maxed-out borrowing capacity robs sales – twice. 

Consumers are deprived of the credit lines which financed a significant portion of their past purchases.  Worse, paying down principal such that our debt levels return to what we can afford to service will require yet more cash from already anemic household budgets. 

And an awful lot of that cash will come from one place – your sales.

Retention vs Acquisition.  We’re seeing companies are responding to this change in a number of ways. 

In the worst cases, I’ve seen companies whose strategies focus on a combination of discounting and hell-bent overhead slashing, with the goal of staying afloat “until the economy recovers”.  The economy may well bounce back, but it won’t return to anything like it was before for a long time.  This isn’t a strategy for the future.

The fittest companies we’ve met this year have adapted to the reality that their customer list is their most precious asset, and they’re guarding it carefully.  They’ve retooled their marketing departments to make them as focused on customer retention as they are on its more sexy cousin – acquisition. 

The defining competency of successful companies from retail to restaurants in the coming years will be their ability to constantly teach front-line employees the value of existing customers and how to stay close to them.  Investments in feedback, social media and the training to make that information part and parcel of their employees’ day will be vital.  This will enable them to remain approachable and relevant to customers through the coming years of paying down a great deal of debt.