The growing threat of substitutes and second-hand goods

By Timi Olubiyi

The coronavirus pandemic, as well as the economic turbulence, have had significant impacts on businesses, manufacturers and households, including individual lifestyle and well-being in recent times. The direct consequence of these impacts has been a very large increase in inflation. Globally, no country is immune to inflation. But in Nigeria, the peculiarity is that inflation has been getting higher steadily for the last two years.

The National Bureau of Statistics (NBS) says Nigeria’s headline inflation rate increased to 18.24 percent on a year-on-year basis as at June 2022. The percentage change is the highest in the last five years, according to the records.

Though academic literature has pointed out that once inflation exceeds a certain level, on average above 15 per cent , it starts to have a negative impact on the economy, principally on economic stability, growth, employment and investment attractiveness.

Without a doubt, the food inflation trend over the last two years has been overwhelming. The proportion of the majority’s income that is spent on food has remained ridiculously high. The persistent rise in inflation results in a decline in the buying power of Nigerians, who are therefore getting poorer. Because they will be forced to prioritise significant spending and the affordability of essentials will continue to decrease.

A report by Aljazeera titled “Inflation rises in Nigeria amid fuel scarcity and insecurity” indicated that four out of 10 Nigerians are living below the poverty line. So, with this trend, the author has noticed a spike and sharp rise in the demand for substituted products and services by the majority of the citizenry in the country. The substitution usually happens when consumers replace very expensive items with cheaper ones due to price changes or when their financial conditions regress, and vice-versa. However, the point is about the decline in purchasing power due to inflation and its attendant consequences. According to the substitution effect, people switch from more expensive products and services to less expensive alternatives when prices rise or income declines.

For the majority of businesses, the persistent inflation in the country has made the high cost of running and maintaining independently generated power unbearable, particularly the cost of diesel. This has resulted in a high cost of running businesses. However, this cost is passed on to the consumers without notice. When this cost is passed and consumers find it intolerable, then a change in demand by switching to substitute products and services prevails.

The propensity for this trend is high and it has been the order of the day. Substitute products or goods are alternative goods that could be used for the same purpose. Therefore, substituting means that consumers seek out alternatives that are frequently low in price, most of the time low in quality, inferior, and largely unregulated. The demand for substitutes continues to rise, because the masses need to survive at all cost, so who has the blame?

So long as the price of goods and products continues to increase, demand for their substitutes will continue to rise. Consequently, business operators need to be aware of this. For instance, numerous salary earners have been forced to reduce the quality of the food they purchase, and business owners continue to replace family food basket staples with any affordable alternative.

From a business perspective, substitute products create rivalry, loss of revenue, weak sales, loss of potential customers or consumers, low or no patronage, and threats to business survival.

The main absurdity is that businesses cannot even identify the providers of these alternatives, because they remain largely in the dark. For instance, canned and jarred Sardine Titus is expensive, but Sardine Estus an alternative is available and affordable but the producers are faceless and unknown. Many of such competitors are available in the Nigerian market with a huge market share and competitive pressure.

However, the quality of these readily available cheap alternatives is significantly compromised, and market leading companies and products could even suffer business continuity issues if the lower-priced alternative continues to gain market share and interest of the masses.

As a response, it is a time for businesses to re-strategise, engage in high marketing and promotional campaigns, in line with customer expectations and patronage-improving products, and lower prices. Again, businesses can review their pricing model at this time to accommodate consumers and customers with waning purchasing power. It is also important for the government to play a bigger role in regulating substandard, inferior, and bad products, especially those that are dumped on the Nigerian market. Right now, it’s important to look at and understand how substitution can affect the economy, businesses, and environment in order to stop high death rates and illnesses.

In a market where there are fewer substitute products, there is a higher probability of businesses earning greater profits, but the reverse is the case, with inflation and the current realities. So, entrepreneurs, business owners, and SME operators need to clearly understand that their businesses may just suffer from a substitution effect, which can weaken the sales of their products and may be attributed to consumers switching to cheaper alternatives just because they no longer have affordability or the price hike is unbearable.

Dr. Olubiyi, can be reached via [email protected]