Inflation's hit to consumer spending power means retailers may refocus on the low end

Whenthe Hudson's Bay Co. announced last week that it was joltingZellers back from the dead, many former shoppers were moved to sharefond memories of the discount chain.

From old-fashioned Coke bottles to retro kitchen products, retailers know that nostalgia can sell. To the extent that some Canadians find themselves yearning for what they recallasthose happy,joyousdays when Zellerswas part of their lives, the venerable Hudson's Bay Co.will be pleasedto gratify them.

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But according to Waterloo, Ont.-based economist Jean-Paul Lam, there may be something other than nostalgia at play and itdoesn't sound quite so warm and fuzzy.

May I interest you in something inferior?

The Bay's move to relaunch its lower-end brand represents a trend that Lamexpects to see replicated, as inflation makes people feel poorer: Catering to the consumer demand forwhat economists call "inferior goods."

"I think this is what a lot of retailers are probably thinking about," Lam said onFriday, just after Statistics Canada released its latest data on retail sales.

As Lam explained, in its origin, the economic concept of inferior goods does not necessarily refer to products that are shoddily made or unattractive,although it may include products like that.

Instead, economists say the principle springs from the idea that with most goodsfrom food to fashionpeople spend more on themas they get richer. But inferior goods arean exception;as peopleget richer,they buy less of them.

Lam offers the example of filet mignon and ground beef, orcar brands BMW and Kia.

"Individuals rank goods in terms of our desire," said Lam, helping to explain the principle, which is often discussedas part of behavioural economics.

"We tend to rank certain goods above other goods in our preference, and these preferences might be subjective."

Lam, for example, said he doesn't like filet mignon, preferring the taste and texture ofcheaper cuts of beef. And Kia may actually make a better car.

In fact, the difference between some goods may have nothing to do with quality, but rather have a lot to do withprestige and status. Inferior goods are cheaper, which may, perversely, reduce their appeal to rich people.

Lam notes that around 2014, an economic recovery was kicking inhouse prices were up and stocks had begun to rise. People were feeling rich. And it was then that the Bay incorporated SaksFifth Avenue,a prestigebrand, into its stores to take advantage of consumers'urge toshop for high-end goods.The premium retailer Nordstromalso came to Canada, whilemiddle-class retailerSears hadcrumbled.

But once incomes andwealth begin to fall, Lam said, everything can change. The demand profile suddenly switchesand people who are falling behind seek out inferior goods instead.

Stripped of the fancy economic theory, the idea is a familiar one: When our wealth and incomes shrink, we start looking for bargains.

Dollarama rising

"I think this is what a lot of retailers are probably thinking about," he said. "With incomes lagging prices, maybe there will be a rise in demand for these inferior goods and that's why it makes sense to revive a discount store like Zellers."

The way Statistics Canada collectsretail data, a trend towardinferior goods is hard to tease out in the latest sales figures, saidBMO economist Shelly Kaushik,even if that trend had already begun in June, when most of the numbers were collected.

However, other indicators, including a 12-per-cent increase in sales at Canada's Dollaramawhat both economists described as the epitome of an inferior goods retailer hintthat a move toward the bargain-hunting part of the cycle may have already begun. Companies such as the Ottawa-based Giant Tiger could also benefit.

Kaushik is also quick to point out that Zellers was never in the same category as Dollarama. The HBC-owned retailer was traditionally a conventional goodsretailer that carried many familiar brands, butwithout the prestigiousshopping bag or experience.

June's retail sales figures were a demonstration of how much inflation affects how we shop and what we buy. Sales showed a healthy gain of just over onepercent in dollar terms, more than three times what economists had been predicting.But in volume terms, sales hardly budged.

"Say you wanted to buy two widgets, but now they cost twice as much.You're definitely spending twice as much as you used to, but you're still only buying two widgets. So the volume of what you are buying stays the same," explainedKaushik.

Aspiring to affluence

Like Lam and others,Kaushik recognizes that wages are falling behind inflation, but she said despite preliminary figures showing sales down in July, it is too early to pronounce the beginning of a retail recession.

One confusing factor is that while goods sales are expected to decline, a bigger share of incomes is going to purchases of services, such as travel, entertainment and meals outnone of which are usually considered inferior goods.

"I think it is way too soon to say we are seeing a real shift in consumer psychology," said Kaushik. "I think that the idea of wanting to aspire to affluence or, you know, higher-end shopping is still very much something that we are still seeing."

WATCH | A look at the plan to bring back Zellers:

Hudsons Bay to bring back discount retailer Zellers

2 years ago

Duration 1:55

A decade after closing its doors, Hudsons Bay Company wants to revive the Zellers brand. The company says it plans to launch a new e-commerce website and sell products under the discount label in some Bay stores by early 2023.

That may be true for those whose income has been rising with inflation, but as many others have pointed out in the past, peoplewhose after-inflation incomes have declined by about sevenper cent this year may have paused their aspirations.

As someone who watches inflation closely, Lam worries that the current trend toward rising prices may be far from over.Rising global inflation and the rising costs of importing consumer products could indicatea consumerpreference for inferior goods is no fad.

If wages continue to fall behind and your after-inflation incomeshrinks a little more, maybe you, too, will think about buying perfectly good Zellers-type jeans at a Zellers-type store and forgo the fancy shopping bag. Retailers will be watching.

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