As we head into the over-analyzed, all-important Holiday retail season, I’m having flashbacks to “the land of the rising sun.” However, my image gave way to a deflating sun, as Japan withered from its strong and rising number two spot on the global economic stage, brusquely shoved down to third place by the now blinding sun rising over China. There are two big time messages in this metaphor that should give pause to our economists and general business and financial communities.

First, if you take my “Who Blinks First?” article to a potential end scenario, the U.S. economy could easily fall into a Japan type deflationary cycle. It’s pretty simple. Not only will consumers not “blink” first and give in to higher prices (due to inflating commodities, raw materials, labor and shipping costs), just the opposite is happening.

More than ever, consumers are demanding lower and lower prices. I guarantee you, we will see one of the most promotional Holidays ever, which means that manufacturers and retailers will be forced to take the hit on their margins, which means they must find lower costs or take costs out of the product, which means they will give in once again to lower prices, and so forth and so on, a deflationary cycle.However, regardless of the inflation occurring on the cost side, China will absolutely not allow their blinding sunrise to dim. They cannot. Because the sunrise is comprised of two components: one, a rising standard of living demanded by their people; and, two, the necessity to keep their manufacturing engine at full speed to generate the jobs, income and economics to support the rising standards. To fail on either of these components will result in social unrest, disorder and worse: a possible threat to the regime.

So, message number two is: China will do whatever is necessary to keep its lion’s share of Americans’ wallets. The conundrum, however, is how do they maintain low costs while increasing the Chinese standard of living, to say nothing of higher materials and shipping costs? Further, their currency, the yuan, is under pressure to increase, which would simply pile on higher pricing in the U.S., which our consumers will not accept.

How will this conundrum play out?

“Next Stop USA,” a section in the article China: Communists – Capitalists – Conquistadors, spells it out for you. For the Chinese to keep their sun rising, to lock in U.S. consumers’ wallets, and to additionally increase their own consumers’ spending, all with a strengthening yuan, China will acquire U.S. brands and retailers. Thus, by owning the higher margin market segment of the supply chain, they can better absorb pricing pressures. They can also export sought-after American brands more easily back to China. And, finally, they can begin seeking lower cost manufacturing sources around the world.

Ironically, in the end, the very deflationary cycle our government wants to avoid by, in part, pressing for a stronger yuan, may instead drive China to buy our country.

Read at your own risk.

My very best regards,
Robin

November 2010

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for Kohl’s Department Stores, and dozens of others. In addition to his role as Publisher and CEO of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology, where he teaches the thesis of his book, The New Rules of Retail, co-authored with Michael Dart, Partner and Managing Director at KSA. The book will hit stores later this year.