Aurora Magazine

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Finding the opportunity in times of recession

Published in Jul-Aug 2019

Recession could separate serious companies from their seasonal counterparts.

Recession, by definition, highlights a time of slow economic activity, posing serious challenges for both brands and consumers.

In such a phase, companies find it increasingly difficult to market their products and maintain high growth rates. Recession can be a testing time that separates serious companies from their seasonal counterparts. With slow economic activity and the resultant drop in disposable earning, consumers trim their spending.

According to the Harvard Business Review’s research on marketing in a downturn, conducted by John Quelch and Katherine E. Jocz, consumers fall into four clusters.

The first cluster is the high-income consumer. They will continue with their consumption patterns in the same way as they did before the recession. Needless to say, they are confident about their finances. In essence, products focused entirely on this cluster continue to do business at the same pace. The Porches, Louis Vuittons and P.F Chang's of the world face no major economic setback.

The second cluster (the backbone of society) is the middle-class consumer. They are more confident about economic recovery. They prefer to maintain their living standard yet economise on all purchases. Considering that the bulk of sales are targeted specifically to this class of consumers, any shift in their purchase patterns affects companies the most. This segment is also a growing market for luxury products as they forego immediate consumption and save money in order to purchase a luxury item at a later point in time. However, if the economic outlook does not improve, they tend to become more aggressive in economising their consumption habits.

Consumers’ shrinking disposable incomes have impacted their purchasing patterns. Rather than going for larger economical packs, consumers are opting for smaller packs that fit their spending power. For instance, if we look at the powdered milk category, recent trends have seen high growth in sachets. Similar trends are observed across personal care categories such as shampoos and detergents.

The third cluster is the live-for-today consumer, specifically the Millennials, who spend as they earn and live as single-person households. In developed countries, this cluster represents a sizeable population; in Pakistan their numbers are low.

The fourth cluster is the one who is hardest hit financially. They react to a downturn by aggressively decreasing the quantity or completely eliminating purchases of various items. Their spending cuts begin from their wishes beyond necessities (new clothes and shoes) to the most basic needs (fruit and meat).

The majority of consumers fall under the second and fourth clusters. They react by prioritising consumption and sorting products into essentials and unnecessary items. During a recession, they become price-sensitive and switch to cheaper labels as opposed to their preferred brands.

Rising inflation, depreciating currency and increasing interest rates have added layers of complexity to the lives of average Pakistanis. The new fiscal objectives set by the government have resulted in adjustments in the exchange rate by the State Bank of Pakistan (SBP). Pakistan’s movement away from a consumption-led growth and a sharp decline in imports has put downward pressure on the economy leading to slowdown in GDP growth. According to Conference Board’s Global Consumer Confidence Survey conducted in collaboration with Neilsen Pakistan, more people are citing job security, the economy and the rising cost of living as major concerns.

As a result, consumers’ shrinking disposable incomes have impacted their purchasing patterns. Rather than going for larger economical packs, consumers are opting for smaller packs that fit their spending power. For instance, if we look at the powdered milk category, recent trends have seen high growth in sachets. Similar trends are observed across personal care categories such as shampoos and detergents. Consumers are finding a good balance with smaller packs. They help reduce consumption as well as avoid wastage and excessive use.

The silver lining is consumer optimism about the future. This can be gauged by the uptick shown by The Conference Board® Global Consumer Confidence Survey (TCB Global CCI) as well as the SBP’s Consumer Confidence Survey conducted in the fourth quarter of 2018 (compared to the third). Furthermore, both Nielsen and the Conference Board Index indicated that the proportion of people who feel the economy will move out of recession has increased from 33% in Q3 2018 to 50% in Q4.

When contemplating how to cope with the consequences of the current recession, it is helpful to learn the lessons from the past. One of the most devastating downturns in history was the Great Recession that rocked markets worldwide in 2009. Yet, even during those tumultuous times, when most companies (including global giants) struggled, some companies did manage to thrive. One example was Reckitt Benckiser (RB).

According to The Economist, when the economy was experiencing its lowest point in 2009, RB expanded their marketing spend by 25%. At face value, this may seem counter-intuitive, as most of their competitors were slashing their marketing budgets. However, as it turned out, RB benefited greatly by making the extra investment, reporting higher revenues than the other key players. What might explain this turn of events? Firstly, it makes sense for companies to keep pushing to remain relevant to both loyal consumers as well as prospective ones at all times. Although people may postpone the purchase of many items during times of uncertainty, they are less likely to give up brands that are at the top of their minds. Secondly, RB continued to make themselves relevant across all income segments. They had their product offerings in multiple price brackets. However, one also needs to ensure that the existing portfolio is not downgraded, a mistake, which according to The Economist, P&G made at that time, the reason being that once the recession ends, consumers may not find any reason to shift back to the original (the more expensive) version. Similarly, in Pakistan’s case, given the belief among a substantial portion of the population that the economy will soon start to recover, companies need to avoid myopic short-term thinking and focus on dealing with present issues while capitalising on future opportunities. Finally, the last and most important reason credited to RB’s growth was innovation as well as speed in reaching the market. Analysts believe that although consumers cut down on expensive products, they are still willing to spend more on products they find ‘innovative’. This example is also relevant to Pakistan. Looking at Nielsen’s Retail Audit Data, the growth in the FMCG basket in the last few years has been driven by homecare products and within this category, soap has played a pivotal role. In 2018, a large number of new items were launched in this category, each one with a different value proposition. This has given consumers more options and all the more reason to not consider cutting down on consumption.

John F. Kennedy said: “The Chinese use two brush strokes to write the word ‘crisis’. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger but recognise the opportunity.” Although no one looks forward to downturns, there are many examples of converting unfavourable situations into favourable outcomes to learn from, such as that of RB’s outstanding performance during the Great Recession and the accelerated expansion of the personal care segment in Pakistan.

Asif Wazir Ali, Shahrukh Mushtaq and Raameen Saleem work for Retail Measurement Services, Nielsen Pakistan.