What changes will consumers find in the marketplace this year? And what businesses will thrive while others wither? To try to find out, free-lance writer Michele Lingre interviewed experts in various industries. Excerpts of the interviews follow:
Charles Bernstein, chief editor of Nation's Restaurant News, a weekly publication based in New York:
"The big trend is takeout or home delivery, ranging from fast food to gourmet. People want to relax at home with their VCRs. Supermarkets are getting more and more into takeout foods, salad bars and microwave oven stuff that people just grab. More convenience stores--7-Eleven, Circle K--are going into takeout foods and competing with the fast feeders.
"People will always be conscious of health and preventing heart attacks. But that is a trend everyone talks about, and then they eat more or less what they want. Still, anything that doesn't have much cholesterol in it has an image of health, and so seafood is on the rise tremendously, chicken is gaining, and lean beef is very strong.
"Ethnic is still in. In New York, there seems to be a little more interest in Russian cuisine. I think it is related to glasnost, but it is not really a mainstream trend. French is still in, but the so-called nouvelle cuisine went down, and now you're back to a more traditional, 'country' French cuisine. Mexican has peaked.
"You'll see a lot more pressure on fine dining. People don't necessarily want to dress up when they go out. They want to relax.
"Also, at what price do you get consumer resistance? In some cases, that point has already been hit. Prices have risen over a number of years. For example, at the Quilted Giraffe in Manhattan, dinner including drinks is likely to go up to $130 or $150 a person. So I'd expect to see almost no price increases. The better restaurants are going to be hurt by the stock market crash because some of the consumers are going to be much more careful.
"Although it's not new, you'll get more and more companies grabbing off other companies. You'll see more openings and more failures of restaurants because of the saturation of the market. Pillsbury in Minneapolis, in a kind of countertrend, is trying to get rid of its restaurants because of the fierce competition. They have Burger King, Steak and Ale restaurants and Bennigan's. These things aren't as profitable as they once were."
Harold Vogel, an analyst with Merrill Lynch Capital Markets and the author of "Entertainment Industry Economics":
"There are no hot areas in entertainment. The theatrical box office did very well in 1987. I think it hit a new high of $4.2 billion (in box office receipts) for 1987, and, for 1988, it will be up 5% or 7%. But there is nothing in the industry that will be dramatically different. It's a relatively boring year in that sense.
"With the exception of Paramount, Disney and Warner, nobody is making money in the business right now. It's not an easy business to be in and a lot of people found that out during 1987. So, in 1988, there is no major cause for optimism.
"The smaller, independent movie companies are in trouble and they are going to be forced out of the business. In order to survive on a medium- and long-term basis, they're probably going to have to find merger partners.
"The position of the larger film studios will be enhanced as the production money slows down and the smaller independents have difficulty raising capital. The production glut of the last couple of years will probably be reversing. There will be fewer films and higher profits for companies that remain in the business.
"Every year has its hit films. This year it was 'Beverly Hills Cop II,' 'The Untouchables,' 'Fatal Attraction' and some other things, like 'Three Men and a Baby.' The trend is shifting away from the out-and-out teen-ager movies, the silly kind of a movie that really didn't have a very large market or a big run. There are more adult pictures like 'Broadcast News.'
"Home video is slowing. The market is pretty nicely saturated with tapes, and there aren't that many new titles coming out, just what's being made in Hollywood. The libraries have pretty much been exploited and half the population has a video recorder. It's not a novelty anymore. I feel the price of cassettes will go down, video recorders will probably stay the same or go up because of the weak dollar."
Lawrence A. Krause, a San Francisco financial planner and the author of "Sleep-Tight Money":
"Certainly the market crash has reinforced everyone's belief that you better play your cards close to your chest. In 1988, it's clear we'll be moving even further in that direction.
"In 1987, 75% of the money that went into mutual funds was in bond funds as opposed to growth stocks funds. When the market crashed, more money went into bonds than ever before. People are buying shorter-term bonds to remain more flexible. There has been a flight to quality. Also, during 1987, we saw books like "The Depression of 1990" on the best-seller list, which also demonstrates that people are worried about a recession coming up.
"In 1988, I predict you are going to have something one step short of a tax revolt. The Tax Reform Act of 1986 has only been something you read about.
"The first real effect of the 1986 tax act that hit home was the W-4. The next one is coming and it's called 'filling out your tax return.' People think it is tax simplification because you have only five tax brackets. But it is mind-boggling beyond comprehension. It will force people to use accountants where they didn't have to before. To make matters worse, most of them won't be able to deduct their fees, and accountants's fees will be two to three times greater because they have many more questions and many more categories--it is much more difficult to do your tax returns. As people go through that gut-wrenching process, they are also going to realize that their tax bills are substantially higher.
"There is about a 20% probability of a recession or even something worse, you know, a depression. I'm strongly recommending to people to prepare for that possibility, without overreacting. . . . What you need to do to defend yourself against these unusual events, since you can't know what is going to happen, is diversify and upgrade your portfolio."
Barbara Alexander, a managing director of Salomon Bros.:
"I think the biggest surprise of 1988 is that there will be no surprises. 1988 will work a lot like 1987 did, and we won't see the catastrophe that some people have feared. For 1987, we will see about 1.65 million housing starts. That's down from 1.8 million last year, but still a very good year. In 1988, we may see about 1.5 million housing starts and that will still be about in line with demand.
"The things that impinge most directly on home affordability are relatively few in number. One is consumer income, and that should continue to track ahead and help affordability. Another, obviously, is the down payment. While the stock market crash certainly took some wealth out of the economy, most of that did not come out of first-time home buyers. The stock market is not where first-time home buyers keep their money when they are building up to buy a home.
"The other two factors that are of utmost importance are home prices and mortgage rates. New home prices had been going up rather fast, but because of the stock market situation, home prices won't be going up quite so fast. New home prices were up about 12% in 1987 on average across the country. Home prices next year will probably be up somewhere around 3% to 5%.
"Meanwhile, mortgage rates have actually come down since Oct. 19. Salomon Brothers' economic outlook suggests they will go up as 1988 unfolds, but we're going to start out 1988 with lower mortgage rates than we did in 1987. The first half of 1988 ought to be a very good time to buy a house in many parts of the country.
"There is an excess of rental housing in the United States, so there will be less of it built in general in 1988 than there was in 1987. The excesses tend to hold down rents and it becomes a renter's market. But there is the effect of the tax bill passed in 1986, which changed how much owners can write off. So landlords will need to raise rents to achieve the same return they used to. These two things will counterbalance each other and rents nationally will go up about in line with inflation, about 4% or 5%.
"The important component of the housing industry that often gets overlooked but which in dollar terms is very big, is repair and remodeling, and that should be good next year. There are over 100 million housing units in the United States, and when you think that nearly every unit needs to have something done to it, just the cumulative effect of all that becomes important."
George W. James, president of Airline Economics, a Washington consulting firm:
"A lot happened in the airline industry in 1987. The industry stands a good chance of setting a record for operating profits, nearly $2.5 billion. I'm quite positive that, in 1988, the airlines will equal or improve upon their operating profit of 1987. That doesn't mean some carriers won't struggle. There are still a number of them that are in very heavy negotiations with labor unions.
"We are not done with the acquisition and merger phase. We started with 38 certificated schedule carriers in 1978. Today, when you assume that the USAir and the Piedmont merger is going through, there are eight main carriers that have about 95% of the market. You can see the consolidation that has occurred. There will be a little bit more of it, but not much more.
"The average fare probably went down about 1% in 1987. In 1988, I think the average fare will go up about 3%. But it is important to underscore that it will be less than the change in the consumer price index. So, you will have a better price break with your airline ticket on average than you will with shoes or milk or clothes or household goods.
"Fuel costs could benefit the industry significantly in the next year. For every dollar a barrel that the price of crude oil drops, the airlines benefit to the tune of about $300 million in savings. Some of that could flow to the consumers, some to the stockholders."
Bama B. Rucker, a venture capital partner and health care services specialist with Hambrecht & Quist in San Francisco:
"The industry is becoming competitive and the way care is provided is shifting. It used to be the physicians and the hospitals that ran the patient, moved the patient like a pawn throughout the system. Now it is the insurer that is getting more involved with who the patient should see, where the patient should go, how long the patient should be in the hospital, how many tests the patient should have, etc. Something called managed care is coming in. An insurer will hire somebody to do a utilization review--that is, track the patient throughout the treatment plan. That trend has just begun over, say, the last two years.
"Basically, back in 1983, when DRGs (diagnostic related groups) came in, the government changed the way they reimbursed the elderly. Now the government will give so much per appendectomy and you can't just bill ad nauseam. Then the private sector--HMOs, Aetna, Blue Cross, Blue Shield and others--started to raise deductibles and co-payments, and they would ask for second opinions, making the consumer reach more into their pockets. That trend is going to increase. Deductibles will continue to rise because health care costs are still rising.
"But when the consumer spends less, the whole world spends less, and the premiums come down. It's called capitalism, competition--it's called purchasing health care as a free market item.
"We are going to see more and more outpatient home care. The hospital of tomorrow is going to be a 300- to 600-bed hospital that will be very high-tech, automated with computers just as banking and airlines became automated as they became deregulated.
"For the patient, it will mean better care. If you talk to doctors, they would say worse care, because they are losing money. Physicians think of two things: the patients's well being and their own well being--that's the amount of money they make. They sincerely believe that with their training and the way the medical system has developed, you cannot put a for-profit, competitive model into health care, that it would promote wrongdoing. There is a flip side of that coin: If you have each doctor delivering care according to his or her perspective and his or her income, there is a tendency to do more tests than necessary."
Trilby Lundberg, publisher of the Lundberg Letter and president of Lundberg Survey, a research firm based in North Hollywood:
"The average gasoline price in December fell below the $1-a-gallon mark. I don't expect it to stay there for long mainly because crude oil and wholesale gasoline prices will likely bounce back. It doesn't take much change in supply and demand to alter price in this complex market.
"For all the excitement about OPEC, the decline in prices was not due to their meeting, because the decline had already begun well before the 13 ministers began their recent conference in Vienna. In fact, although spot and futures crude oil fell during their contentious meetings, crude has rebounded somewhat. Unless crude oil prices fall substantially once again and stay low, gasoline prices will probably not plunge. In fact, some wholesale prices are now rising, so the fall at retail could soon be halted, despite seasonal factors.
"Unless crude oil supply changes radically during 1988, I think we can expect prices to fluctuate but, overall, rise a few cents per gallon before the year is through.
"In 1988, American motorists can expect more than retail price changes. The quick oil change and lube-service-type outlets are emerging fast around the country. And for long-distance travelers, the truck stops are becoming more popular. They have gasoline as well as diesel fuel, and are now fast becoming self-sufficient villages, with hotels, restaurants and shops serving gasoline motorists as well as truckers."
James E. Gray, president of Bullock's-Bullocks Wilshire, a chain of 29 department stores based in Los Angeles:
"Growth was solid during 1987, although our ready-to-wear fashion results were a little disappointing. There has been the debate between the short skirts and the long skirts, but no dominant new look to fuel an aggressive fashion business in 1987. Until something new strikes the fancy of the consumer, that area is likely to remain soft.
"In the home furnishing areas, there has been a number of new products for upscale markets: We sold every model of Waterford clock we could get our hands on, and a new Cuisinart item was very popular. In the domestics area, high-quality items, like 200-thread, all-cotton sheets by Ralph Lauren, are increasingly in demand. With more and more home entertaining, people want their residence to make a statement about them and their life style, so they spend more on furnishings. Cooking is almost a form of entertainment. This Christmas season, we had a bread-maker appliance selling at $350 that was very popular.
"The cosmetics business was absolutely outstanding in 1987. As the so-called baby boomer population group ages, there is a desire to hold back the aging process and the emphasis on physical fitness ties right into that. There again, it is the quality merchandise that sells the best.
"We think that inflation will be in the neighborhood of 3% in 1988. Couple that with the devaluation of the dollar, and you can look for price increases of 3% to 5%.
"There is a lot of anxiety out there because of the stock market crash and when people get nervous, their shopping patterns are somewhat erratic. But we have just had our best Christmas season ever. We have double-digit sales increases."
J. David Power III, president of a Westlake Village automotive consulting firm bearing his name:
"1986 was such a good year, we couldn't keep up that sales volume. For 1987, sales will come in for passenger cars at 10.1 million units. That's down from 11.5 million in 1986. Domestic cars are the ones that suffered the most, while imports remained steady. For 1988, we are estimating that passenger car sales will be about 9.8 million.
"For the first time ever, the Japanese have actually not been able to sell up to the level of their quotas. The yen rising in value versus the dollar forces either a price rise or a profit loss to the Japanese companies when they ship the cars here. So far, they have been absorbing some of the cost increase in their own distribution organizations. But as the yen continues to drop they will have to pass more of that on.
"The prices on cars went up, on a transaction price basis, perhaps only about 6% in 1987. In 1988, we might see prices coming down. Everyone, the Japanese, the Europeans, the domestics, will be in an oversupply situation by the end of the year, with the exception, perhaps, of the Koreans. With higher field inventories, the manufacturers and dealers will be trying to move product and that will translate into $500, $1,500 and $2,000 rebates over official prices. The financing packages have been worn out, people don't see them as a great advantage any longer.
"We also expect that in a tight market situation the auto malls, the high-volume dealers that we see especially here in Southern California, are going to increase their share of the marketplace, while smaller dealers will go out of business."
Emanuel Goldman, a beverage and tobacco analyst with Montgomery Securities in San Francisco:
"Recession or no recession, people have to wet their palate, they like to indulge themselves a bit. Beverages, relative to the rate of inflation, will be an increasingly good value. Prices were up about 1% in 1987 and I would look for about 2% in 1988.
"Soft drinks continue to be a growth area. The average American consumes about 44 gallons of soft drinks each year. In 1987, that industry grew at a rate of about a 4.5%, much faster than the population. That's extraordinary growth and it seems to be continuing at a very substantial pace.
"The reason is that companies are doing several things. They come up with new products --Cherry Seven Up and A & W Cream Soda both are real winners. They come up with new packages --they are now working on a resealable can. They pass on any cost savings to the consumers, so the price of soft drinks remains very attractive.
"Also, the overseas market is growing twice as fast as the market in the U.S. There, the focus is on getting full distribution. If you are in the midst of the Amazon jungle in Brazil, it's hard to find a vending machine right now. Ten years from now, you'll have no trouble finding one.
"The beer market is not growing particularly fast. It looks like it will be up 0.8%, in line with population growth. The big story of 1986-87 was Corona. In one year, Corona sales expanded from $1 million to $2 million, in an industry of $185 million. The major growth probably is done, but what a phenomenon. The 'light market' continues to grow, and within that you have Miller Lite, Bud Light and Coors Light as rapid growers.
"Hot products are funny, they grab quickly. Remember, the beer consumer is a fickle animal. Beer is a peer pressure product. What is the hot beer product for 1988? Got me."