Making a virtue out of necessity

To say that the business community is concerned about the current economic situation and the future prospects for their businesses, would probably qualify as the understatement of the year. Beyond the shock experienced by the massive increases in the cost of energy related services, business people are worried about the ability of their clients to spend as much money as they were doing up to some months ago.

It is now officially confirmed that retail sales have been declining in volume for several months this year in the EU, and in Malta in particular. Workers hit by strong food and fuel inflation as well as fears of losing their jobs are cutting down on their spending not just for non essential commodities, like holidays and entertainment, but also reducing their outlays on basic essentials like food.

The operators in the tourism industry are perhaps the ones suffering from the highest anxiety. The gloomy prospects for the UK and Irish economy, combined with the dramatic fall in the value of sterling against the euro, will undoubtedly mean that fewer tourists will be visiting Malta during 2009.

The recently published Economic Survey has confirmed that during 2008, despite attracting higher number of tourists, the money spent per bed night per tourist fell from €60.4 to €55.6. This is proof, if any was needed, that this industry is becoming less profitable and may be facing structural problems.

A well known hotel operator has already declared openly on TV that the first people to suffer from these poor prospects will be part-time workers. The knock on effect of such workers losing their part time work is likely to be a curtailment of consumer spending that will hit the retail and entertainments services industries.

The property developers' fraternity are not faring much better. It is a fallacy to believe that property development is carried out solely by fat speculators with deep pockets. In the last few years many small property owners have resorted to developing small projects - knocking down one or two townhouses and building four flats in their place.

Banks initially cashed in on this opportunity and provided the necessary financing to build up their loans books and boost their profits. In the last two years they reversed to some extent this liberal policy and are now more cautious on lending for property development.

A prices correction process has started. Some of course will suffer more than others. Those developers who have built sub-standard properties in areas where demand is limited will end up with egg on their face. The bankers who lent them the money to do so will not be much happier either.

I have seen a private property market analysis that predicts that in the next five years there will be 50,000 vacant properties on the market, most of which will be available for sale. Moreover, this research document concludes that foreign demand for local property is unlikely to be sufficient to stop the slump. A bailout by the government is unlikely.

The retail businesses are bracing themselves for a tough Christmas period followed by months of stagnant demand. A major importer of body care products that usually sell so well in the Christmas period, has stated publicly on TV that his salesmen are not finding much interest from retailers in our towns and villages to stock up with these products at the levels they did up to last year.

The higher end of the supermarket industry is also experiencing falling demand and is losing market share to the low-cost outlets. These latter outlets are not only experiencing a growth in demand, but are also taking business away from small shops like butchers and village grocers who cannot afford to reduce their prices sufficiently to retain the loyalty of their customers.

Unless the spending power of consumers is boosted through fiscal measures and public spending this scenario will continue to upset the business community. Of course, it is difficult to say to what extent the current pessimistic predictions about the short-term economic prospects in our traditional markets will in fact materialise.

In the meantime, the business community, like the consumers it serves, is trying to make a virtue out of necessity. The advertising industry is one of the few winners in this gloomy economic climate. There is never so much need for advertising one's products and services as when consumer demand is weak. A quick glance at our newspapers and tele-selling programmes on TV shows how strong the promotion market still is.

If this latest phase of economic downturn is not too long, it may serve to make our businesses more competitive. Focus on satisfying customers needs, both when the economy is booming as well as when it is receding, can bring a cultural change that will mean a fairer deal to consumers and a sounder economic base for product and service providers.