Interest rates mostly crop up in the news in the context of debt, and particularly mortgages. That’s how most people feel them most directly. But they affect everything in the economy. Interest rates determine the price of money, and determine the difference between what money is worth now and what it will be worth in the future. Low interest rates mean cheap debt, cheap money, and mean that money in the future is worth just as much as money now.
In the 300 years between the founding of the Bank of England and the 2008 financial crisis, interest rates never fell below 2%; most of the time they hovered around 5%, and have spent plenty of time north of 10%. But for 13 years between March 2009 and last summer, things were totally different. Interest rates were never higher than 1%, and fell as low as 0.1% during Covid. We lived through over a decade of interest rates that were unprecedentedly low.
In the context of centuries, our era of low interest rates has been a blip. But in the context of individual careers, 13 years is a long time. As Matt Levine notes:
“This is maybe the first real interest-rate-hiking cycle of my professional life, and I’m kind of excited? Not just my professional life. I’m pretty old! A whole lot of people in fairly senior roles… grew up a world of low interest rates; large expanses of the financial industry collectively forgot that rates could go up.”
It’s a long time in the context of brands, too. Think about the landscape of consumer brands in 2008, the last time interest rates were higher than 2%; it feels like a different world. The 2010s were the era of “lifestyle”; but how much of that lifestyle was the result of low interest rates, rather than some permanent shift in the way we live? How many people working within brands also collectively forgot that rates could go up?
There are three things in particular that I think were the result of low interest rates, and that won’t stick around for long in our new world:
- Venture-funded D2C brands
- Brands doing ESG by default
- Free and easy consumption
Venture-funded D2C brands
When interest rates are low, there are few safe ways to generate a return. So capital looks for exciting places to go that might deliver growth, and venture capital booms. Likewise, the future value of money is similar to the present value, and so future profits are as valuable as present ones. So a lack of profit now isn’t an obstacle to investment, so long as you’re on the road to profitability.
Low interest rates created a phenomenon whereby brands could take several rounds of investment before becoming profitable, and could largely use that investment to fund customer acquisition. Blue Apron is the classic example, but there are countless others.
Brands that take investment, funnel it into customer acquisition, and hope one day to get big enough to become profitable can only exist in a low-interest-rate world.
Now that world is gone, brands will need to fight for investment, demonstrate cost-effective acquisition from the beginning, and generate profits quickly. The barriers to entry for new brands will be higher. The returns to brand advertising that builds price preference will be greater than the returns to discount-led, offer-based direct response advertising.
ESG by default
ESG is obviously on one level about doing the right thing, about business as a force for good, about ensuring we’ve still got a planet to do business on in fifty years’ time. But it’s also – and especially as it relates to interest rates – a financial concern.
As a financial concern, ESG is about avoiding future liabilities. You invest in businesses that are doing good, since those businesses won’t incur huge costs in the future when they’re forced to internalise their externalities (like paying new taxes or fines, or being forced to clean up their mess at their own cost).
In a low-interest-rate world, the future value of money is close to the present value of money. Future liabilities – and future profits – are just as important to focus on as liabilities in the here and now. The future matters as much as the present.
In a high-interest-rate world, though, the future value of money is much lower. Future liabilities matter a lot less than making money now; if making money now means drilling oil, well, you should drill oil.
Brands that are less profitable (or even unprofitable) now, but who promise success in a future where sustainability incentives are stronger, can only exist in a low-interest-rate world.
Now that world is gone, brands that turn a profit while doing good will remain doubly attractive – but they have to justify their existence now, not only in the future. That means turning a profit, but also means speeding up regulatory change and creating circumstances where bad businesses have to internalise their externalities sooner rather than later.
Free and easy consumption
Imagine you started squirrelling away £2,500 a year in savings in 2009 – about what the average household in the UK saves. Imagine you put it into a savings account earning 0.5% interest, like most earned in that period. In 2023 your bank account would tell you you had ~£36,000. But if you adjust for inflation you’d have the 2009 equivalent of just ~£25,000; you’d have lost a quarter of the £35,000 you’d saved.
That’s the incentive to save money in a world of low interest rates: you’re actively punished for it. And meanwhile, debt is cheap. It’s easy to do the big things – to take out finance for a car or to remortgage to pay for a new kitchen – but cheap debt fuels countless small purchases too, on credit cards or interest-free credit. Interiors brands, car brands, consumer electronics brands… how many of them owe their last decade’s growth to low interest rates?
Brands that power a lifestyle of a new car every three years, a new iPhone every two, and big purchases made without saving can only exist in a low-interest-rate world.
Now that world is gone, brands will need to accept that big-ticket purchases will become more considered. The addressable market for some of those purchases is going to shrink; the frequency of purchase is going to fall.
It’s not all doom-and-gloom. New brands and new models will emerge that draw strength from higher interest rates. But we’ve already entered a period of transition, and that transition will be painful for some. And who knows: perhaps these higher rates are themselves a blip, and we’ll return to the free and easy times of before. But in the absence of a crystal ball, all we can do is adapt, and try to build a business that can weather the storm.