A number of global brands including Prada (01919.HK) and mass-market brands such as Uniqlo are cutting prices.
Prada said last week that its net profit slumped 26.5 percent to 330 million euros (US$371.5 milllion) in the fiscal year to Jan. 31.
At the same time, it said it plans to launch more products in the 1,200-1,400-euro range and reduce the price gap between Europe and other markets to 10 percent.
Some Prada products are 35 percent more expensive in mainland China than in Europe.
Japanese fast fashion retailer Uniqlo slashed prices up to 30 percent across its global chain.
Uniqlo, which mainly targets mass consumers, caught its rivals off guard.
Even Apple has gotten in on the act, although its price-cutting is done differently.
Recently, it launched its cheapest iPhone for as little as HK$3,488 (US$450), almost half the price of the iPhone 6.
These price cuts go against the theory that when there’s more money chasing too few goods, prices go up.
Assuming supply is stable, a flood of cash in the financial system will push up consumer prices and thus create inflation.
Monetary easing by the world’s central banks, which has fueled years of easy money, created those conditions but the reality is different.
There are four factors behind the phenomenon.
First, excessive liquidity caused by monetary easing has not flowed into the real economy.
Instead, money keeps circulating in the financial system or remains stuck in certain asset classes such as property, arts etc.
Thus, quantitative easing has failed to create inflation. In addition, employees have not gotten big pay raises.
By contrast, many countries in Europe, Japan, China and the US are facing deflation.
Deflationary risk is suppressing prices of everything from designer handbags to mass market clothing and smartphones worldwide.
Second, a number of industries are grappling with overcapacity thanks to automation.
For example, it costs much less to produce a t-shirt than it did 10 years ago, so there is room for price cuts.
Third, big brands have been making huge profits in the past decade, driven by globalization.
They have established a wider presence across the globe but they have limited growth prospects.
Meanwhile, consumers have become increasingly sophisticated. They would not pay a hefty premium for certain brands.
In addition, anti-consumerism has been gaining traction among the younger generation.
Last but not least, big brands are listed companies.
That means they are constantly under pressure from shareholders at a time when they are struggling to maintain sales momentum.
Price cuts are the fastest and most efficient way to boost sales and please investors.
But that has also made investors wonder whether they should continue to invest in these companies.
The upside is that in the case of major global brands, world-class corporate governance is something they can take for granted.
They have two options.
They could find winning stocks in emerging sectors such as Facebook, Tesla or Netflix. Or they could bet on defensive stocks such as infrastructure plays and utilities.
That’s exactly what Li Ka-shing has been doing.
This article appeared in the Hong Kong Economic Journal on April 15.
Translation by Julie Zhu
[Chinese version 中文版]
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