Discretionary Pause

Soaring inflation of the last few months has seemingly driven up the cost of everything. It has hit low-income Americans hard, as some of the biggest price increases have been in non-discretionary items. With prices for the 12 months ending July revealing a 44% increase in the cost of gas and a 13.1% spike in the cost of groceries, many consumers are feeling financially squeezed.

Discretionary expenses are on the chopping block, with spending on certain products and services not just being cut, they’re being eliminated.

Teeth Straightening is Out

This trend leaves companies that provide items that fall in the non-discretionary spending category vulnerable. SmileDirectClub (SDC) is one such company that is stumbling in the current economic environment. It has lost about 90% of its value since its 2019 IPO.

The company offers a relatively inexpensive teeth-straightening service to customers whose average income level is $65,000 a year. The $2,000 fee for its services is about 60% less than what its competitors like Invasalign’s Align Technology (ALGN) charges. Rising inflation is squashing demand, while expenses, particularly for advertising, remain high.

Survival of the Fittest

As it takes on water, SmileDirectClub is scrambling to increase its website conversion rate, expand its market share to higher-income customers, offer technological enhancements, and cut staff. These moves may be too little too late, given its current cash burn rate can only sustain it for about a year.

The company’s woes may indicate that other companies may not be well positioned to weather the current economic headwinds. This may well be the case for financially-lean companies peddling non-discretionary products to lower-income households.

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