Keeping a Level Head in Recession

Keeping A Level Head in Recession

No one looks forward to a recession, but economic downturns can provide opportunities. Some of these opportunities will come from changes in consumer behavior, others will come from reduced marketing activity by rivals.
We now have an extensive amount of research on buying behavior, gained from several recessions in the past 40 year, on how advertising works and how brands compete. The following information is based upon this data.
How Will Consumer Spending Change?
One of the big lessons we've learnt is how habitual consumers, underneath the day-to-day randomness, show a consistent patterns of behavior. This suggests that even if consumers want to, they will find it difficult to change their behavior.
The big environmental constraint for consumers in a recession is they have less money (or access to money/credit). However, even in a severe recession, the economy is much the same size this year as it was last year. Many consumers have just as much disposable income as ever and will find it easier to make changes in non-regular behaviors than to substantially modify their day-to-day lives.
The 1970s saw probably the most extreme recession since WW2, yet records over this period do not show a contraction in purchases of consumer packaged goods, instead purchases actually grew by an average of 15%. Plus there was no flight to Private Label brands, in spite of supermarkets deliberately introducing some budget generic brands to cater for the hard times.
Pricing
There is considerable evidence that relative prices matter, this isn't to say that brands have to have similar prices, only that you should maintain an appropriate differential between your brand and competitors (depending on relative quality). So in a time of rising costs, if competitors raise their prices you are very safe to do likewise. Observations on price promotions however, showed they cause sales spikes but did little to change the brands overall market placement.
Advertising
There are a number of studies that purport to show that firms that spend more during a recession do particularly well. However, these have been criticized as being funded by vested interests.
However, an independant 2003 report showed that firms who increased advertising spend during a recession did slightly better than firms who increased advertising spend during other times. Equally importantly it showed no effect of cutting advertising during the recession, perhaps because this was the norm (i.e. most competitors cut advertising). This is important because for some firms cutting advertising (and other expenses) may be necessary to survive a recession - survival being a much more important issue than simply doing better or worse than rivals over the period.
Falling advertising budgets are not critical. Its most likely that rival brands will follow suit and advertise less too. In which case you should be able to maintain your position. However you can always do better with the money you have. It's a fair assumption that less than 20% of your current advertising budget does any good. If your budget is halved you can fix it by doubling effectiveness. That sounds impossible but there is evidence that it is possible.
New Products
Reports show that the grocery categories that grew most during the 1970s recession showed the highest levels of new product introduction. This suggests that new products can certainly still succeed during hard times. If competitors are making cuts in marketing effort this makes sales and advertising efforts cheaper and more productive. Premium quality, higher priced new products and established brands can also still do well. While recessions tend to result in slumps in expensive holiday travel, smaller luxuries can do well.
During the 1970s recession,when the cost of chocolate rose a great deal, Rowntree's reaction was to make the chocolate coating on the Kit Kat much thinner so as not to change the price. At the same time, Mars kept the Mars bar product the same and raised prices. It was Kit Kat which suffered share losses that took it years to recover. A similar story occurred in 1976, when Rowntree got it right. They launched a small chocolate bar with traditional large chunks of chocolate in response to an industry trend to make chocolate pieces thinner due to rising chocolate costs. Rowntree's efforts were very successful, and this was the making of the UK brand Yorkie.
The lesson would appear to be that the market isn't stupid and is prepared to pay for quality that consumers understand.
In Summary
There does appear to be real advantage in a 'business as usual' strategy, i.e. maintaining marketing support and the introduction of new improved products.
Recessions don't change fundamental consumer behavior much, at least not for products and services that are 'everyday' items. However, they do change marketing activity of your competitors. For example, advertising spend tends to react dramatically to changes in economic activity, contracting far too drastically during recessions and expanding far too fast during booms. There is opportunity in going against this pattern, by being more consistent.
Taken from an article by Byron Sharp of the Ehrenberg-Bass Institute. For the full article goto: http://members.byronsharp.com/Institute/Recession.pdf

12th February 2009

 

No one looks forward to a recession, but economic downturns can provide opportunities. Some of these opportunities will come from changes in consumer behavior, others will come from reduced marketing activity by rivals.

 

We now have an extensive amount of research on buying behavior, gained from several recessions in the past 40 year, on how advertising works and how brands compete. The following information is based upon this data.

 

How Will Consumer Spending Change?

One of the big lessons we've learnt is how habitual consumers, underneath the day-to-day randomness, show a consistent patterns of behavior. This suggests that even if consumers want to, they will find it difficult to change their behavior.

 

The big environmental constraint for consumers in a recession is they have less money (or access to money/credit). However, even in a severe recession, the economy is much the same size this year as it was last year. Many consumers have just as much disposable income as ever and will find it easier to make changes in non-regular behaviors than to substantially modify their day-to-day lives.

 

The 1970s saw probably the most extreme recession since WW2, yet records over this period do not show a contraction in purchases of consumer packaged goods, instead purchases actually grew by an average of 15%. Plus there was no flight to Private Label brands, in spite of supermarkets deliberately introducing some budget generic brands to cater for the hard times.

 

Pricing

There is considerable evidence that relative prices matter, this isn't to say that brands have to have similar prices, only that you should maintain an appropriate differential between your brand and competitors (depending on relative quality). So in a time of rising costs, if competitors raise their prices you are very safe to do likewise. Observations on price promotions however, showed they cause sales spikes but did little to change the brands overall market placement.

 

Advertising

There are a number of studies that purport to show that firms that spend more during a recession do particularly well. However, these have been criticized as being funded by vested interests.

 

However, an independant 2003 report showed that firms who increased advertising spend during a recession did slightly better than firms who increased advertising spend during other times. Equally importantly it showed no effect of cutting advertising during the recession, perhaps because this was the norm (i.e. most competitors cut advertising). This is important because for some firms cutting advertising (and other expenses) may be necessary to survive a recession - survival being a much more important issue than simply doing better or worse than rivals over the period.

 

Falling advertising budgets are not critical. Its most likely that rival brands will follow suit and advertise less too. In which case you should be able to maintain your position. However you can always do better with the money you have. It's a fair assumption that less than 20% of your current advertising budget does any good. If your budget is halved you can fix it by doubling effectiveness. That sounds impossible but there is evidence that it is possible.

 

New Products

Reports show that the grocery categories that grew most during the 1970s recession showed the highest levels of new product introduction. This suggests that new products can certainly still succeed during hard times. If competitors are making cuts in marketing effort this makes sales and advertising efforts cheaper and more productive. Premium quality, higher priced new products and established brands can also still do well. While recessions tend to result in slumps in expensive holiday travel, smaller luxuries can do well.

 

During the 1970s recession,when the cost of chocolate rose a great deal, Rowntree's reaction was to make the chocolate coating on the Kit Kat much thinner so as not to change the price. At the same time, Mars kept the Mars bar product the same and raised prices. It was Kit Kat which suffered share losses that took it years to recover. A similar story occurred in 1976, when Rowntree got it right. They launched a small chocolate bar with traditional large chunks of chocolate in response to an industry trend to make chocolate pieces thinner due to rising chocolate costs. Rowntree's efforts were very successful, and this was the making of the UK brand Yorkie.

 

The lesson would appear to be that the market isn't stupid and is prepared to pay for quality that consumers understand.

 

In Summary

There does appear to be real advantage in a 'business as usual' strategy, i.e. maintaining marketing support and the introduction of new improved products.

 

Recessions don't change fundamental consumer behavior much, at least not for products and services that are 'everyday' items. However, they do change marketing activity of your competitors. For example, advertising spend tends to react dramatically to changes in economic activity, contracting far too drastically during recessions and expanding far too fast during booms. There is opportunity in going against this pattern, by being more consistent.

 

Taken from an article by Byron Sharp of the Ehrenberg-Bass Institute. For the full article goto: http://members.byronsharp.com/Institute/Recession.pdf

 

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