WHAT GOES DOWN MUST...?

How to Thrive When Prices Fall: Deflation has hit certain industries hard. But some companies are turning falling prices into a chance at reinvention (Stephanie N. Mehta, April 30, 2003, Fortune)

Hormel Foods is facing a marketer's nightmare. (No, we're not talking about the fact that one of its best-known brands, Spam, is synonymous with unwanted e-mail.) Prices for one of Hormel's core products--fresh pork--are dropping because of an oversupply of hogs. And consumers are losing their appetite for slow-cooking homemade braises and roasts.

You'll find similar scenarios playing out at companies all across the country. Just substitute televisions, cellular-phone service, or hotel rooms for pork. Call it selective deflation. While the overall U.S. economy has stubbornly deflected deflation--the consumer price index rose 0.3% in March--many industries have been suffering from sustained falling prices. Women's clothing, for example, is about 3% cheaper than it was last year. Audio equipment costs some 6% less.

That's good for thrifty consumers. But unchecked, deflation can cause havoc for a corporation, not to mention its employees and shareholders. It's no coincidence that some of the biggest bankruptcies in history (United Airlines, Kmart, WorldCom) have occurred in industries facing massive pricing pressure. If companies don't cut costs quickly enough or find new revenue sources--or both--they may find themselves unable to pay their bills or their workers. But rather than treat deflation as a life-threatening emergency, many companies fail to take dramatic action, simply because they've grown used to it. "Deflation is sort of like a headache that you've had for a long time," says William Rochelle, a bankruptcy attorney with Fulbright & Jaworski in New York City. "If you've had it long enough, you don't even realize you've got a headache."

Though economist friends have made it painfully clear that I'm a crank, it just seems impossible that the inflation measures in use are accurate, especially since even Alan Greenspan has testified that the market basket used to measure it is outdated. And it's significant that after he did so, Democrats killed an attempt to update it lest the COLA for Social Security recipients not kick in. The announced inflation rate may now be a political, rather than a real, number. Posted by Orrin Judd at May 9, 2003 9:09 AM