The increasing velocity of goods is a deflationary pressure (rental markets in everything Average is Over)

by on December 2, 2013 at 2:17 pm in Economics | Permalink

Anouk Gillis often sports a pair of organic-cotton jeans she ordered online. But she doesn’t actually own them.

Rather than buying the pants, which retail for around €100 ($135), Ms. Gillis signed a 12-month lease with their designer, the small Dutch fashion label Mud Jeans. The terms: a €20 deposit and monthly installments of €5.

After a year, Ms. Gillis, who is also Dutch, can decide to buy the jeans, return them, or exchange them for a new pair.

“The idea was to make high-quality jeans available to everybody,” said Bert van Son, chief executive of Mud Jeans, which promises to recycle the used jeans into new pairs or sell them secondhand at the end of a lease.

The deal shows how companies are trying to reconnect with Europe’s cash-strapped consumers, who increasingly rely on renting, sharing or even bartering for products and services ranging from clothing to vacations to lawn mowing.

There is more here.  For the pointer I thank the man who delivered my morning Wall Street Journal.

1 Z December 2, 2013 at 2:22 pm

Lending your customers money so they can buy your products is a great idea. What could possibly go wrong with that?

2 Rahul December 2, 2013 at 11:57 pm

Saddest part of this story is that a cash strapped customer thinks $135 for a jean is a good deal. Installments or not you are a sucker.

3 Scott E December 2, 2013 at 2:36 pm
4 Urso December 2, 2013 at 2:52 pm

The only part of this story that surprised me is that it didn’t come from the NYT Style section.

5 Joe Smith December 2, 2013 at 2:53 pm

Whole sale interest rates are low. Retail lending channels are broken. It was just a matter of time before new lending channels developed. This development is not deflationary.

6 Spencer December 2, 2013 at 3:29 pm

What is the difference between this and leasing a car?

At least with cars a robust resale market already exist.

7 Z December 2, 2013 at 4:30 pm

A car lease sets a residual that is market based. What’s the market for used pants? Even designer pants have to have a near zero resale value. Assuming the company is not trying to go out of business, they probably have such low costs they can heavily discount the product this way and still make a profit. This way they can maintain the pretense of being a high end good, but sell volume to the underclass.

8 Urso December 2, 2013 at 6:59 pm

Au contraire, especially for high end brands.

I would bet that E20 for high-end jeans, one year old, in good condition, is not that far afield from what you’d get on ebay. (Assuming dutch ebay is comparable to US)

9 byomtov December 2, 2013 at 8:26 pm

Still, I think Z has a point. It might just be a cute way to sell the jeans at a discount without seeming to do so.

Let’s also bear in mind that newspapers love to declare three occurrences a “trend.” Is there anything at all to suggest that this is widespread enough to have any effect,deflationary or other, on the European economy?

10 prior_approval December 3, 2013 at 12:33 am

‘ It might just be a cute way to sell the jeans at a discount without seeming to do so.’

No, it is a way for the designer to sell the jeans at a mark-up by cutting out the retailer. Not knowing anything particular about the Dutch clothing retail market (but actually knowing a German former high end clothing boutique owner and her numbers), it is likely the designer is easily making a good 30 euros more per pair of jeans using this model, than having them bought (and resold) by a retailer.

Then when you factor the tax write-off involved in depreciation per pair of jeans, the fact that the actual production cost of the jeans is undoubtedly under 20 euros, that non-payments can be written-off, this sounds like it could, at least for a while, be very profitable for the designer.

11 Rob December 3, 2013 at 7:34 am

The “tax write-off” from depreciating jeans for one year v. losing the upfront COGS deduction in a sale sounds like a bad deal to me.

“You don’t even know what a write-off is”

12 byomtov December 3, 2013 at 10:44 am

If that were the case why couldn’t the designer just sell the jeans directly to customers? There ids nothing inherent in this “leasing” approach that makes it easier to bypass retailers, though there may be some sort of contractual provisions with retailers.

Does the lessee really have to return the jeans after a year? I doubt it. Note the 20 euro deposit. Is it going tpo worth the company’s time and effort to chase down unreturned jeans when they could just keep the 20 euros?

Tax write-off? What are you talking about? If you just sell them outright you take the expense at the moment of sale. There is no tax advantage to the lease.

13 prior_approval December 3, 2013 at 11:13 am

Do you know what factoring is? Warenkreditversicherung? Of course debt is written off all the time – just like a shop owner writes the value of what was stolen. Which is part of why a shop’s products are marked up in the first place.

The tax write off is in the depreciation of an asset (the jeans collectively) – a major reason why leasing schemes are workable in the first place.

14 prior_approval December 3, 2013 at 11:28 am

‘If that were the case why couldn’t the designer just sell the jeans directly to customers?’

Well, that is what is happening. With a bit of likely profitable vendor financing to boot, depending on how well their numbers work. Including volume, of course. Along with free publicity using a distinctive method selling their product line.

What may not be realized by most Americans is just how extensive direct transfer payment is in Europe (though the SEPA conversion is making it a pain in the butt for a lot of people at the moment). Here, the jeans company is almost certainly automatically deducting the money monthly. Doesn’t ensure they will be paid, of course – but it really simplifies matters when the bank is doing all the billing, so to speak, transferring money from one account to another like clockwork.

Admittedly, I’m out of date in the U.S. – perhaps recurring payment schemes are commonly used by small scale businesses, directly transferring money from the customer’s account to the business’s with no hassle (and legally limited fees at this point). Or how something like SEPA works, and not just through the eurozone, nor even only the EU. Integrating a continent’s banking system is a lot of work – and is easily missed by people focusing on the public projects, as compared to the actual infrastructure of a banking system that spans the world’s largest commercial free trade zone. Currencies come and go – banking systems seem considerably more resilient.

15 prior_approval December 3, 2013 at 11:43 am

And just a note about taxes – the Dutch do not use IRS accounting rules for anything. But it wouldn’t surprise if the scheme also uses a BTW quirk – something that has nothing to do with any American accounting standard.

16 dirk December 2, 2013 at 3:34 pm

Faster moving goods may be deflationary, ceteris paribus, but doesn’t this situation also lower demand for cash? Isn’t that inflationary?

Consumers becoming cash strapped is deflationary. if retailers find new ways for consumers to buy without cash on hand isn’t that an anti-deflationary pressure?

17 dirk December 2, 2013 at 4:37 pm

Am I wrong?

18 dirk December 2, 2013 at 8:51 pm

I don’t think I’m wrong. Not this time.

19 dirk December 2, 2013 at 9:12 pm

I wish someone more economically literate than I would explain why this example is considered to be a deflationary pressure when my intuition is the exact opposite. Perhaps I should be commenting at The Money Illusion instead.

20 XVO December 2, 2013 at 9:56 pm

I agree with you dirk and would like to see an explanation.

21 Dangerman December 2, 2013 at 4:08 pm

So the renter pays half the cost, and at the end of the year has no jeans?

Reminds me of this, in reverse but the same underlying point:

“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

This was the Captain Samuel Vimes ‘Boots’ theory of socioeconomic unfairness.”

22 T. Shaw December 2, 2013 at 4:29 pm

“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.”

Heck! I thought it was because they steal from the poor.

23 Ray Lopez December 2, 2013 at 4:12 pm

Ukay ukay. Youtube: Macklemore – Thrift Shop

No that’s not spam. Check it out. I buy a lot of clothes from the USA here in the Philippines for about 50 cents to a dollar. Not fifty cents to THE dollar but 50¢ TOTAL, for a quality T shirt and $1 for pants. With designer logo. I have worn stuff with famous designer labels (they go for $1) like Abercrombie (common) and Massimo (rare). And from Wall Street and obscure US firms (common). Full cotton is better IMO than nylon for the tropics but the latter is actually more popular since it lasts longer and looks more ironed. I draw the line at used shoes though, which are also popular here. Ever wonder what happened to that T-shirt you “lost” at the unscrupulous cleaners or that that you donated to Good Will? It’s here, sold in a bale wholesale by the pound, OK? OK (ukay ukay !)

Fifty cents is one-tenth of a good daily wage here, so it’s more like $5 in the USA; still cheap.

For you classicists, during Antony’s civil war between Augustus Caesar and Mark Antony –or was it earlier during Julius Caesar’s time?–it is said the forces of the old order knew the could not compete with the new order when they saw the latter’s threadbare clothes and meager food, barely fit for animals, that Caesar’s legionaries tossed over the stockade barricades for effect. They realized these guys were in a different league if not legion than themselves, that these guys were like animals, too tough to beat.

So get used to it Americans. Coming soon to America–hard working immigrants wearing Ukay Ukay and working for $5. A day. Average is over. The six sigma tail end is at the gates, with a vengeance.

24 mike December 2, 2013 at 4:25 pm

Animals are actually pretty easy to beat. Not that I ever would, because most of the ones near my size are incredibly cute when you see them in person.

25 Ray Lopez December 2, 2013 at 6:06 pm

Yet mike you beat your cute wife that’s nearly your size? So she has less rights than an animal? Note the question marks indicate these are questions not assertions.

26 mike December 2, 2013 at 9:23 pm

If deer could vote, and “the deer vote” was steering the ship of state towards Communism, I’d probably find deer less cute. Say, how are the Philippines this time of year?

27 Z December 2, 2013 at 4:33 pm

Dick Cheney sent Katrina to clean up New Orleans. He sent that typhoon your way last month. Our average is over when you learn to control the weather.

28 Ray Lopez December 2, 2013 at 6:01 pm

The Soviets and Red China claimed to control the weather, and the USA almost did but cancelled a cloud seeding project after a record downpour after seeding a cloud in a blind experiment…because the seed material was not silver iodide but sand.

29 Max Factor December 2, 2013 at 8:51 pm

We’re supposed to be impressed that you can buy a used T-shirt for 50 cents? I’ve seen new clothes at JC Penney selling for $1.97. I used to wear a brand new $4 sweater until I got sick of my coworkers’ teasing.

30 Ray Lopez December 2, 2013 at 10:48 pm

But this is not a promo, like your $1.97 JC Penny Xmas sweater, it’s the everyday rate. And pants too. Face it: you pay more in the USA for stuff than you do outside. It’s only a matter of time before this deflation affects the US economy. Same with services. Whatever you do, a foreigner can do for cheaper and nearly as good if not better.

31 Rahul December 3, 2013 at 1:02 am

Yes, but the trick for the US lies in utilizing the capital & comfort and constantly innovate and invent and produce new things or new ways to make things.

So far foreigners are not inventing better. I worked in the petrochemicals industry and I cannot recall a single process whose basic engineering package was developed in a developing nation.

32 Dismalist December 2, 2013 at 10:10 pm

I guess all renting is deflationary: Buy, buy, buy, but only on credit, not after you’ve saved up for it.

33 cigarrillo electronico efectos secundarios December 3, 2013 at 5:08 pm

Hello friends, pleasant article and nice urging commented at this place,
I am actually enjoying by these.

34 David Bley December 4, 2013 at 10:49 pm

Leasing, to me, is an indication that the person is no longer able to afford to purchase an item. Anytime the demand outstrips the ability to purchase the demand has become inflated and in the long term is not sustainable.(IMHO) In the case of jeans, the life of the pants is much longer than the one year lease, the seller gets to sell the pants twice and the buyer ends up having to purchase or lease another pair to replace the first. For a person that cannot afford to buy the pair in the first place, this results in poor money management.

Comments on this entry are closed.

Previous post:

Next post: