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IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio valued for its depth and scope, the company equips clients with the insight necessary to make better business and investment decisions.
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  • Daily Deals do More Harm than Good for these 10 Industries
    By IBISWorld Consumer Products Analyst Mary Gotaas

    Small businesses have embraced daily deals offered by companies like Groupon and LivingSocial as a way to drive sales amid a sputtering economy. But, the strategy to increase revenue by using daily deals is not the wisest move for businesses with small profit margins and only a few locations, especially those in the 10 IBISWorld industries highlighted in this report. Companies present in these industries have already experienced poor performance during the recession and daily deals are unlikely to bring them back to prerecession levels. In fact, these deals might be detrimental to their performance, pinching profit margins further and enhancing the risk of closure.

    Struggling during the recession
    Industries that provide discretionary products and services to consumers have experienced declining clientele in the past three years, and a strong rebound is highly unlikely. These industries, including interior designers, tour operators and nail salons, offer luxury services that are heavily dependent on consumers’ willingness to spend. It is no surprise that these industries have not fared well amid markedly high unemployment and low disposable income during the Great Recession.

    Consumers shifted their spending patterns substantially and switched to cheaper substitutes to save money. For instance, instead of paying for an expensive espresso, many Americans opted for standard coffee. Other consumers chose to give up certain luxuries altogether, such as acupuncture and vacations, which hurt revenue for alternative healthcare providers and tour operators, respectively.

    Although the shift in consumer spending affected almost all American industries, those with high competition, low concentration and low profit margins have had more difficulty recuperating. These industries operate with many competitors and gain business by offering price-competitive services. Price has been one of the major determinants of consumer purchases during and after the recession, leading consumers to visit the shop that is the most affordable. Further pressure is placed on profit margins in these industries as consumers stay cost conscious. Additionally, low profit margins increase the risk that a firm will be affected by a shift in sales. For instance, when sales declined 8.9% in 2009 for the Hair and Nail Salon industry, 3.5% of the salons closed. Also with low profit margins like those in the Supermarkets and Grocery Stores industry (2.0%), firms hesitate to lower prices further because they fear the price change will not boost sales significantly enough to increase or keep profit margins at the current level.

    Enter daily deals
    After struggling for a few years, many of these industries have tried to increase their sales by offering group discounts through websites like Groupon and LivingSocial. Despite many firms’ reluctance to lower prices amid sluggish growth, firms increasingly use daily deals because it does not cost anything upfront to gain customers. Providing group discounts through websites can also increase the company’s visibility because these sites generally have a very large number of subscribers that are unfamiliar with many of these retailers.

    There are substantial risks for small businesses that use daily deal websites to drive customer traffic, though. The discount is often too steep that the company only breaks even or even loses money on their offerings, leading to a decline in profit margins. Most group discount providers take a fraction of the revenue reducing the companies’ gains from the discounts.

    Furthermore, many customers who purchase such discounts do not become regular customers, defeating one of the main purposes of the coupon. This is especially true among highly competitive industries, such as coffee shops and snack shops. Consumers may go to the local coffee shop to use their coupon one day and then return to their normal habit of Starbucks the next day. This trend is also apparent with more experimental services. Some consumers want to try acupuncture but don’t intend to make it a regular habit. In sum, by accepting a large number of daily deals, small businesses actually experience a drop in profit margins and fail to acquire new customers—this is a losing strategy.
    Here are the 10 IBISWorld industries that are most adversely affected by using daily deal websites to drive revenue:

    Jul 21 1:08 PM | Link | 1 Comment
  • US industries welcome international tourists
    By IBISWorld Risk Analyst Dale Schmidt

    Since last summer, the American dollar has fallen in value in relation to the currencies of all of the top nations that travel to the United States. The Federal Reserve has allowed the value of the dollar to fall primarily to increase foreign demand for US products. Whether from North America, Asia (Japan, South Korea, China and India) or the European Union, people from other countries will find it cheaper to travel to the United States this summer than last summer.

    In particular, tourism from Canada, which accounts for about 40.0% of all trips to the United States by foreign citizens, will experience a stronger summer than last year due to its economic recovery (with GDP growth at about 3.0% so far this year compared with a 2.5% decline last year) and the falling value of the US dollar against the Canadian dollar. Similarly, Japan has rebounded since last year—when its economy contracted by more than 5.0%—and the yen has strengthened against the dollar. Each of the world’s major industrialized economies has mimicked this trend of strengthening economies and strengthening currencies against the US dollar, which will boost demand for the US tourism industries.

    Transportation services
    Due to the influx of travelers, the transportation industries are poised to jump ahead this summer. The recession caused demand for international and domestic air travel, as well as bus services, to drop off, and recent high gas prices have offered no reprieve for these damaged industries. An anticipated influx of foreign travelers this summer will boost demand once again, though, and help turn these industries around. For example, the International Airlines industry (IBISWorld report 48111a) suffered a revenue drop of 20.5% in 2009 due to weak consumer sentiment, low disposable incomes and high fuel prices. In 2011, IBISWorld expects revenue to grow 5.2%, driven primarily by the influx of dollar-holding tourists. Similar falls were experienced by the Domestic Airlines industry (48111b) and Scheduled and Charter Bus Services industry (48522) in 2009. But they, too, should experience recovery this summer as foreign tourists require their services upon arriving in the United States. Domestic transportation will also benefit more from the weak dollar since all fares must be paid in US dollars, whereas travelers can often pay for international trips in the currency of the nation of departure.

    Tourist activities
    Tourism-specific industries, such as Tour Operators, Convention and Visitor Bureaus and Sightseeing Transportation, will be an obvious beneficiary of any tourism increases. These industries rely specifically on visitors from other places (whether from within the United States or from outside) for almost all of their demand. Unsurprisingly, the demand for these services dropped precipitously in 2009 due to the recession. Tour Operators (IBISWorld report 56152) and Sightseeing Transportation (48710) experienced revenue drops of more than 10.0% in 2009, with Sightseeing Transportation dropping an additional 11.9% in 2010. Convention and Visitor Bureaus (56159) experienced a smaller decline because of business demand for convention space, which remained more stable during the recession than consumer trips for pleasure. IBISWorld expects strong growth from each of these industries this summer, however. A greater volume of international travelers will benefit the Sightseeing Transportation industry the most, as it bounces back from two straight years of rapid decline.

    Naturally, any tourists that travel to the United States will need a place to stay, so industries that offer lodging or housing are also poised for a summer boost. The three major accommodations industries—Hotels and Motels (IBISWorld report 72111), Casino Hotels (72112), and Bed and Breakfast and Hostel Accommodations (72119)—each suffered during the recession, with revenue dropping significantly in 2009. With worldwide economic growth slow to pick up and the high cost of fuel stymieing travel, 2010 offered little respite and revenue grew only marginally. Fortunately, the still-weak US dollar will attract visitors from economically strong nations around the world, and demand and revenue for the services of these industries are poised to jump this summer. The Bed & Breakfast and Hostel Accommodations industry in particular could grow faster than expected since foreign travelers, especially budget-minded young adults, are more accustom to these kinds of accommodations than the average American.

    The entertainment services sought by foreign travelers will also win big this summer. While the greater number of travelers will naturally increase demand for entertainment, more travelers are more willing to spend on entertainment this summer compared to last, when the negative economic climate kept them frugal. The improved outlook this summer, combined with the cheap dollar, will encourage travelers to spend a greater amount on entertainment per trip. As a result, IBISWorld expects entertainment industries, especially Non-Hotel Casinos (IBISWorld report 71321), Amusement Parks (71311) and Historic Sites (71212), to grow strongly in the coming months.

    Industries not directly involved with providing transportation, lodging and entertainment to foreign travelers will grow strongly during the next five years too. A lot of industries are involved in traveling to a foreign country, and IBISWorld expects the smaller services to boom as well. The Credit Card Processing and Money Transferring industry (IBISWorld report 52232) will grow as a result of spending- and financing-based activity associated with foreign tourists. Financial institutions charge fees to transfer money from other countries, thus, an increase in international travel will increase the amount of these fees collected by the industry. Similarly, the demand for Translation Services (54193) will increase as the number of inbound travelers increases. Finally, IBISWorld expects the weak dollar to increase the attractiveness of the United States as a business destination, leading to expansion of the Trade Show and Event Planning industry (56192).

    Jul 21 12:50 PM | Link | Comment!
  • Despite falling commodity prices, Glencore‚Äôs IPO is still set to be a blockbuster

    By IBISWorld Energy Analyst Justin Molavi

    Glencore’s IPO marks its feeling that the commodity market has already hit its peak and that it's time to cash in. This forecast comes on the back of the IMF downgrading GDP forecasts for the US and other developed economies as consumers pull back spending amid higher prices for energy and food.

    What does this mean for energy markets in the US ?
    Glencore’s IPO marks the beginning of the end of incessant energy price increases. With the dying down of political tensions (for the most part) in the Middle East and gasoline demand falling in the US, crude oil and other commodities have declined from their highs during the first quarter of the year. However, this does not necessarily mean prices are going to drop dramatically because emerging economies like China are still demanding energy at increasing rates and QE2 is still pushing the value of the dollar lower. As such, energy prices will stay elevated as China continues to provide a floor on energy demand. Crude oil prices are likely to stay above $90 a barrel throughout 2011.

    Glencore operates in a variety of growing industries, and its IPO is a testament of US industry growth expectations over the next five years. The Oil Drilling and Natural Gas Extraction industry is anticipated to grow 5.5% annually to $432.0 billion in the five years to 2016. Mining Services in the US is expected to grow 3.8% annually to $95.9 billion in the five years to 2015. Crop Services are also projected to increase 3.7% annually to $16.1 billion in the five years to 2015. 

    May 19 3:39 PM | Link | Comment!
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