The Nice-to-Have Economy
During the pandemic, interest rates sat at record lows, which sparked investment in startups that offered creative “nice-to-have” concepts. Examples include flashy services such as ultra-fast delivery, custom clothing subscriptions, and used car vending machines.
However, amid recent economic uncertainty, record-high inflation, and recessionary concerns, consumer confidence reached its lowest point since the 2008 financial crisis. Subsequently, consumers appear to be shifting their spending away from indulgences, a move that has left once-popular startups struggling to keep the lights on.
The Need-to-Have Economy
This list of startups includes pandemic-era phenomenon Peloton (PTON), as well as Stitch Fix (SFIX) and Carvana (CVNA). Meanwhile, many food delivery companies are also facing challenges, including Blue Apron (APRN) and Freshly, which parent company Nestlé (NSRGY) announced will shut down this month. The common thread among these companies is that they all offer “nice-to-have” services.
During the pandemic, meal delivery was closer to “need-to-have” as it meant consumers could avoid risking exposure. But with spending power now limited for the average consumer, they’re more likely to drive to the store than splurge on delivery services.
Another potential contributing factor is that, while many of these startups are powered by technology, they are actually built on low-margin business models, unlike tech giants. Carvana, for example, touts high-tech capabilities like car vending machines, AI, and a fully-online car buying process. That said, it only generates a small profit on each car sold, making the explosive growth investors may hope to see from such a company unlikely.
Will This Continue?
The “need-to-have” economy is now an unfortunate reality for these startups. But how long will it last?
If this is a short-term shift in consumer spending, many companies may be able to tread water and burn their surplus of investment capital until the tides turn. But, if we enter an extended recession, it could spell bankruptcy for many pandemic-era startups.
So, if any of those “nice-to-have” products are “need-to-have” for you, it could be time to get them while you can.
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