• by Sean Hargrave , Staff Writer, February 23, 2015

It's counterintuitive. A growing economy -- which should be putting more money in peoples' pockets which, when spent, should lead to healthy, low inflation -- is instead witnessing downward pressure on prices that is likely to lead to deflation.

Is this apparent paradox the new norm? If so, what does it mean for brands that are trying to launch premium products? After all, it would appear to make perfect sense that an economy well and truly returning to growth would give people to cast aside the austerity years and instead opt for upmarket, premium offers. Economists warned through the past half decade that brands should guard against presuming the old days of boom and bust would carry on as normal and that instead, growing economies could lead to new customer behaviour rather than a return to spending patterns seen before the global financial crisis. 

So as Starbucks and McDonald's commit to rolling out and promoting premium offerings, economists as well as marketers will be eyeing the results with great interest. On the one hand we have Starbucks trying to lure in people for a beer or glass of wine and some upmarket food on their way home from work or on their way to an evening out. On the other, we have McDonald's reminding the public they don't have to go to a premium coffee shop for a great coffee, they can pop in for McCafe experience at any time.

Trouble is, people appear to be looking for value right now. instead of spending more on the supermarket shop, for example, we're seeing people spend less -- or at least get what they perceive to be better value -- through the rise of the discounter supermarkets. Prices are heading downward, not by their own, but through competition that has focussed on price rather than quality and customer service. Hence, FMCG brands are reporting a lift in sales that is twice as high as a lift in revenue -- sales are up but prices aren't. The result is a lot of uncertainty about whether to launch premium FMCG products -- or if you do go for it, how should they be branded and presented?

In contrast, coffee was often heralded as the one consumer good that wasn't ditched throughout the recent years of global financial crisis and austerity. It turns out it was an affordable luxury that people seemed unwilling to drop. While we could go without a designer suit or luxury city break, our daily caffeine fix was desired too much to forego.

So it begs the question whether this resilience will translate in to coffee in a fast food chain, in McDonald's case, and upmarket alcoholic drinks in a coffee shop, in Starbucks. Will the price pressure on FMCG goods that are being widely reported impact on consumers' willingness to buy chili dipping prawns and a glass of wine at Starbucks or a premium coffee from a burger counter, such as McDonald's?

Time will tell, but with a growing economy being widely reported as yet to deliver corresponding wage increases, it seems likely that people will carry on as normal because their personal bottom line has yet to be improved. That means people are likely to award themselves minor luxuries -- and so, one would image, that bodes well for Starbucks as a tapas bar-style venue for tasty treats before a train is caught home or while cinema and theatre goers are waiting for their show to being. McDonalds, though, I'm not so sure personally. Obviously, advertising widely among a Channel 4 audience that I would presume is not their core demographic cannot fail but lift sales but whether it will reach the desired effect is not so certain. After all, Starbucks' one taint on its character was paying tax it is promising it will now pay. McDonald's will still be associated with what is often referred to as "junk" food and so not the first place upmarket coffee drinkers will think of to get their caffeine fix. 

Affordable luxuries in an apt setting will continue to do well -- that is my prediction. Those trying to sell luxury at the same counter as 99-pence burger or bargain meal deal will probably find it more difficult to pull off.

The new norm is that people have realised they don't have to spend more to get what they want because price competition is bringing it to them for less. When they do want to have that small indulgence it's far more likely going to be in a coffee shop in nice surroundings. But this is the new norm we're talking about here, and we're yet to find out exactly what it is. Finding out is going to be fascinating.