Stop Waiting For Prices To Fall: Higher Costs Are Here To Stay And Consumers Are Evolving In Surprising Ways. Here's What Investors And Business Leaders Should Know

By Sean Laffere

We’ve been addicted to cheap stuff for so long, you have to be a certain age to remember when we weren’t.

Emerging from the pandemic, though, tectonic shifts in the world economy are signaling the end of that era. Globalized supply chains have cracked, and inflation has hit its highest level in 40 years. While it’s tempting to think this is just a passing storm, the signs indicate a more permanent transition to higher prices and localized production that will force Americans to become more conscious and selective in the way they consume.

The happy consumer over the next decade will be one who only spends on what he or she really needs, or really wants, and who values sustainability and supporting the local economy over immediate gratification. In other words, we are all likely to start acting more like Generation Z consumers. Investors and business leaders should take note of the following trends.
Investors take note

Certainly, consumers of all generations have benefited from low inflation, cheap goods and unprecedented choice, but the societal costs have been crippling. Over a quarter of U.S. manufacturing jobs have left the country since 2000.

That model of outsourcing production to Asian factories is now being questioned harder than at any time in the past three decades. The severe logistical bottlenecks and supply disruptions of the past two years are jolting companies into de-risking their production and bringing more of it closer to home.

Washington to weigh in

This is a shift that Washington will look for ways to incentivize, especially in critical areas such as pharmaceuticals, medical equipment, and food. The Biden administration has put forward a series of steps aimed at building supply-chain resilience and encouraging local production, including expanding U.S. manufacturers’ access to capital and increasing U.S. production of critical goods as well as commodities such as rare earths.

Going forward we’re likely to see even more incentives to encourage the consumption of made-in-America products, in the same way that buyers of electric cars are eligible for tax breaks in recognition of their contribution to environmental goals.

Shortening supply lines also fits squarely into the long-term push by companies, investors, and governments to reduce carbon emissions and score better on ESG metrics.

Inflation impact

All this means that we’ve likely only just seen the beginning of inflationary pressure. Even if the Federal Reserve gets a handle on the current wave of inflation, the longer-term structural shift of U.S. companies coming home (or closer to home) is set to keep prices elevated for years.

The price of pretty much any manufactured item you can think of has been pared to the bone over recent decades thanks to companies’ relentless search for foreign economies of scale. But as those companies de-risk their supply lines – by spreading their production over multiple countries and bringing some home – costs and prices will inevitably rise and stay higher.

This will be a rude awakening for U.S. consumers after three decades of expanding choices and bargain-basement prices. In this new environment, they will need to become comfortable with buying fewer things – and spending more when they do.
Much to learn from Gen Z consumers

This is where we have much to learn from the Gen Z consumer. This cohort is highly motivated to contribute to societal change through both technology and their personal spending habits. More than other generations currently, people of this age group tend to seek meaning by being highly attuned and support to their local communities.

Surveys in recent years have found that while Americans love the idea of buying U.S.-made goods, they are much less enthusiastic about paying a premium for them. But the upcoming Gen-Z cohort - whose buying power is already approaching $150 billion - appears to be different. Surveys consistently show that younger consumers are willing to pay significantly more for brands they regard as authentic and whose products are viewed as environmentally sustainable.

While it may not be easy or smooth, many of us will inevitably need to adjust the buying behaviors we have become so accustomed to over prior decades. U.S. consumers as a whole can learn from the Gen-Z outlook and adopt a similar mindset to help wean themselves off their cheap-stuff habit.

Sean Laffere is Managing Director with Alvarez & Marsal’s Corporate Performance Improvement practice in Houston.