Masso Group

"...consumer less wasteful, buy less of everything, delay purchases of durable products, and bargained for lower prices more often than they used to.More shopping in cheaper outlets such as discount and neighborhood stores...". During a recession, consumers tighten their belts, while businesses, in contrast, engage in strategies to encourage demand and overcome consumer propensity to save (Cundiff 1975). This contradiction in strategies employed by consumers (belt tightening) and businesses (demand stimulation) provides an interesting examination of how a recession affects the economy.

 

Adjustments in consumption behavior

Research showed that consumers change their buying patterns under economic hardship and stress (Ang, Leong, & Kotler 2000; Shama 1978). The impact seems most severe on finance as consumers argued more over financial matters, and became more insecure about their job and frustrated. Some of these changes were similarly observed when the economy opened for Eastern Europe. Although there was more variety of products available, consumers felt that inflation was higher than wage increases. They sought a second employment to tide over the higher cost of living. Other research showed that consumers bought less, looked for cheaper products such as private labels, spent more time on comparative shopping, bought more through wholesale outlets, and became more do-it-yourself individuals (cf. Shama 1981). There was also lower participation in leisure–recreation activities, more price substitution, more deferment of purchase of expensive durables, increase in do-it-yourself activities, and greater emphasis on price–value over time–convenience (Anon 1975). In Asia, Mastercard International found that the consumer confidence index more than halved in Thailand, Indonesia, Malaysia, Singapore, and South Korea at mid-1998. Singaporeans were found to be more careful in their spending (de Souza 1998; Song 1998b). Indonesian housewives were observed to go for good quality and affordable price and preferred buying at a low price without gifts rather than with a gift at a higher price (MarkPlus International 1998). Thai consumers indicated that they preferred price-cutting promotions to free gifts (Business Asia 1998). Nationalistic sentiments also manifested during the crisis. Thais were encouraged to ‘buy Thai.’ The Malaysian government actively encouraged its citizens to switch from buying imported to locally-produced products. Similarly, in South Korea, Malboro and Virginia Slims cigarettes were passed up for local brands (Business Asia 1998). Our discussion can be synthesized as follows (according to Ang, Leong, and Kotler 2000):

 

• General reactions:

-         Reduce consumption and wastefulness

-         More careful decision-making

-         More search for information

• Product adjustments:

-         Buy necessities rather than luxuries

-         Switch to cheaper brands and generic products

-         Buy local rather than foreign brands

-         Buy products in smaller packages

• Price adjustments:

-         Emphasise product life cycle costs - durability and value for money

-         Emphasis on cheaper prices

• Promotion adjustments:

-         More rational approach to promotions

-         Reduced attraction to free gifts

-         Preference for informative rather than imagery-based advertisements

• Shopping adjustments:

-         Increased window shopping

-         Preference for discount and neighbourhood stores

-         Fewer end-of-aisle impulse purchases

 

Impact on and adjustments in marketing strategies 

Historical precedence (cf. Rosberg 1979) and empirical evidence (Shama 1978) indicate that businesses trim expenses during a crisis to protect the bottom line. Businesses may offer cheaper and more functional products with narrower lines, especially those with high contribution (Schafter & Roper 1985). Roxas and Huszagh (1996) found that businesses in the Philippines modified their product strategies to reduce costs and maintain profitability when there are economic constraints. Price discounts were given and credit loosened to stimulate demand. Distribution outlets were expanded to ensure easy consumer access. In terms of advertising, Ostheimer (1980) found that advertising expenditures tend to be in line with business cycles, with advertising expenditures cut during a recession. Research by Andersen Consulting showed that most businesses, in response to the Asian crisis, became inward looking and responded by cutting costs, postponing investments, adapting products, and emphasizing exports (Song 1998). Mandell (1998) observed that during the Asian crisis, US manufacturers enhanced promotions by offering discounts, hired more salespeople, cut manufacturing costs, bolstered customer service, and emphasized faster delivery. Some companies such as Fila Korea resorted to alternative local sourcing to cut costs (Business Asia 1998).

Marketing strategies in an economic recession can be synthesized as follows (according to Ang, Leong, and Kotler 2000): 

• Market mix strategies:

-         Withdraw from weak markets

-         Fortify in markets where brand is strong

-         Acquire weak competitors

-         Consider non-Asian and youth markets

-         Consider resale market for durable products

• Product strategies:

-         Prune weak products

-         Avoid introducing new products to fill gaps

-         Introduce fighter or second-line brands

-         Adopt adaptive positioning

-         Concentrate on simple and durable products

-         Augment products with warranties

• Pricing strategies:

-         Improve quality while maintaining price

-         Reduce price while maintaining quality

-         Avoid reducing quality and price

-         Consider product life cycle pricing

• Promotion strategies:

-         Maintain advertising budget

-         Increase use of print media

-         Provide assurances through rational appeal

-         Use expert endorsements, traditionally respected figures and satisfied-customer testimonials

-         Avoid celebrity endorsements

-         Adopt an advisory tone

-         Capitalise on public relations

-         Use discounts and premiums, not contests and lucky draws

-         Introduce customer loyalty programmes

-         Train salesforce to anticipate questions and handle objections

• Distribution strategies:

-         Location is still important

-         Sell in discount and wholesale centres

-         Prune marginal dealers

-         Consider alternative channels

 

Moderating factors

However, several factors in the environment may moderate the impact of and adjustments to an economic crisis by consumers and businesses. These factors are described below. Nature of the Crisis. Differences in the economic background of a crisis may moderate the impact. Stagflation—stagnant economy with inflation—was experienced in the US during the 1973 oil crisis, and also in Yugoslavia, the Philippines, and Eastern Europe in 1990, mid-1980s, and 1989 respectively. The Philippines had fiscal and monetary problems, while Eastern Europe experienced stagflation when it opened its economy. The Asian crisis, in contrast, arose in large part from massive bad loans for investments in non-productive assets. Country-specific Characteristics. The effects of a crisis also depend on countryspecific characteristics. The level of trade dependencies is likely to influence the impact of and responses to the crisis for both businesses and consumers. Countries with high trade dependencies, like Singapore, are likely to have businesses that are vulnerable to the events in the region. Four of Singapore’s top five leading exporting markets are Asian. Thus, when the regional currencies depreciated relative to the Singapore dollar, exports became more expensive. In contrast, exposure to such external vagaries is less pervasive in the US. Its large domestic market provides the benefits of a ‘closed economy’ to local businesses. They have some buffer to insulate themselves against the reversal of fortunes of its neighbors. Based on the above discussion, we expect the Asian crisis to be more severe on Singaporean businesses, like the stagflation on Eastern European businesses, compared to the oil crisis on US businesses.

The second country-specific characteristic is the nature of business operations. The US has numerous homegrown MNCs such as AT and T and Boeing engaging in R&D activities. In contrast, local businesses in Singapore tend to be small, engaging in trading rather than R&D activities. For instance, the total expenditure on R& D as a percentage of GDP is 2.42 for the US and 1.37 for Singapore (Anon 1998). Therefore, the impact of a crisis on R&D activities will be less severe in Singapore where such activities are limited. Correspondingly, adjustments in R&D activities will be negligible in Singapore compared to the adjustments experienced by US businesses during the oil crisis.

The third country-specific characteristic pertains to the socio-economic structure. Safety nets in the socio-economic structure such as welfarism are likely to buffer the impact of a downturn on such issues as unemployment and savings. However, welfarism prevails in the US but not in many Asian economies including Singapore and the Philippines. The Asian downturn saw numerous lay offs and decreased asset values. During the height of the crisis, Singapore’s unemployment rate doubled that of pre-crisis level (Reuters English News Service 1999). 

Likewise, market sophistication also moderates the effects of a crisis. The more sophisticated a market is, the lesser are the impact and adjustments thereof. A sophisticated market offers several substitutes, and hence, the possibility for brand switching is higher. Consumers can switch from a top- to a lower-grade brand to ease financial hardship. Further, a sophisticated market also offers different types of retail outlets ranging from mom-and-pop stores to large brand name stores. This provides an opportunity for consumers to adapt where they shop. In contrast, a less sophisticated market does not offer a range of substitutes and therefore, adjustments in consumption behavior are limited. Further, the limited variety in the types of retail outlets available constrains the extent to which consumers can adjust their behavior. The Singaporean retail landscape is less mature compared to the US. There are no factory outlets and few wholesale centers because of land scarcity. Further, no-frills products are not as available in Singapore as in the US. Therefore, changes in consumption behavior in such areas as buying at wholesale or discount stores and buying no-frills products may be more limited for Singaporeans than US consumers during a crisis. 

 

Conclusion 

The paper showed that the greatest adjustments in a crisis were price related. Consumers were found to be less wasteful, buy less of everything, delay purchases of durable products, and bargained for lower prices more often than they used to. More shopping in cheaper outlets such as discount and neighborhood stores was also observed. These discussions are consistent with Cravens’ (1974) observation that during economic hard times, consumers become more attentive to their purchases.

 

(by Luu Tong Tuan, Phd. Vietnam Marketing and Management Institute)    

 

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