Sunday, June 28, 2009
US RECESSION AND ITS IMPACT ON AMERICAN CUSTOMERS
Due to economic uncertainty, US customers have changed their mind in the purchase of expensive items. In fact this has been seen in the behaviour of the American customers in the purchase of products. Actually the American customers have decided to shift their purchase from now to the future in the case of expensive items. This becomes a concern for all the people who are related their purchase. Not to forget, American customers are considered as the backbone of the American economy. These are the customers whose spending decisions make up 70% of the economic activity. These customers’ moods are continuously assessed by the pollsters. Mainly their purchase decisions are deferred with reference to the house, cars, electronics, clothes and other expensive items.
2. US RECESSION
A recession is a decline in a country’s gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down. US economy is on the brink of or already in recession. During the first quarter of 2008, US economy managed to grow by 0.1% and is also likely to decline by 0.5% in the second quarter of 2008. The second quarter growth result is likely to come by 31st July 2008. It has also been seen that there was no growth in the last month of the 1st quarter. Not surprisingly, consumers are distinctly less confident now than they were just one quarter ago.
3. REASONS OF US RECESSION
Thus what could be the reasons for the slower economic growth in the US? As US has not declared that they are in recession, it can be written as slower economic growth. First reason could be the Bush administration which gave the economy before 2004 and 2006 elections, through a combination of large tax cuts and large increases in military outlays. Second could be the record budgetary and current account deficits have severely neutralized the fed’s monetary policy view as interest rates cannot be reduced substantially for fear of collapse of the US dollar. Third, all this is taking place at the same time that the construction industry is in confusion and housing prices are declining.
4. CONSEQUENCES OF US RECESSION
When the economy slows down, business activities decline and less money change hands. Businesses often find themselves in a more difficult environment. They spend less in the businesses and try to curtail their investment in the different expenditures such as reduction of the sales force size. According to reports, in March 2008, the US economy lost 80000 jobs. This is the biggest drop in five years. The economic analysts have also opined that the rising oil prices, the prolonged housing slump and continuous job losses in the first quarter of 2008 are the main reasons behind recession. “I think the key concern for a consumer in a recession is the worry that they‘ll lose their job, said Joel Naroff, Chief Economists at Commerce Bancorp. If it’s an extended recession, there will be fewer and smaller pay raises and bonuses, so they will be bringing in less income.” The rise in the global economy has prompted many us based companies to close factories and outsource the work to other countries. Some economists see debt and the current credit crises, as a significant threat to consumers in a recession.
5. INDUSTRY SALES AND INDICATORS
The monthly retail sales in the US increased by an average of 0.1% in the second quarter of 2007, 0.5 % in the third quarter and 0.13% in the fourth quarter over the corresponding period of the previous year. However in the first quarter of 2008 consumer spending declined by 0.03% per month. US Durable Goods Orders over the past year exhibit a similar pattern. These are items that have a normal useful life of more than one year.
Another indicator is Personal consumption expenditures (PCE), over the past year, the monthly average has been positive every quarter: Q2 2007-+0.2%; Q3 +0.43%; Q4 0.53%; Q1 2007-08 - +0.3% and April 2008 +0.2%. Retail Sales in the US over the same period added an average 0.1% in the second quarter of 2007, 0.5% in the third and 0.13% in the fourth. Only in the first quarter of 2008 did consumer spending reduced by 0.03% per month. In April Retail Sales fell by 0.2%.
The consumer confidence survey released by the conference board showed the consumer confidence index slumping to 64.5 on a 100 point scale in March, the lowest since 2003.JD Power & Associates predicts that total automobile sales in the US during 2008 will be 14.95million vehicles, which would be the lowest since 1995.
6. FACTORS INFLUENCING AMERICAN CUSTOMERS
The main factors which influenced American customers are as follows:
• Focus of purchase changes. With tighter budgets, customers concentrate purchasing on essential products and services. They tend to acquire fewer impulse items, and tried to shift their purchases. For marketers, this can have an impact on products they choose to highlight and how they're positioned.
• Product tradeoffs. Due to reduction in disposable income, consumers may make different product tradeoffs. Depending on the type of items involved, these options may vary. It may mean using things longer, being satisfied with what they have rather than buying new, or trading down to less expensive substitutes. It's important to consider how these behaviors impact customers' view of buying merchandise.
• Lead time increases on the purchase decision. Before going for a purchase Customers are likely to think more and try to get more information about their purchase, acquisition, assessing need, utility, alternate products, and price.
7. PROBABLE STRATEGIES OF THE COMPANIES DURING RECESSION
Companies should bear eight factors in mind when making their marketing plans for 2008 and 2009:
1. Focus of research on the customer. Instead of cutting the market research budget, they need to know more than ever how consumers are redefining value and responding to the recession. Price elasticity curves are changing. Consumers take more time searching for durable goods and negotiate harder at the point of sale. They are more willing to postpone purchases, trade down, or buy less. “Must-have features of yesterday are today’s can-live-withouts”. Trusted brands are especially valued and they can still launch new products successfully but interest in new brands and new categories fades. Conspicuous consumption becomes less prevalent.
2. Focus on family values. When economic hard times arrive, people tend to withdraw themselves. Firms should look for comfortable hearth-and-home family scenes in advertising to replace images of extreme sports, adventure and rugged individualism. Greeting card sales, telephone use and discretionary spending on home furnishings and home entertainment will hold up well, as uncertainty prompts most to stay at home but also stay connected with family and friends.
3. Controlling the expenditure on marketing. This is not the time to cut advertising. It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times. Uncertain consumers need the reassurance of known brands--and more consumers at home watching television can deliver higher than expected audiences at lower cost-per-thousand impressions. If companies have to cut marketing spending, they must try to maintain the frequency of advertisements by reducing from 30-to-15 second advertisements, substituting radio for television advertising, or increasing the use of direct marketing, which gives more immediate sales impact.
4. Reviewing the product-mix strategies. Marketers must reforecast demand for each item in their product lines as consumers’ trade down to models that stress good value, such as cars with fewer options. During this time, people prefer multi-purpose goods over specialized products and weaker items in product lines should be pruned. In grocery-products categories, good-quality own-brands gain at the expense of national brands. Industrial customers prefer to see products and services unbundled and priced separately. New products, especially those that address the new consumer reality and thereby put pressure on competitors, should still be introduced but advertising should stress superior price performance, not corporate image.
5. Extending the help to distributors. In uncertain times, no one wants to tie up working capital in excess of inventories. Marketers can follow some policies such as early-buy allowances, extended financing and generous return policies to motivate distributors to stock your full product line. This is particularly true with unproven new products. Care should be taken while expanding distribution to lower-priced channels; doing so can jeopardize existing relationships and the brand image. However, this may be the time to drop weaker distributors.
6. Reviewing the pricing strategies. Customers will be shopping around for the best deals. It may not necessarily mean to cut list prices but may need to offer more temporary price promotions, reduce thresholds for quantity discounts, extend credit to long-standing customers and price smaller pack sizes more aggressively. In tough times, price cuts attract more consumer support than promotions such as sweepstakes and mail-in offers.
7. Focus on the market share. Knowing cost structure can ensure that any cuts or consolidation initiatives will save the most money with minimum customer impact. Companies such as Wal-Mart and Southwest Airlines, with strong positions and the most productive cost structures in their industries, can expect to gain market share. Other companies with healthy balance sheets can do so by acquiring weak competitors.
8. Emphasizing the core values. Although most companies are making employees redundant, chief executives can strengthen the loyalty of those who remain by assuring employees that the company has survived difficult times before, maintaining quality rather than cutting corners and servicing existing customers rather than trying to be all things to all people. CEOs must spend more time with customers and employees.
Economic recession can elevate the importance of the finance director’s balance sheet over the marketing manager’s income statement. Managing working capital may tend to dominate managing customer relationships. CEOs must counter this. Successful companies do not abandon their marketing strategies in a recession; they adapt them.
By: Dr. SUNIL KUMAR PRADHAN ASBM,BHUBANESWAR.
References: 1. Marketing mastermind,May,2008, 2. Portfolio organizer, June, 2008. 3. http://seekingalpha.com/article/79725-recession-isn-t-here-until-the-consumer-says-so 4. http://www.clickz.com/showPage.html?page=3628564 5. www.TheCodeForGlobalEthics.com