Thursday, March 8, 2012

Central Banks are hurting your web business

The FED has been holding the base interest rate at 0.25 for more than 3 years now. Euro Zone and British interest rates have similar graphs as well, they are all at historical lows after the 2008 economic crisis. The reason they are doing this is to keep troubled banks afloat and prevent a repeat of Lehman Brothers type big bankruptcy.
While the economy is protected from the damage of a shock, it is now subject to a slow and addictive erosion.

Cheap credit leads to malinvestment
A well known side effect of low interest rates is suboptimal investment decisions. Once the bar is lowered, the pressure to achieve is alleviated. Investments that would normally fail, start to look viable and those that are viable tend to form bubbles. While the general public understand that the latter is destructive, they are more forgiving to the former. It hides nasty effects of business failure, like unemployment, dereliction of neighbourhoods and such.

As a web business your competition is still brick and mortar businesses
Make no mistake, brick and mortar businesses are dying. They are not going to disappear tomorrow but day by day you will be seeing less of them. It will probably take decades but these businesses, unless they are selling an experience, will disappear. The volume of business however will remain unchanged, if not bigger, and be on the web.

A brick and mortar business is categorically a malinvestment. Cheap credit delays the inevitable for  these businesses. They typically have overheads in rents, staffing and stocking. Their margins are low and they only look viable in a low interest rate environment. The immediate downside is, every penny these businesses make is at the expense of a web business, which could do the same job more efficiently. Your central bank is effectively propping up your competitor. Not that it can change the inevitable result, but it is adding extra time to the game.

Takeaways for entrepreneurs
Knowing the end result and having a bit of time can be beneficial, though. Here are some ground rules using that time:

  1. Prey on brick and mortar businesses. Look into ways of stealing their lunch. Anything that can be done on the web, will be done on the web. Find those which aren't and use the first mover advantage.
  2. If your heart is set on opening that book shop, make it a place where your customers live an experience, not just a place to exchange books and money. A coffee/chocolate/book shop looks like a better place to hang out than a book shop. Same goes for any other business really; restaurants, phone shops, music stores, you name it...
  3. Study Japan. Japanese have decades of experience doing business under low interest rates. Find out how your business sector is coping in Japan and learn from them. 

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