One of the hardest things investors have to do is to figure out whether drops in the stocks they follow are due to short-term or long-term considerations. Many stocks are cyclical in nature, thriving during times of economic expansion but then struggling through recessions and periods of slower growth. However, when you look beyond individual business cycles, secular trends reflect the success or failure of a company or an industry, and a secular decline in particular occurs when adverse long-term trends act to threaten an entire business model.
Solid companies typically weather cyclical declines by waiting until the next period of expansion. However, an industry going through a secular decline faces the more daunting task of either reversing the downward trend hurting its business prospects or transforming itself in a completely new direction.
Examples of secular declines
You can find plenty of examples of secular declines in economic history. The buggy whip is one of the first and most-cited instances, as the rise of automobiles led to a secular decline in carriages and therefore the eventual death of the buggy-whip industry.
More recently, the U.S. cigarette industry has been suffering a secular decline, with a long-term trend toward falling numbers of smokers in the U.S. market. Also, the production of paper written checks is also in secular decline, as electronic payment methods like credit and debit cards and mobile payment systems replace the use of paper checks among a growing number of consumers.
How companies can respond to secular declines
How a business responds to a secular decline depends on the pace of the drop and the alternatives at its disposal. For instance, in the tobacco industry, most major players in the industry have been able to offset the secular decline in smoking by raising prices. The pricing power that cigarette manufacturers have earned from promoting their brands has allowed them to boost prices per pack enough to offset volume declines and keep overall sales and profits growing.
Yet at some point, pricing power dies out, and businesses have to consider other options. That's part of what's happening in the tobacco industry with electronic cigarettes and other reduced-risk products, as tobacco companies look for ways to profit even if traditional cigarettes were to cease to exist.
Sometimes, more dramatic action is necessary. For paper-check specialist Deluxe (NYSE: DLX), the answer to the secular decline in check writing was to expand the scope of its business to provide marketing services, customer relationship strategic options, and operational optimization services to small businesses. By doing so, Deluxe is aiming to play a much more all-encompassing role in the daily work life of its small-business customers, preserving its own ability to profit in the future.
Secular declines represent existential threats to an industry or business. With aggressive action, however, businesses can survive and even thrive going forward.
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