I have already, on several occasions, shared on this blog my perplexity in the face of the economic context in which we currently live. On one hand, an inflation that does not weaken, interest rates at their highest since the subprime crisis, rumors of default by the United States (another great example of non-cooperative play that can lead to a suboptimal equilibrium, in reference to one of my last posts) and still palpable geopolitical tensions lead a growing number of financial market specialists to talk about an upcoming crash and a major economic crisis. On the other hand, a still vibrant job market and admittedly weak but still alive economic growth maintain the hope of a brighter future. How to make sense of so many seemingly contradictory signals? Not to mention that the story becomes even more complex if, on top of these strong signals, we superimpose the many weak signals that our environment sends us.
McKinsey defines “weak signals” as “snippets—not streams—of information and can help companies to figure out what customers want and to spot looming industry and market disruptions before competitors do”. Last week, while driving my car and as my brain was wandering around the considerations mentioned in the introduction (yes, my brain sometimes does strange things), I came across a radio advertisement for a company touting the merits of its verandas along with a juicy promotion (for a very limited time, of course). My thoughts then clung to what I had just heard: what can this advertisement tell us about our economic context?
Starting with the most obvious, it can be easily assumed that the advertising company is in sufficiently good financial health to afford such marketing investments – not surprising considering the recent boom in the construction sector. Moreover, the target audience is consistent with the chosen media – verandas are not sold to teenagers on social networks.
However, beyond the simple possibility, the advertising company believes it is profitable to broadcast this advertisement, meaning that they believe the additional revenue is greater than the additional cost of the operation as a whole. If we break it down:
- On the revenue side, the company seeks to sell more verandas by expanding its customer base – we can assume that, given the nature of the product, it is not trying to sell more verandas to its existing customers. Therefore, it believes there is a potential market that is not aware of the existence of its products and/or hesitates to take the plunge for price reasons – a barrier that the promotion tries to reduce;
- Apart from the costs associated with broadcasting the advertisement and producing the sold verandas, the so-called “variable” costs are relatively limited. Indeed, it can be assumed that the company employs installers permanently (thus making them “fixed” costs) and adjusts its order book to maintain the highest level of activity possible with constant staff;
- Finally, this operation can, in a seemingly counter-intuitive way, reduce certain costs. Indeed, it can be imagined that the advertising company seeks, through increased sales at lower prices, to reduce a high level of stock that ties up liquidity (which earns nothing while it could be invested elsewhere) and requires more space (hence a warehouse, hence rent). This phenomenon of overstocking emerges in some sectors, mainly with high fixed costs, whose supply chain has been severely impacted by the COVID crisis and/or the economic recovery that followed. Companies have preferred to over-order rather than miss a sale due to lack of product.
By putting these deductions and assumptions end to end, we can see a converging bundle of clues suggesting that the construction sector is slowing down, and that companies in the sector, although still healthy, must begin to play on prices to maintain a level of activity comparable to the post-COVID rebound.
“Advertising is the life of commerce,” said former American President Calvin Coolidge. Just as a car’s rearview mirror provides a perspective of the road behind us, advertising serves as a reflective surface for our economic journey. Unquestionably, the messages embedded within the advertisements we encounter can offer insightful snapshots of our economic landscape’s vibrancy, shifts, and trends… even during a casual car ride.