Wallet Inflation versus Brand Resonance

Zdena Macháčková

November 14th, 2022

Reflex Capital → Blog → Wallet Inflation versus Brand Resonance

But first things first. This blog is about market sentiment and story starts this summer. Winter is coming, it might get worse!

In August 2022, in hot summer when few people are watching market signals, the CNB issued its forecast for 2023. The forecast basically says that the CNB can no longer defend Czech crown against excessive volatility. In fact, it predicts that the exchange rate will be between 25.5-26.0, and a year later it doesn’t look much better. In other words, they say – we, the CNB, will not have enough cash to continue to intervene. The forecast has thus reinforced to the market that Czech crown does not have great prospects.  Hmm… – what does that mean for the Bushman guys? Rents in euros, buying their fashion collections a year in advance in dollars. Frankly the harakiri in the UK market in October didn’t help the crown’s exchange rate against the dollar either. How could anyone manage liquidity and foreign currency purchases when a paralysed consumer sits waiting on the other side of a precarious little Czech market?

Everyone in the Czech Republic is now living with government measures – late, but still – finally the government has come up with something concrete and capped energy prices. However, most of all, they and the media do not understand how these state aids and interventions are spinning the inflationary spiral. The mainstream news media shows stories that are just scary for “Baba Dymakova “*), a single mother, roasting sausages in her backyard with her children, warming herself by the fire and lamenting how we will survive the harsh winter. The value of the information is zero, it’s based on emotion. Emotion is the best selling commodity today. Among other things, have you also received energy subsidies and you don’t need them at all? In addition to the energy subsidy, I also got a CEZ announcement in my email telling me to look forward to a decent dividend.

What a spectacle. What is the second act going to look like?

The government initially claimed that it would keep its election promises and improve the state’s economy and that it would slim down the civil service. None of this is happening. Here I would recall the remarks of Governor Michl, who stresses that “to tame inflation, the coordination with the government’s budgetary policy is needed. (…) However, if the state budget deficit actually rises significantly this year and next year due to the capping of energy prices compared to the plan, then this will only make the fight against inflation more difficult. (…) Any increase in the deficit at this time of higher inflation may mean its monetisation in commercial banks. That is to say, the banks will buy more and more government bonds and move the money to the account of the state, which in turn will continue to spin it out. This will in turn push back the growth in the amount of money in circulation, and hence the growth in inflation.”

A vicious circle, uncertainty, caution. The Czech Crown stability, the fiscal deficit and wages. These are factors that could potentially cause the interest rate to be pushed even higher.

Let’s translate this whole situation into the price of one nice quality piece of BUSHMAN branded merchandise:

Current selling price   : 100
Inflation               : 17 (current latest figure)
Interest rate           : 10 (current average bank rate)
Increase in minimum wage: 20 (mainly affects shop assistants)
Fall in CZK/USD rate    : 15 (last year)
------------------------------
New selling price       : 162

What will such a price do to consumer demand? The law of market equilibrium speaks clearly, demand will fall. The critical question for the retail non-food segment is how to survive the hard times, to maintain consumer trust in the brand. The theory goes that it is a strong brand that can retain the customer in tough times. Consumer trust is translated into investment in a beloved brand.

Compared to 15 years ago (before the financial crisis, smartphones and Covid-19), 2x more people now say they have the best life they could ever imagine. But 4x more people now say they are living the worst life they could imagine, according to FT.

So let’s hope that even with these black scenarios, (such as a 10% pay raise in the public sector – most recently in September in public education), Bushman will retain his Bushman loyalist‘s base on which this business is built.

Let us hope, secondly, that the COVID programs announced back by the Babis government and readily supported by the CBRC will not mature after this winter to put the final nail in the coffin of small and medium-sized businesses, but that current government will extend them.

Let us also hope that, as the saying goes, „misery has come to the Cossacks“, and that Europe will try to regain its composure by seizing this crisis as an opportunity and finally and genuinely striving for its own self-sufficiency. That instead of green deals based on the cheap price of Russian gas, it will understand that Europe’s roots are choking and that it will remember the good old sustainable traditions.

As part of the unification itself, the traditional commercial power of the regions was suppressed or completely disappeared. For the Bushman, this could mean that he could get the Portuguese or the Turks or the Ukrainians to sew without hemorrhaging the purchase prices. It must be added that good margins coming from cheap Asian “purchases” will be affected anyway by growing interests from credit lines. Bushman tries not to sew in China, but as much as possible in Vietnam, Bangladesh, India, which are more friendly countries, both in terms of their political systems and in terms of reliability. With the zero covid policy in China, you really can’t plan anything, so many are leaving from China,which will certainly help us in the long term in re-establishing local competences.

Finaly Asians feverishly and cheaply manufacture what is requested as well as quickly load their products onto ships floating to European ports. Ships sail halfway around the globe to hit another European barrier. In Hamburg, there are no staff to unload beautiful branded shirts and jackets? Well, as a small Czech merchant with a sustainable brand, you are waiting and waiting in European port and pay interest in the bank for waiting. One day it is your turn and you bring the product to Czech and finally start displaying available goods in a small Czech/Slovak market. You have passed a long journey full of inflationary influences with the aim  to get “the goods on the counter”. A long pilgrimage as it was in the fairy tale About the cock and the hen. But fairy tales always have a happy ending. So let’s end on a positive note here as well.

The Bushman brand has survived many difficult trials and has the ambition to grow further. In addition to the Czech homeland, it sows seeds in several nearby markets. Despite everything, “BUSHMAN” seems to be resonating well with consumers. People like not only good ends, but also good quality.

*) „Bába Dymáková” / old woman Dymak“ ” is equal to a unit of sentiment. Sample of consumer perception setup. In the 1990s, this unit was used by Nova TV, where I worked from the beginning. Whatever you didn’t like about the content (and let’s face it, there were plenty of commercial), but measured by the “BD” unit, it made business sense because it brought viewership and revenue growth.

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